How to Develop an Effective Third-Party Risk Management Strategy

By Sanjana Sachdeva, Product Marketing Manager

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The adage, “No man is an island,” rings true for businesses and individuals alike. Modern organizations depend on an increasingly intricate web of third parties to facilitate day-to-day operations.

Adding third-party players provides a world of opportunities, but such opportunities also come with increased risk. Through third-party risk management (TPRM), companies assess the risks of the third parties so they can decide who to work with, mitigate risks, and monitor such risks over time. TPRM involves vendor risk management (VRM), supplier risk management, and supply chain risk management.

Thanks to TPRM, organizations can use proactive measures to mitigate risk and keep themselves, their data, and their reputation safe. Read on to learn more about third-party risk, how to assess it for your organization, and best practices for establishing comprehensive TPRM strategies.

Defining Potential Third Party Risks

To build a comprehensive strategy, it’s crucial to understand the scope and potential risk exposures in your third-party ecosystem.

Types of third parties include business partners, affiliate entities, distributors, SaaS service providers of automation or productivity tools and financial institutions that facilitate transactions, manufacturers, agents, resellers, suppliers, on-site representatives, and more. These entities exist at the inflow, such as suppliers and manufacturers, and the outflow, including resellers and distributors.

To truly understand the importance and urgency for TPRM, let’s cover some types of risks and real-world examples:

• Information security and risks: These include both cybersecurity and physical vulnerabilities. Breaches and cyberattacks can release your data if you have weak, outdated policies or misconfigured servers. With the rise of remote and hybrid work models, many companies are behind in updating their security policies accordingly.
• Operational risks: Operational risks apply to internal and external operations. Internal risks relate to ineffective or ill-conceived controls, processes, systems, or personnel activities. External threats include those that are, by and large, out of the third party’s control, including natural disasters or fraud that affect business continuity.
• Strategic risks: These include a third party’s internal decisions, such as whether they ensure regular software updates to the latest (and most reliable or secure) version.
• Regulatory requirements and compliance risks: Such risks can occur when third-party entities fail to meet regulatory, legal, or compliance requirements in areas pertinent to your organization or customers.

• Credit and financial risks: Credit and financial risks occur when third parties are in poor financial health. A third party’s insufficient funding, breakdowns in investor relations, or cash flow issues can put your company at risk. Consider fourth parties as well, including any financial services companies your third-party partner may employ.
• Reputational risks: These risks are a prominent yet somehow overlooked aspect of TPRM. A company’s reputation is crucial to its ongoing success, and an organization’s reputation can suffer from third-party issues. If a third party has privileged access to private information and is subject to a data breach or exploited cybersecurity risk, you’ll be left holding the bag, so to speak.

This non-exhaustive list highlights some key elements of TPRM and the importance of a policy for analyzing and mitigating the risk profile with third-party entities. While these risks are commonplace, they’re avoidable with the right third-party risk strategy and due diligence processes.

With so many moving sources and types of risk, how can a business protect itself? This is where a TPRM strategy comes in.

Steps to Building Your Third-Party Risk Management Strategy

With a methodical approach to building and executing your strategy, you can make the risk management process less overwhelming. A robust TPRM strategy requires an agreed-upon process for evaluating and onboarding third-party entities, along with organizational buy-in and ongoing attention and requires your due diligence.

Here are some concrete steps for beginning your risk assessment:

1. Create a List of All Third-Party Entities

Creating and maintaining a database of third-party entities is essential for all organizations, large and small. Once established, it’s easy to maintain by including database updates in your internal onboarding process.

Ensure participation from stakeholders across the company in each department, such as procurement, accounts payable/receivable, and upper-level management. Remember, no third party is too small to potentially impact your business.

2. Analyze and Classify Your Risks

Once you have a list of vendors, your team will need to classify each third party according to your vendor risk assessment results. To ensure adherence and organizational-buy in, you must develop a risk rating system that is clear and easy to follow.

Many organizations choose to develop a questionnaire that applies to their third-party vendors. This ensures continuity and structure.

Some key questions to consider when performing a third-party risk assessment include:

• What does this vendor provide, or what is their function?
• Who manages the relationship?
• What data does this third party have access to? At what level of data controls?
• Is the vendor solely responsible for the services provided, or is there fourth-party involvement?
• What systems and networks can the vendor access?
• Is the vendor outsourcing crucial functions, such as payment processing or order fulfillment? To what extent?
• What industry certifications do they hold? What regulations or compliance requirements are relevant to this relationship?

Start with current vendors to ensure you have a benchmark for creating effective third-party risk management protocols. By profiling and assessing your current vendors, you develop a comprehensive workflow and ensure your current risk profile is effectively managed. A questionnaire and rating system like the one above can also help you decide the potential risk of both current and future vendors.

An end-to-end digital workflow will ensure ease of use by any relevant parties and adherence to established protocols. By automating your TPRM process using the right digital tools, your organization can increase ease of use and consistency.

2. Assign a Risk Level According to Your Approach

Once you’ve assessed the risk profile of each vendor, assign a system for noting risk levels as nominated by your organization. Whether that means High, Medium, Low or A, B, C, choose a system that is easy to understand and follow.

Ensure your organization has a clear policy about what each label means regarding priority and action. For example, a high-risk vendor likely requires your organization to take immediate action (as outlined below) to mitigate risk. A medium-risk entity may need attention within a defined period. Low-risk vendors can be further assessed to determine whether their risks can be mitigated or accepted as they are.

Generally, high and medium-risk vendors have access to privileged information and systems, while low-risk vendors function without access to critical systems.

3. Create Your Vendor Onboarding Process

Once you’ve handled the essential steps of defining risk levels and evaluating existing vendors, incorporate these learnings into a standardized onboarding process. As you onboard new vendors, you’ll need to add them to the database. Make sure this repository is transparent and accessible to relevant members of your organization so you can streamline the onboarding process.

An effective onboarding process includes:

• Vendor risk assessment, including the above questionnaire
• Clear communication and expectation management
• Secure protocols, including individual credential verification
• Transparency and accessibility for relevant parties across your organization

With a comprehensive onboarding platform, steps are easy to follow and vendor information is securely stored and accessible.

4. Take Action

Depending on the nature and level of the risk, you may need to take action to address potential issues. Prioritize high-profile risks first and resolve potential issues — either internally or with the support of the third party in question — to lower your overall risk scope.

This may mean adjusting your agreement or relationship with a high-risk partner. If the risk cannot be resolved and downgraded, your company may decide to offboard them to mitigate and keep your organization or data safe.

Regardless of the action you take, thoroughly document each step in your workflow. Using templates along the way can ensure easy and uniform records.

5. Ensure Continuous Monitoring

Just as you regularly review the terms of your relationship and service-level agreements (SLAs) with partners, it’s key to continue assessing their risk profiles. A low-risk entity can evolve to present a more present potential vulnerability. For example, if a partner has begun outsourcing part of their operations — such as payment processing or fulfillment — to a fourth party, this can impact their risk rating.

For that matter, it’s crucial to review third-party vendors and reclassify them according to new risks. A risk management solution like Certa’s toolkit, will help with real-time monitoring and automated risk identification and provide notifications so your organization can stay ahead of threats.

Not only should your third-party risk management process factor monitoring, but it’s important to stay abreast of the changing risk landscape. Webinars, white papers, case studies, and other materials are great sources to ensure full coverage for your organization.