What is Third Party Risk Management?

Definition of Third-Party Risk Management

Third-party risk management (TPRM) is the process of identifying, assessing, and mitigating risks associated with working with external organizations, such as suppliers, vendors, partners, or contractors. These risks can come from various sources, including: Cybersecurity vulnerabilities, Financial instability, Compliance issues, Legal liabilities, Operational failures.

Imagine a large retailer that relies on a software provider to manage their online payment systems. If the software provider experiences a data breach, sensitive customer information (like credit card details) could be exposed. This not only harms the provider but also the retailer’s reputation, potentially leading to legal penalties. By using TPRM, the retailer would regularly assess the security practices of the software provider to minimize such risks and ensure compliance with regulations.

Importance of Third-Party Risk Management

Third-party risk management (TPRM) is crucial because companies often rely heavily on external vendors or partners, and any risks those third parties introduce can directly impact the business. These risks can range from data breaches to supply chain disruptions, compliance violations, or reputational damage. Without a strong TPRM process, a company might be blindsided by issues outside of its direct control, which can lead to financial losses, legal problems, or damaged trust with customers.

Consider a pharmaceutical company that outsources the production of a key drug ingredient to a third-party supplier. If that supplier fails to meet regulatory standards or delivers contaminated materials, the pharmaceutical company could face regulatory penalties, recalls, and harm to its brand. With TPRM, the company would regularly evaluate the supplier’s compliance, quality control, and financial health, reducing the likelihood of these issues.

The Lifecycle of Third-Party Risk Management

The lifecycle typically includes the following key stages:

• Planning and Assessment: This is where you identify your third-party needs and evaluate potential vendors. Here, businesses assess risks like financial stability, regulatory compliance, or cybersecurity standards before engaging with a third party.

• Due Diligence: A thorough examination of the third party is conducted, looking into their reputation, legal standing, security protocols, and business practices to ensure they meet your company’s risk tolerance.

• Onboarding: Once a vendor is selected, the terms of the relationship are formalized, including risk management procedures, expectations, and contractual obligations.

• Monitoring and Performance Review: This is an ongoing phase where you continuously track the third party's performance and risk exposure. It includes regular audits, assessments, and updates to ensure the vendor maintains compliance and meets agreed-upon standards.

• Offboarding: When the relationship with a third party ends, businesses ensure that risks related to the termination (such as data transfer, outstanding contracts, or regulatory obligations) are properly managed. This phase closes the loop, ensuring a secure exit without leaving loose ends.

For example, a healthcare company is looking to partner with a cloud services provider to store sensitive patient data.

• Planning and Assessment: The healthcare company identifies its need for a secure cloud solution. It evaluates several cloud service providers, focusing on risks like data security, regulatory compliance (e.g., HIPAA), and the provider's reputation. The goal is to find a vendor that meets its specific security and regulatory requirements.

• Due Diligence: The company conducts a detailed background check on the chosen provider. This includes reviewing their security certifications, data handling practices, past breaches, and their ability to comply with healthcare regulations like HIPAA. They might also assess financial stability to ensure the provider won't go out of business soon.

• Onboarding: After selecting the provider, the healthcare company formalizes the relationship by signing a contract. This contract includes specific terms on data protection, compliance obligations, security audits, and service level agreements (SLAs). They also set up communication protocols and assign a team to manage the relationship.

• Monitoring and Performance Review: Over time, the healthcare company regularly monitors the cloud provider’s performance. They conduct security audits, ensure compliance with HIPAA, and review the provider's security incident reports. They also monitor any changes in the provider's business, like mergers or financial troubles, that might introduce new risks.

• Offboarding: If the healthcare company decides to end the partnership (perhaps due to switching providers or bringing the service in-house), they follow a formal offboarding process. This includes securely transferring all patient data, ensuring the cloud provider deletes any residual sensitive information, and closing any legal obligations. This step helps prevent data leaks or compliance issues after the partnership ends.

How News can help with Third-Party Risk Management

News plays a critical role in third-party risk management (TPRM) by providing real-time insights into potential risks or issues related to the vendors, suppliers, or partners a company works with. Monitoring news helps businesses stay informed about developments that could affect their third-party relationships, allowing for proactive decision-making. Here’s how news helps TPRM:

• Early Warning Signs: News can reveal early signs of trouble, such as financial instability, layoffs, management changes, or legal disputes involving a third party. These indicators allow businesses to assess whether their partner's situation could impact their own operations. A major supplier for your company is reported to be facing a financial crisis, giving you the opportunity to reconsider or prepare alternative supply options before disruption occurs.

• Regulatory and Compliance Alerts: News can report on changes in regulations that may affect your third-party partners, especially in industries like finance, healthcare, or technology. If a vendor fails to comply with new regulations, it could expose your company to penalties. A news article reveals that one of your software vendors was fined for violating GDPR. This prompts you to review their data protection practices to ensure your company stays compliant.

• Cybersecurity Threats: News about data breaches or cybersecurity incidents at a third-party organization is crucial. These reports alert businesses to potential vulnerabilities, allowing them to respond quickly by tightening security measures or conducting an immediate risk assessment. A news story breaks about a ransomware attack on a cloud provider you work with. Knowing this, you can initiate discussions on how to mitigate risks or consider alternative providers.

• Reputation Management: Negative press surrounding a third party can harm your company's reputation by association. Monitoring news about controversies, unethical practices, or environmental and social issues involving your partners can help you distance your business from them before reputational damage occurs. News coverage of a lawsuit against a manufacturing partner for unethical labor practices gives you the opportunity to reconsider the relationship and communicate your values to stakeholders.

• Market and Industry Trends: News helps track trends that might affect third-party partners in terms of innovation, competition, or industry shifts. Understanding how these factors influence your partners helps in long-term planning and anticipating changes in risk profiles. Industry news predicts a shift in technology standards that might require one of your suppliers to upgrade their systems. You can engage in proactive discussions with the supplier to ensure they’re prepared, reducing potential disruptions to your own operations.

Who Need Third-Party Risk Management (TPRM)?

1. Risk Management Team – To protect the organization from risks posed by third-party vendors or partners.
2. Procurement and Supply Chain Teams – To ensure the consistent and reliable delivery of goods or services from third-party vendors.
3. Compliance and Legal Teams – To ensure that third parties adhere to laws and regulations to avoid penalties or legal actions.
4. Information Security/IT Teams – To manage cybersecurity risks and ensure third parties follow security protocols.
5. Finance Department – To monitor the financial stability of third-party vendors and manage risks related to contracts and payments.
6. Internal Audit Teams – To assess the effectiveness of the TPRM process and ensure compliance with internal and external requirements.
7. C-Suite Executives (CRO, CFO, CIO) – To minimize overall business risks and protect the company’s reputation and operations.
8. Board of Directors – To ensure the company is protected from third-party risks that could affect its long-term stability and shareholder value.
9. Investors and Shareholders – To ensure the company has robust TPRM practices to safeguard its profitability and stability.
10. Operations/Business Unit Leaders – To maintain smooth operations by managing third-party risks that could disrupt business processes.

How BizLidar can help with Third-Party Risk Management (TPRM)?

Managing third-party risks requires real-time insights into the potential threats your external partners may pose. BizLidar helps streamline this process by aggregating news related to critical risk areas such as company operations, ESG (Environmental, Social, and Governance) concerns, compliance violations, and credit risks. With our platform, businesses can stay informed about emerging risks that could affect their third-party vendors and partners, allowing for proactive risk management and informed decision-making.