What is Third-Party Risk Management (TPRM)?
Third-party risk management (TPRM), otherwise known as vendor risk management (VRM), is the process of identifying, assessing, and managing potential risks posed by third parties.
Third parties are any person or entity outside of an organization’s direct control that could potentially impact the company’s operations. This includes any fourth parties that a vendor subcontracts to perform a service.
Government agencies typically enact TPRM regulations to ensure specific standards are met for business practice, environmental protection, etc.
There are many different types of third-party vendor risks you need to be aware of, which will affect your supply chain. Understanding what these factors are can help mitigate third-party risk in your particular situation.
In this blog post, we’ll share common types of vendor risk, some examples of regulatory frameworks around third-party risk, and how to best mitigate third-party risk for your organization.
Common Types of Third-Party Risk
Several different types of third-party or vendor risk impact an organization depending on the industry and scope of the organization’s operations. However, there are a few common threads for most organizations that we’ll explore broadly here.
Security risk is a third-party risk that can impact an organization’s operations due to a third party having access to sensitive data, such as the personal information of customers or employees.
An example of security risk will be if your company outsources its IT department. The contractor accidentally leaves sensitive corporate documents on their public website for anyone with internet access to read.
Reputational risk is a third-party risk that can impact an organization due to a third party having the ability to influence the company’s reputation. This can take several different forms.
One such example will be if your marketing department outsources its social media management and the vendor posts objectionable content on the company’s page.
However, another example could be a security risk like the one mentioned in the previous section that leads to a data breach. With said data breach, the organization could damage its reputation as a trusted resource in the community.
Compliance risk is a third-party risk that can lead to an organization violating a particular law, regulation, or contractual obligation, either intentionally or unintentionally.
An example of a compliance risk will be if your third-party carrier is found to have been violating the Fair Labor Standards Act by not compensating their employees for overtime hours.
As this third party has violated a contractual obligation with you and federal law, it could lead to legal action being taken against your organization. This, like a security risk, could also impact your organization’s reputation.
Financial risk is a third-party risk that can impact an organization with financial implications based on the vendor relationship.
An example of a financial risk could be if your third-party carrier fails to pay its bills owed to you promptly, which impacts the company’s cash flow and ability to meet payroll.
This would also lead to legal action against the third-party carrier and the organization depending on their contract.
Operational risk is a third-party risk that can impact an organization due to a third party having the ability to influence the business’s operations.
An example could be outsourcing all of your HR functions only to find that it takes way too long for new employees to receive their onboarding information. This might result in delayed onboarding, new employee training, and ultimately, reduced production.
While it is essential to understand the most common types of risk that may impact your organization, it’s equally important to understand what resources are available to help organizations manage and mitigate vendor risk.
What Compliance Frameworks Regulate TPRM?
As third-party risk is related to many different industries and uniquely affects each, there are several third-party vendor risk regulations that have varying impacts based on the scope of a business’s third-party risk.
A few examples include:
- The National Institute of Standards and Technology (NIST) is a framework that creates a third-party risk management plan and identifies what third parties pose the most risk to an organization.
- The Federal Financial Institutions Examination Council (FFIEC) is another framework that regulates third-party vendor risks related to financial institutions or financial service providers such as banks, insurance companies, etc., including recovering from security breaches.
- The European Union’s General Data Protection Regulation (GDPR) has third-party risk management implications surrounding collecting and processing personal data.
- The International Standards Organization (ISO) and, mainly, ISO 31000 is based on a business continuity approach and focus more on the impact third-party risks will have rather than controlling third-party risk.
While many of these frameworks provide guidelines for managing third-party risk, and certifications can go a long way in securing valuable business partnerships, there is still much to do to ensure effective third-party risk management.
Best Practices to Mitigate Third-Party Risk
There are many third-party vendor risks businesses need to be aware of, but it doesn’t mean you have no control over them. Here are some best practices for implementing third-party risk management that can help organizations mitigate vendor risk.
Identify Your Third Parties
This first step is crucial as it lays the groundwork to accurately identify third parties that could potentially pose a risk to your organization.
This can be done through an analysis of information such as contracts, financial records, etc., and essentially should encompass all third-party relationships you have with any business partner. This includes those both inside and outside the United States.
Assess Each Vendor’s Third-Party Risk
Now that you have identified third parties, it’s essential to go through each of them and assess their third-party risk.
This can be done by using a third-party vendor risk questionnaire which will help identify risks associated with the third party and what type of impact these risks may have on your organization.
Mitigate Unacceptable Risks
Once the third-party risks are identified, it’s essential to evaluate each and determine whether the threat posed is acceptable or not and apply remediation to any risks that are considered unacceptable.
While there may be third parties you cannot altogether remove from your organization for one reason or another, management can explore different strategies for mitigating specific third-party risks.
Examples include implementing new security controls or changing the nature of the business relationship with the vendor.
Monitor Third-Party Risk on an Ongoing Basis
It’s also important to note that the third-party risk management process isn’t a one-and-done process.
Continuous monitoring should be an ongoing part of your business culture to keep third parties accountable for their actions and identify new third-party risks before they become significant issues for the organization.
This should also include doing your due diligence before onboarding new vendors in the first place. Vendors must be screened during the procurement process, and your organization must have a process in place to ensure all service providers meet your risk requirements.
Lastly, this should include proper offboarding procedures to ensure a parting vendor loses access to sensitive information, IT systems, and physical access to assets.
How CENTRL Can Help You Implement an Effective TPRM Program
Whether the risks are related to non-compliance with industry norms, information security, or financial risk, Vendor360 can help you identify, evaluate, and adequately address them.
Vendor360 is a vendor risk management solution that manages the third-party ecosystem, including developing risk profiles for each vendor and monitoring the entire vendor lifecycle.
Our platform helps our client’s trade vendor management overwhelm for workflow automation, questionnaire templates, recurring assessment scheduling, auto-assigning to business users, alerts, and notifications.
Clients and vendors see up to 50% improved efficiency via deep automation and customizability that streamline and simplify their workflows.
Furthermore, our clients can take their third-party risk management program to the next level with enhanced third-party risk assessment insights, actionable intelligence, and analytics that empower stakeholder and senior management business decisions.
Ready to learn more? Book a free demo of Vendor360 today.