Why is third-party risk management important?
Organizations worldwide rely increasingly on third parties to help them deliver. But alongside reduced costs, greater efficiency and an improved ability to scale as needed, using third parties can carry significant risk. Against this background, why is third-party risk management important, and can implementing third-party risk management software help?
Why Is Third-party Risk Management Important?
Your third-party vendors are probably more numerous and varied than you think. The company that shreds your confidential documents; your cleaning contractors; your SaaS cloud computing partner, all these third parties can introduce risk to your operations.
What are the various risks involved in using a third party? Allowing these third parties into your offices, sites and systems brings a degree of risk — financial, regulatory or reputational. 63% of all cyberattacks have been traced directly or indirectly to third parties.
And if your third-party vendor makes a mistake, your customers, the media and often the regulators will hold your organization accountable.
An effective third-party risk management (TPRM) strategy can mitigate this.
Why Do Companies Use Third Parties?
The fact that third-party risk management is so important speaks to the prevalence of third-party use. And there’s a good reason for this. Using third parties can have significant benefits:
- You can serve customers better by focusing on your core operations and outsourcing peripheral activities
- This focus on your key strengths can also make operations more efficient and lower costs
- Using third parties means tapping into their significant expertise; capitalizing on their experience rather than needing to build your own
- Your operations can easily be scaled up or down with customer demand
The Importance of Third-party Risk Management
Alongside these benefits, though, there are risks, as we’ve touched on, to using third parties — precisely why third-party or vendor risk management is such a crucial aspect of your wider governance, risk and compliance (GRC) strategy.
And although unexpected events may turn your attention from third-party risk, a crisis is precisely the time you should double down on your third-party risk management. Maintaining focus is essential for a robust third-party risk management strategy — as is turning to third-party risk management technology to simplify processes.
Using Automation to Enhance Your TPRM Strategy
Placing importance on third-party risk management means implementing some simple yet often-overlooked processes. These steps will bring increased rigor to your supplier assessment, selection, onboarding and ongoing management.
- Be diligent about third party management. This means keeping an up-to-date inventory of suppliers and vendors, so you know your risk potential at all times. Classify suppliers based on the type and amount of work they do for you, and the type and probability of risks that they bring. For instance, a company handling your clients’ confidential data may carry significantly more risk than a supplier delivering food to your cafeteria.
- Ensure you are vigilant on supplier due diligence, selection and onboarding. Evaluating the potential risk of new suppliers, putting appropriate controls in place to manage third-party risk, and ensuring your contracts are watertight, all help to achieve TPRM best practice.
- Put in place processes to oversee third-party risk on an ongoing basis. Measurement and monitoring of your third-party suppliers and vendors doesn’t stop once they’re embedded as trusted partners. You need to implement ongoing risk controls, monitoring, remediation and vendor management processes to bring structure to your third-party risk management.
- Use automation to help you. Automating your third-party risk management processes and controls leaves you free to focus on the more strategic elements of risk management. Automated controls can make third-party risk management quicker, cheaper and more robust.
Third-party Risk Management Essentials
The advantages of working with third parties are clear, and it’s easy to understand why businesses bring third parties on board. But third-party risks continue to grow, especially as organizations rely increasingly on emerging technologies like cloud computing.
Building a third-party risk management program that works demands focus; a clear framework. It might mean introducing automation that takes care of day-to-day risk management processes, allowing you to focus on maturing and expanding your approach.
Diligent’s e-book, Third-Party Risk Management Essentials, explores the issues and provides a framework you can adopt to help mitigate the risks third parties can bring. It will give you a clearer understanding of why third-party risk management is important and how you can implement a structured approach to tackle it.
