Tips for Effective Third-Party Risk Management
Independent contractors, vendors, and other third-party service providers play a crucial role in today’s business world. In fact, for many organizations, these third parties are instrumental to success.
But as with all good things, there is a downside. In the case of third-party service providers, the downside is risk — risk of compromised trade secrets, data and intellectual property theft, financial loss and so on. It is impossible to mitigate risk entirely but there are many measures a company can take to reduce the potential for losses with a robust third-party risk management strategy.
Do I Need a Formal Strategy for Effective Third-Party Risk Management?
Third-party risk management or TPRM must be approached intentionally and strategically. TPRM should be part of an organization’s larger risk mitigation efforts.
Unfortunately, many companies don’t realize the importance of third-party risk management until after the horse has escaped the barn, so to speak. And by the time that happens, it’s too late and you’ve sustained losses. Effective third-party risk management should begin today with the development of a solid four-prong strategy.
Prong 1: Effective Third-Party Risk Management Through Vendor Identification
As you begin the development of a TPRM strategy, it is imperative that you identify all of the vendors, independent contractors, freelancers, and other third-party service providers that work with your organization. This can be a challenge, especially in a large enterprise environment where you have dozens of different departments and divisions that operate independently of each other. In this kind of setting, it’s unlikely that there is a single person who knows about all of the third parties who are affiliated with the business. That makes identifying these individuals very challenging.
One effective technique for identifying the third parties who work within your organization’s sphere is to reference the books. Contractors, vendors, and other third parties don’t work for free. They’re getting paid, so consult your bookkeeper to track down payments to vendors, contractors, and other third parties.
In addition to identifying the third parties who are working with your company currently, it is important to establish a protocol for documenting the new individuals who are pulled into the fold. This ensures that nobody falls through the cracks, evading the very important screening process.
Prong 2: Effective Third-Party Risk Management Through Vulnerability Identification
It is important to understand where a company’s vulnerabilities dwell; only then can you develop a solid strategy to minimize risk and implement protections where necessary.
Vulnerabilities take many forms. They can include some of the following.
Financial vulnerabilities – Money-related vulnerabilities are rather universal. Finances are an area that businesses should always take care to protect, so it goes without saying that a TPRM strategy should dramatically minimize access to financials.
Regulatory risks – Many industries are subject to stringent compliance requirements and regulations. The financial sector and the healthcare industry are two examples of highly-regulated industries. An uninformed vendor could easily perform an action (or inaction) that leads to major fines and penalties.
Data vulnerabilities – Many fail to realize the importance and value of data and information. Data is the lifeblood of nearly every business and it carries tremendous value that warrants protection. An identity thief would place great value on a healthcare database filled with patients’ personal information. Meanwhile, a competitor would probably be willing to pay a sizable sum to get their hands on that proprietary algorithm and its accompanying database.
These are just a few areas of vulnerability that may exist within an organization. By identifying the most vulnerable areas, you can take action to implement protocols and protections that will minimize risks posed by third parties and even in-house employees.
Prong 3: Systematic Evaluation of Third Parties
Evaluation and screening are an integral part of any third-party risk management strategy. Many companies achieve this through TPRM software platforms that evaluate a questionnaire that is completed by the third party. The subject’s answers are then evaluated by the software, using a comprehensive algorithm that looks for certain phrases and terminologies. A ranking or score is then issued for the questionnaire, giving an idea of the individual’s threat level.
In addition to the questionnaire-based evaluation, some third-party risk management software programs feature integrations with background check platforms that reference public records such as bankruptcy filings, foreclosures, arrests, and so on. When evaluated as a whole, this information can provide a good idea of an individual’s level of threat.
Prong 4: Effective TPRM Through Periodic Monitoring
Evaluating a vendor’s risk level today offers peace of mind for the moment. But circumstances change, resulting in changes to an individual’s level of threat. For this reason, an effective third-party risk management strategy requires a plan for periodic re-evaluations.
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Consider prioritizing third parties based on their perceived risk level and the vulnerability of the areas where they work within your organization. The highest-risk individuals and those working within the most vulnerable areas of your organization will generally warrant more frequent rechecks. On the other hand, those who are considered relatively low risk and individuals who do not access highly vulnerable regions of your business would require less frequent rechecks.
Once you have developed a TPRM ranking and classification system, you will be well-positioned to develop a risk re-evaluation protocol.
Third-party risk management requires an intentional, well-thought-out strategy. The most effective way to develop this strategy is to assemble a task force that is composed of representatives from throughout the organization. This will provide a broad-scope view of the company’s risks, vulnerabilities, strengths, and dynamics — everything you need to develop a solid TPRM strategy.
An experienced TPRM consultant can serve as an indispensable resource by guiding the development of an effective third-party risk management strategy. At iTech, we understand the challenges our clients face and we are well-positioned to help guide them to the TPRM consultants and technology you need to succeed. Contact the team at iTech today to discuss third-party risk management and how we can get you on the path toward a robust TPRM strategy.