Managing Third-Party Risks: 9 Best Practices for Risk Mitigation

The need for vendors is essential for getting business done today; however, allowing them access to your systems and data increases your organisation’s vulnerability. Any disruption caused by third-party failures can have severe financial, legal, and operational consequences, like the ones faced by Toyota and Okta in 2023.

The rise in business globalisation, cyber threats, and AI-driven solutions has also contributed to the expansion of the TPRM market, a market predicted to grow to $11.34 billion by 2028.

Thus, third party risk management can no longer be regarded as a point-in-time focused exercise, but a critical daily function that manages risk throughout a vendor's lifecycle.

This article delves into:

• Third-party risks & their implications
• Third-party due diligence & its importance
• Steps for effective TPRM
• 9 best practices for TPRM

Third-Party Risks & Their Implications

Third-party risks involve any risks originating from contractors, consultants, service providers, or other vendors engaged in your organisation's routine business operations.

They take various forms: legal, financial, operational, and reputational risks. Legal risks arise when a vendor fails to comply with regulatory requirements, leading to legal consequences. Financial risks occur when a vendor faces financial instability, leading to supply chain disruptions. Operational risks occur due to vendors' failure to meet service or product expectations, leading to disruptions in business operations, while reputational risks arise if vendors' actions negatively impact how your business is perceived.

That’s why thorough third-party due diligence is a must.

Third-Party Due Diligence & Its Importance

Third-party due diligence is the process of comprehensively examining and assessing risks associated with external parties before engaging in business relationships. It’s similar to vendor due diligence but broader in scope.
It involves scrutinising a vendor’s background, financial health, compliance track record, and security posture and demands ongoing monitoring. However, it is only one key aspect of third-party risk management (TPRM).

Steps for Effective Third-Party Risk Management

To effectively manage third-party risk, organisations should know and apply the steps and best practices of third-party risk management.

These steps are:

• Vendor Identification
• Evaluation & Selection
• Risk assessment
• Risk mitigation
• Contracting & Procurement
• Reporting & Ongoing Monitoring
• Vendor Offboarding

9 Best Practices for TPRM

Proactive third-party risk management is crucial.

Here are 9 best practices to implement.

1. Set clear policies & expectations

Define risk tolerance and establish a TPRM framework aligned with your organization.
Set goals, roles, and evaluation strategies, standardising processes for consistency.

2. Centralise Third Party Oversight & Engage Senior Leadership

Adopt a centralised third-party risk management model for better consistency and transparency.

3. Conduct Due Diligence & Risk-based Tiering

Conduct due diligence and categorize vendors by risk level based on data sensitivity, financial health, and compliance with standards like ISO 27001 or SOC 2.

4. Ensure Robust contracting

Create a comprehensive contract that includes data management, vendor liability, performance, and SLAs for full protection and clear vendor expectations.

5. Ongoing Monitoring & Reporting

Regularly track vendor security posture, performance, financial health, and compliance status using various tools and techniques.

6. Leverage Technology & Automation

Leverage technology and AI for AML & KYC compliance. Automate due diligence, risk analysis and reporting for efficiency and improved insights.

7. Develop contingency & incident response plans

Detail actions for third-party breaches or disruptions, including communication and remediation steps. Verify that vendors have business continuity and disaster recovery plans.

8. Foster Open Communication & Provide Training

Foster open communication and train employees who manage third-party relations in risk identification, compliance, and problem reporting.

9. Continuously Review & Update

Continuously review and update your processes, reports and KPIs (Key Performance metrics) in line with evolving business needs, and regulations.

Final Remarks

Understanding the value of third-party risk management is only the first step.
Successful execution requires bringing together the right people, processes, and technologies.
At Cedar Rose, we offer you that.

With CR Comply, our automated all-in-one compliance screening tool, you cut through the complexity of vendor assessment and save time and resources.
Ensure Ongoing Compliance.
Try our services today.

Sources:

1. Data breaches at Toyota: the company once again warns customers of a breach 2023 (Techwire Asia)
2. IOTW: Okta data breach affects all customer support users 2023 (CShub)
3. Third-Party Risk Management Global Market Report 2024 (The Business Research Company)
4. Third-party risk is becoming a first priority challenge (Deloitte)
5. What to Know Regarding Third-Party Due Diligence for GDPR Compliance (Cedar Rose)
6. Third-Party Risk Management 101: Guiding Principles 2023 ( Auditboard )
7. What to Know Regarding Third-Party Due Diligence for GDPR Compliance (Cedar Rose)
8. EY Global Third-Party Risk Management Survey 2023 (Ernst & Young)
9. What is Third-Party Risk Management? (OneTrust)