Companies dealing with third parties are vulnerable to risks throughout each step of the vendor relationship. A crucial error many make is believing third-party risk management (TPRM) is a one-time deal, a single risk assessment and remediation initiative.
However, your organization requires a third-party risk management program that covers each stage of the TPRM lifecycle, from planning to renewal or termination.
Let’s get into the specifics of the TPRM lifecycle, why it’s important, and how your company should approach each stage.
A TPRM assessment lifecycle involves a process of six stages designed to streamline an ongoing process through which organizations identify, assess, manage, and monitor the risks associated with their third-party relationships. Third parties often include suppliers, vendors, contractors, partners, and other external entities integrated into the organization’s value chain.
Some of these processes have the potential for automation through automated business process workflows and other tools, which can help streamline business operations.
But, before you consider automation, it’s essential to understand the ins and outs of the lifecycle. Typically, the lifecycle has several stages.
A TPRM assessment lifecycle involves a process of six stages designed to streamline an ongoing process through which organizations identify, assess, manage, and monitor the risks associated with their third-party relationships. Third parties often include suppliers, vendors, contractors, partners, and other external entities that are integrated into the organization’s value chain.
As these relationships become more common, so do the headlines detailing the prosecution of enterprises whose third-party suppliers or vendors have failed to comply with regulations or engaged in unlawful conduct.
Organizations should be aware of third-party risks, such as cybersecurity, ESG, and financial risks. Being vigilant throughout each stage of the TPRM lifecycle will aid in managing and mitigating these risks.
The six phases of an appropriate TPRM program address the entirety of the third-party lifecycle, making it one of the most effective risk management strategies businesses have at their disposal. These phases provide a framework for dealing with the overall risk of working with third parties.
Business owners must create a TPRM program tailored to their unique situation. A tailored program will become an effective tool for understanding and managing their third-party risk management lifecycle.
As the digital world continues accelerating rapidly and the likelihood of cyberattacks and other risks becomes more prominent, it’s more important than ever for the TPRM lifecycle to be high on the priority list for organizations to succeed.
Along with increased vigilance and an understanding of the inherent risk associated with having third-party relationships, following the stages outlined in this post will solidify an organization’s risk management strategy.
This stage is the first stepping stone businesses take toward developing third-party relationships. Businesses must first identify the need for third-party products or services and determine whether they want to renew relations with a previous supplier or forge a new one.
Once you’ve established a need for outside relationships, screen any potential third parties before further communication. Determine the risk profile of potential vendors or suppliers based on their services, their location, and the data they can handle.
Due diligence expands on the planning phase and understanding any inherent risks with a potential third-party relationship.
During this stage, businesses should assess the third party’s controls, policies, procedures, financial health, reputation, and compliance. Businesses must also assess the third party’s subcontractors, (fourth or nth parties) as the activities of these can also affect compliance and operations.
At this point, many businesses use sanction lists and other sources to determine if any ethical or compliance concerns would make the relationship too much of a risk.
This is a prime opportunity to use a dynamic assessment or questionnaire and a risk-scoring engine to help determine whether the relationship is worth pursuing.
Organizations should consider RFPs and make a decision on which parties they’re willing to work with based on the potential risks and the ease with which those risks can be mitigated.
A common process for mitigating risks includes first flagging risks, assessing them against the organization’s tolerance for risk, and then implementing and verifying controls within the framework of the organization’s targeted residual risk threshold.
Once an organization has chosen a supplier or vendor they wish to work with, they’ll move on to the negotiations and contracting phase. This stage is crucial for embedding risk mitigation strategies directly into the contract.
While contracts often include elements that fall outside the immediate scope of a TPRM program, the contract serves as a fundamental tool to ensure the third party adheres to all necessary regulations and standards.
During negotiations, the organization and the third party will collaborate to establish the contract’s terms. These terms should clearly define responsibilities, expectations, and Service Level Agreements (SLAs) specifics.
Additionally, it should outline remedies and actions in case of non-compliance. The contract should outline the third party’s obligations for recordkeeping and reporting to ensure transparency and accountability.
Finally, it should allow the organization to conduct audits when and as needed.
Managing risk is an ongoing process that requires organizations to remain highly vigilant. It’s not unusual for even the most trustworthy third parties to experience unexpected disruptions, and it’s crucial to learn to adapt as new issues arise.
Throughout the contract’s lifetime, organizations should perform regular reviews, audits, and assessments to track the third party’s performance and detect any changes that may require attention.
During this stage, organizations should define the KPIs (key performance indicators) to help ensure they meet business objectives and fulfill obligations outlined in the contract.
Remember to determine the KRIs (key risk indicators) to continuously determine the level of risk posed by third-party relationships while the contract is ongoing. Keeping up with regular monitoring will ensure you catch any issues early, allowing organizations the chance to take corrective action.
The organization must have procedures in place for incident management and risk mitigation. Having a plan in place is vital for the organization to identify, diagnose, and respond to risks and issues quickly.
Along with regular performance and compliance reviews and audits, a TPRM program can determine specific actions based on the emergence of risks.
For example, metrics can be used as automatic triggers. The TPRM program could automatically send notifications to critical stakeholders if a new risk becomes apparent.
Organizations should also use the expiration of a third-party security certification or the detection of breaches or sanctions to automatically trigger actions, such as sending a reassessment or notifying a stakeholder.
During the final phase, the organization decides whether to renew, revise, or terminate the third-party relationship based on its performance and risk assessment. Renewing or revising a contract with a third party often takes organizations back to the “Negotiations and Contracting” phase of the TPRM lifecycle.
When terminating a relationship, it’s crucial to have a thorough and detailed offboarding process.
During offboarding, organizations must ensure that any sensitive information has been deleted and that the parties can no longer access physical and IT infrastructure to ensure information security. Organizations need to maintain detailed records of the offboarding process to ensure all appropriate measures are taken and to demonstrate compliance in the event of a regulatory inquiry or audit.
Managing third-party risks is a challenging aspect of most business relationships. It requires unwavering attention to detail, ongoing monitoring, and the ability to react as issues arise.
It’s essential for organizations to find ways to streamline the TPRM assessment lifecycle. Using relevant software containing key features, such as a third-party portal, document collection and management, a risk scoring engine, and the ability to perform audits, is an invaluable resource for managing third-party relationships.
Share with Your Friends:
