Guide: What is Third-party Risk Management (TPRM)?
Introduction
It's very common for businesses to get services and products they need from outside vendors or suppliers. These third-party entities can include your business affiliates, distributors, service providers, manufacturers, marketers, and resellers.
When you work with an outside vendor, you take on a certain amount of risk, as you have little control over how they operate. Failure to properly vet a third-party partner can damage your company's operations and reputation. This is why businesses should understand third-party risk management and the best practices to follow.
What Is Third-Party Risk Management?
Third-party risk management (TPRM) is the ongoing process companies use to onboard, manage, and monitor an outside vendor. The process starts with reviewing potential vendors and lasts until the contracted relationship ends. The process involves identifying the best vendors and also identifying and reducing risks associated with using a particular vendor. Companies must also consider regulatory restrictions at the industry, local and federal levels when selecting a vendor.
Why Is Third-Party Risk Management Important?
Industries such as finance, healthcare and IT often have strict compliance requirements to maintain licenses and avoid fines. Compliance with those requirements is at risk if unauthorized parties access your company's information. Most businesses rely on third-party vendors to provide the goods or services they need to serve their customers. If a vendor can't deliver, then your business might lose sales or damage customer relationships. TPRM lets you assess and reduce those risks to safeguard your business's revenue and reputation.
Cybersecurity
According to Statistica, between 2024 and 2029, the estimated cost of cybercrime will increase by a total of $6.4 trillion U.S. dollars. Effective third-party risk management software can help businesses assess and prevent cybersecurity threats posed by vendors.Cybersecurity is such a serious issue that in 2021, the federal government initiated Executive Order 14028 to ensure the government and private sector companies do their part to follow security guidelines, update platforms, and quickly report security threats. Even if you're not a direct federal tech contractor, you don't want to risk breaking one of the regulations under this order.One security leak from a mismanaged third party can put your whole company at risk. Some vendors have an excellent security structure that can match or even surpass your own. Others, though, may not be as up-to-date with today's security regulations. That is why you should constantly access your supply chain's security efforts.
Supply Chain Issues
When you invest in third parties for your business, you must look into risks such as:
Sourcing challenges: Are there extreme vulnerabilities due to the vendor only having access to a single supply source?
Technology: How well does the vendor handle technology updates? Are they at risk of becoming obsolete or vulnerable to breaches?
Location: When working across borders, legal, sustainability, and sourcing challenges can become an issue.
Finance and Legal Concerns: You should constantly check the expiration of the vendor license, references from other companies, and the vendor's financial stability.
Failure to take your third-party risk management seriously can hurt you financially. For example, a third-party security breach may leak your customer information, resulting in steep fines and penalties for you — even though it wasn't your fault.
The Third-Party Risk Management Lifecycle
The TPRM lifecycle involves several key steps:
Vendor Identification and Onboarding: Thoroughly vet potential vendors, assess their risks, and onboard the selected partners.
Ongoing Monitoring: Continuously monitor vendors for changes in their risk profile, performance, and compliance.
Risk Mitigation: Implement controls and strategies to mitigate identified risks, such as contract clauses, insurance, or alternative sourcing options.
Offboarding: When a vendor relationship ends, properly offboard them to ensure a smooth transition and prevent any residual risks.
Best Practices for Third-Party Risk Management
Establish a TPRM framework and governance structure
Develop a comprehensive vendor risk assessment process
Implement continuous monitoring of third-party relationships
Ensure compliance with industry regulations and standards
Foster strong communication and collaboration with vendors
Maintain detailed documentation of the TPRM program
Automating Third-Party Risk Assessments
Manual TPRM processes can be time-consuming and error-prone. Leveraging automation and specialized software can help streamline the assessment, monitoring, and reporting of third-party risks. Automated tools can gather data, analyze risk factors, and generate comprehensive reports to support informed decision-making.
By implementing a robust third-party risk management program, organizations can better protect themselves from the various risks associated with their vendor relationships, ensuring business continuity, compliance, and reputational integrity.
Common Types of Third-Party Risks
Engaging with third-party vendors introduces various risks that can impact your data security, financial stability, regulatory compliance, and overall reputation with customers and business partners.
Cybersecurity Issues
As the world becomes more interconnected, the responsibility for securing cyberspace is shared among all entities. Even if your organization has robust cybersecurity measures in place, vulnerabilities in a third-party vendor can expose your valuable data to cyberattacks.Statistics indicate that in 2024, approximately 65% of international financial organizations experienced ransomware attacks. Such incidents can lead to significant financial losses, potentially amounting to millions or even billions of dollars. To mitigate these risks, it’s essential to conduct regular monitoring, testing, and thorough vetting of all third parties involved in your supply chain security.
Compliance
Your vendors play a crucial role in your company’s ability to comply with industry, local, and federal regulations, as well as client agreements. For instance, healthcare facilities must adhere to the Health Insurance Portability and Accountability Act (HIPAA), which safeguards patient privacy and ensures the security of health information.
Reputation
Even well-established companies can suffer reputational damage due to the actions of a negligent or compromised third party. Customers are increasingly cautious about sharing their personal, contractual, or financial information. They are unlikely to engage with a company known for security vulnerabilities. In today’s competitive landscape, negative reviews and a lack of recommendations can severely impact your business’s reputation, making recovery difficult.
Financial Risks
Third-party relationships can introduce various financial risks, ranging from potential lawsuits to revenue declines. For example, Home Depot faced a $200 million settlement due to a data breach in 2014, which stemmed from credentials stolen from a third-party vendor. Additionally, poor supply chain management can lead to delays in product delivery, affecting client relationships and overall revenue.
Operational Risks
An unreliable third party that fails to meet its service obligations can disrupt your business operations. For instance, a contractor responsible for software development might deliver subpar code, or a vendor may neglect to update its security systems, resulting in downtime. Such disruptions can create unexpected challenges as you work to resolve the issues.
The Third-Party Risk Management Lifecycle
To effectively manage third-party risks, your TPRM process should include the following steps:
Planning and Analysis: Assess your vendor needs and identify any gaps. Consider whether it’s time to replace an existing vendor. Research online reviews, seek recommendations, and check the Better Business Bureau (BBB) for unresolved complaints.
Evaluation: After narrowing down your list of potential vendors, conduct a thorough risk analysis. Inquire about their security practices, financial stability, compliance standards, and customer reviews.
Remediation: If you identify red flags with a vendor you’re considering or currently working with, address these issues. Allow the vendor time to resolve high-risk factors or consider terminating the relationship if necessary.
Approval: Once you decide to engage with a vendor or renew an existing agreement, formalize the relationship with a contract that outlines clear terms and conditions.
Monitoring: Continuous monitoring is essential throughout the vendor relationship. A vendor’s security practices can deteriorate due to various factors, such as downsizing or changes in management. Automating this process can simplify ongoing assessments.
Offboarding: If you need to part ways with a vendor due to changing business needs or poor performance, ensure you follow proper procedures to terminate the contract.
Best Practices for Third-Party Risk Management
To establish a robust TPRM strategy, consider these three key practices:
Prioritize: Identify your most critical vendors and categorize them based on their importance and risk level. While all vendors should be monitored, focusing resources on those with greater access to sensitive data or higher roles in your supply chain is essential.
Automate: Streamline your vendor assessments with compliance automation services. These tools can assist with intake, onboarding, risk performance calculations, reviews, and alerts.
Consider Non-Cybersecurity Risks: Remember that third-party risks extend beyond cybersecurity threats. Evaluate how your vendors impact your revenue, operations, privacy, ethical performance, environmental sustainability, reputation, and geopolitical considerations.
Automating Third-Party Risk Assessments
With advancements in technology, dedicated software can help manage your third-party risk assessments efficiently. These tools facilitate faster onboarding of new vendors through automated risk assessments and seamless integration into your business processes. You can receive alerts for security threats and enjoy real-time monitoring of vendor security through data feeds that identify emerging risks. By automating vendor management, you can focus on core business tasks rather than worrying about third-party risks. Additionally, as your organization grows or contracts, these scalable tools can adapt to your changing needs. Given that vendor management is a critical aspect of cybersecurity that can significantly impact your finances and reputation, it’s essential not to overlook it. If you want to learn more about third-party risk management, schedule a consultation with one of our experts today!
