Defining Third Party Risk Management
Third-party risk management meaning: No business is immune to risk, and third party risk assessment is one way to prevent costly and damaging incidents. But what does that term actually mean? In this post, we'll provide a definition of third party risk assessment and explain why it's important for businesses of all sizes. We'll also define some key terms related to the process so you can understand it better. By the end of this post, you'll have a clear understanding of what third party risk assessment is and why it's an essential part of any security strategy.
With a Third Party Risk Management (TPRM) program, you can identify and reduce risks in any third party relationships for your business.
TPRM is sometimes referred to as: ‘vendor risk management’, ‘supply chain risk management’ or ‘supplier risk management’. It is a subset of risk management.
Third party risk management services can help companies better understand:
- Which third party vendors they use?
- How to predict stability risks for critical customers, business partners and vendors?
- How they use them and the nature of potential risk?
- Whether they have sufficient practices in place to identify and reduce risk?
What Does a Third Party Risk Management Software Collect?
Third-Party Vendor risk management programs vary in size: depending on the needs of the organisation and its industry and the associated regulatory requirements. However: there are best practices to adhere to - and certain types of information that every business must collect.
Generally, third party risk management tool considers the following data as vital:
- Personal and essential information e.g. vendor name, business purpose
- Context of the third party’s involvement, and level of engagement
- Any security reviews or certifications
- Vendor contracts
A third-party supplier/vendor risk management tool (TPRM) will gather information that may impact the risks associated with third party vendors. This can include events such as:
- Mergers and acquisitions
- Internal changes to the business e.g. employee reduction, processes
- Negative press coverage across print, broadcast and web
- Major events that pose a risk to your business e.g. natural disasters, COVID-19
- Product releases
- Regulatory changes and industry shifts
- Updates to sanction and PEP lists in many jurisdictions
- Company liquidations
Third-Party Risk Management Lifecycle
What is a third-party risk management lifecycle? The TPRM lifecycle is an ongoing process that requires ongoing attention and regular reassessment to ensure that risks are being appropriately managed. The third party risk management process includes several stages such as:
- identifying whether you need to employ a third party,
- conducting due diligence,
- shortlisting and selection,
- sending a risk questionnaire,
- drafting a contract,
- beginning the onboarding process,
- implementing ongoing monitoring,
- undertaking internal audits, and
- contract termination or offboarding.
These TPRM lifecycle stages help organizations manage third-party risk and ensure that their vendors meet the same standards and expectations for cybersecurity and data privacy as their internal teams.
Benefits of Third Party Risk Management Software
As more and more businesses outsource, third party risk management has also grown in importance. The modern business must rely on third parties to some degree; disruptions to the supply chain can have lasting effects, which is why it’s important to have a TPRM program in place.
Why is third party risk management important? The third-party risk management software can help you keep track of all your vendors and contractors, ensuring they meet security requirements in a cost effective manner. By automating the process of vendor onboarding, you can add new vendors to your system with greater ease and speed.
Monitor Third Party Vendors
Gain a better understanding of your suppliers, vendors, customers and business partners; monitor your third party network through all stages of the vendor lifecycle.
Customised Third Party Risk Management
Nip emerging trends in the bud, and flag potential issues before they grow. In one customisable dashboard, your business can embark on the due diligence process with the click of a button.
Maximise Profits, Minimise Risk
By consolidating vendor information, you’ll collect relevant data with greater efficiency. A market-leading risk management tool will integrate with existing CRM and SCM systems.
Take a Proactive Approach to Third Party Management
To flag and address third party risks before they worsen, it’s a good idea to take a proactive approach to third party supplier risk management. What are third party risk management best practices for relationships with a third party vendor, and how can communication mitigate any potential issues that arise?
1. Prioritise Vendor Risk
Naturally, some vendors have more of an impact on your business than others. As such, you can prioritise your vendors into tiers based on their level of risk and criticality. Some tools will automatically classify new vendors based on their context of involvement.
To help you categorise these, consider whether:
- It would have a negative impact on your ability to provide services, if the third party vendor provides critical services.
- The vendor has access to sensitive or personal data that could be disclosed, modified or destroyed.
- The vendor has a contract of significant value.
Third party vendor risk can be classed into one of three groups:
- Tier 1 - high risk, high criticality
- Tier 2 - medium risk, medium criticality
- Tier 3 - low risk, low criticality
Tier 1 vendors will require the highest level of due diligence, as well as being subject to an in-depth risk assessment.
2. Expand Your Vendor Risk Assessment
While cybersecurity risks are well-recognised in supply chain risk management, there are other types of risks to consider—for any business looking to complete a comprehensive risk assessment.
3. Automate Monitoring Processes
When you automate the repeatable aspects of risk monitoring, the entire process becomes more time and cost efficient. Below are a few ways you can introduce automation—which reduce time and effort, leading to compound savings in the long run.
With an intake form or integration with your existing systems, you can smoothly introduce vendors to your business.
Assigning Risk Mitigation Tasks
When a risk is identified, automatically direct the report to the relevant person in your organisation—complete with a list of action items.
Trigger Performance Reviews & Reassessments
Every year, put vendors through a review: if they fail this review, you can automatically commence the off-boarding process. Reassessment features will be triggered by contract expiration dates.
Common Risk Factors for a Business
There are a number of ways you could be impacted by third party risk. These can range from outages either internally or externally: having the potential to affect operations throughout the supply chain. In short, third party risk can impact your business where it’s most vulnerable. With a third party risk management program, you’ll also eliminate risk to your data collection, storage and security.
Reputational Risk Management
It’s important to stay transparent on ethical practices. Effectively manage media mentions on issues including forced labour, corruption, terrorist financing and environmental impact. A vendor risk management tool will minimise damage to your brand and corporate image, in a cost-effective way.
Stay protected from corporate compliance and sanctions risk. Regulations change quickly; it’s vital to continually update internal procedures and controls in accordance with this. When you use a tool to manage third party risks, you’ll gain in-the-moment insights.
Financial Risk Management
Manage third party risk associated with fines, settlements and remediation measures: which limit future business opportunities. Monitor the vendor’s inherent risk on a daily basis, and protect the financial health of your business.
Strategic Risk Management
Third party risk management is most effective when done strategically. Build a TPRM program that is robust, with inbuilt ESG and CSR compliance features. Identify profitable and exciting opportunities in the supply chain and grow to reach new markets.
Build Risk Awareness and Resilience with Nexis®
Nexis® Solutions takes care of the entire risk monitoring process. By scanning a global content collection, your business can remain proactive and adaptive to the ever-changing market.
1. Visualise your risk in seconds
The risk monitoring dashboard integrates with internal business systems, sending customised risk scorecards via RSS or email alerts. Identify the risks that matter most: and capture their potential in one easy-to-use dashboard.
2. Understand risks in real-time
Whether it’s a sensitive data breach or a security issue, risks can arise with critical vendors. With Nexis® diligence reports and monitoring, you’ll know about risks as soon as they happen - giving you more time to respond.
3. Get a 360-degree view of vendor management
Nexis® Solutions gives your business access to an unparalleled source universe, which includes:
- Global, regional and local news
- Watchlists, PEP lists and sanctions lists—updated in real-time
- Business, market and industry sources - including Experian® business data
Drawing on this universe of sources, you can fuel business decisions while showing your corporate commitment to ethical practices—to investors, consumers and regulators.
Frequently Asked Questions
When it comes to third party risk management, there are a few key questions that come up time and again. Here are some of the most frequently asked questions, along with their answers.
Who is responsible for third party risk management?
Larger organisations will often have a vendor risk assessment team; many companies do not. The responsibility of vendor management will typically fall under some of the following job titles:
- Supply Chain Manager
- Risk and Compliance
- Chief Information Security Officer
- Chief Procurement Officer
- Chief Privacy Officer
- Third-Party Risk Manager
- Information Technology (IT)
- Contract Manager
This diversity showcases the many approaches you can take, in managing critical risks with vendors. For those managing TPRM programs, it’s essential to encourage collaboration and communication throughout the organisation.
What are some other risks to the supply chain?
In the third party ecosystem, there are many different types of risk. These require ongoing monitoring, and can include: geographical, geopolitical, performance, 4th party and operational risk.
The Office of Foreign Assets Control (OFAC) is a government agency that sits within the United States Department of Treasury. Its purpose is to manage, enforce and oversee a variety of sanctions based on United States foreign policy, targeting specially designated nationals and organisations.