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Third-Party Risk Management (TPRM) protects your organisation from risks linked to external partners. A well-designed TPRM programme safeguards your operations, reputation and finances in today's interconnected business world.
TPRM involves identifying, assessing and controlling risks that stem from your organisation's relationships with external parties. These parties might provide products and services or perform business functions on your behalf.
Today's businesses increasingly rely on outsourcing, cloud services and global supply chains to deliver their solutions. This shift has expanded the network of third-party relationships for many companies, simultaneously increasing their exposure to potential risks, which range from cybersecurity threats and data breaches to operational interruptions and compliance violations.
You might encounter various terms in this field, such as vendor risk management, supplier risk management and third-party vendor management. While these terms are often interchangeable, they all fall under the broader umbrella of TPRM, which covers the management of risks associated with any external entity that has access to your systems, data or operations.
This article will discuss:
By the end, you'll understand how TPRM can help protect your organisation and support your business objectives.
The need for effective TPRM has grown significantly in recent years. Cybersecurity incidents involving third parties have become increasingly common and sophisticated across industries. A stark example of this trend occurred in 2013 when Target experienced a massive data breach affecting 41 million consumers, traced back to a compromised third-party HVAC vendor.
Simultaneously, organisations have become more reliant on outsourcing business functions to external partners. This increased dependence was brought into sharp focus during the 2020 SolarWinds supply chain attack. The breach, which affected thousands of companies worldwide, including government agencies, demonstrated the far-reaching consequences of third-party vulnerabilities in an interconnected business landscape.
Adding to these challenges are unpredictable events that can significantly upset third-party operations. Natural disasters, geopolitical conflicts and global health crises all pose potential threats to supply chains and business continuity. The COVID-19 pandemic, for instance, exposed weaknesses in many organisations' supply chains and business continuity plans, underscoring the need for solid TPRM strategies that can adapt to unforeseen circumstances.
When TPRM falls short, the consequences can be severe:
Implementing TPRM helps you spot potential issues early, make informed decisions about your third-party relationships, meet regulatory requirements and maintain business continuity when faced with disruptions.
Modern businesses rely heavily on outsourcing to gain competitive advantages in a fast-paced market.
One of the primary drivers is cost savings. By partnering with external providers, companies can significantly reduce their operational expenses. For instance, a mid-sized tech company might cut its development costs by collaborating with an overseas software development firm, taking advantage of lower labour costs in certain regions.
Access to specialised expertise is another compelling reason for outsourcing. External partners can offer skills and knowledge that might not be available in-house or would be costly to develop internally. A retail chain, for example, might use a third-party logistics provider to manage its complex supply chain more efficiently than it could on its own, benefiting from the provider's years of experience and specialised systems.
Flexibility and scalability also play key roles in the decision to outsource. Third-party relationships allow businesses to adapt quickly to market changes without the need for significant long-term investments. A growing e-commerce startup, for instance, can use cloud services to rapidly scale its infrastructure during peak shopping seasons, avoiding the need for substantial upfront investment in hardware and maintenance.
However, these benefits come with risks. Without a proper TPRM programme, you might face:
A solid TPRM programme helps you with these risks while still reaping the benefits of outsourcing. By doing the due diligence on your third-party partners, you can build a risk management program that supports innovation and growth while managing and mitigating potential downsides.
Not all vendors pose the same level of operational risk to your organisation. Segmenting third-party vendors based on their risk profile helps you allocate resources effectively.
Consider this tiering model:
To determine vendor tiers, start by assessing the inherent risk associated with each vendor and evaluating the potential impact if something were to go wrong in your relationship with them.
Next, examine the business function impact by analysing how important the vendor is to your core operations. Finally, take into account the contract value to understand the financial exposure linked to each vendor relationship.
Take this as an example: A financial services firm might place its payment processing partner in Tier 1 due to the sensitive nature of the data involved and the role it plays in operations. In contrast, its office cleaning service might be in Tier 3.
Automation can simplify various aspects of TPRM:
While cybersecurity is important, a reliable TPRM programme considers various risk types:
Consider fourth-party risk as well — the risks from your vendors' subcontractors or service providers. For instance, if your cloud service provider uses a third-party data centre, that data centre's security practices affect your risk profile. This is where due diligence becomes very important.
The TPRM lifecycle provides a structured approach to managing third-party relationships from start to finish.
In this initial phase, you identify and catalogue all your third-party relationships. This involves creating a centralised vendor inventory, gathering basic information about each vendor and assigning initial risk tiers based on preliminary information.
For example, a hospital might start by listing all its vendors, from medical equipment suppliers to cafeteria food providers, in a central database.
When you need a new third-party service, this phase helps you choose the right partner. You'll develop and distribute Requests for Proposals (RFPs), evaluate potential vendors based on specific criteria and conduct initial risk assessments. A software company looking for a new cloud provider might send RFPs to several providers and then evaluate them based on factors like security measures, regulatory compliance, uptime guarantees and cost.
Once you've selected a vendor, you'll conduct a thorough risk assessment. This involves using standardised assessments, considering risk exchanges for pre-completed assessments and evaluating the vendor's responses and supporting documentation. For instance, a financial institution might require its new payment processing vendor to complete a detailed cybersecurity questionnaire and provide recent audit reports.
Based on the risk assessment, you'll need to address any identified risks. This includes flagging high-risk areas, calculating risk scores and developing and implementing mitigation plans. If the assessment reveals that a vendor lacks proper encryption for data in transit, you might require them to implement stronger encryption protocols before allowing them access to your systems.
This phase involves finalising the agreement with the vendor. You'll include key terms for risk management, confirm the contract addresses identified risks and mitigation plans and obtain necessary internal approvals. A retailer contracting with a customer service outsourcing firm might include clauses about data protection, service quality metrics and the right to conduct periodic audits.
Maintain detailed records of your TPRM activities by documenting all risk assessments, mitigation plans and monitoring activities. Develop TPRM metrics and dashboards, and prepare regular reports for stakeholders. An energy company might create a monthly dashboard showing risk scores for all Tier 1 vendors, incidents reported and mitigation actions taken.
Vendor risk management is an ongoing process. Continuously monitor vendor performance against contractual obligations, stay alert to risk-changing events and conduct periodic reassessments. A bank might use automated tools to monitor its vendors' cybersecurity scores daily, with alerts set for any significant drops.
When a vendor relationship ends, you need proper offboarding. Make sure all company data is returned or securely destroyed, revoke access to systems and facilities and update your vendor inventory. For example, when ending a contract with an IT support provider, a law firm would make sure all client data is removed from the provider's systems, deactivate any access credentials and document the completed offboarding process.
The ownership of TPRM can vary depending on your organisation's structure and industry. However, it typically involves several stakeholders:
Regardless of which department formally "owns" TPRM, cross-departmental collaboration is key. For example:
By thoroughly vetting and monitoring your vendors, you reduce the risk of data breaches and other security incidents. This protects your organisation and builds customer confidence.
For example, after using a TPRM programme, a healthcare provider might see a 30% reduction in security incidents related to third-party vendors over a year. This improvement can be highlighted in patient communications, strengthening trust in the provider's data protection practices.
Automating TPRM processes can significantly reduce the time and resources required for vendor management.
Consider a financial services firm that previously spent an average of 40 hours manually reviewing each vendor's annual cybersecurity risk assessment. By implementing an automated TPRM platform, they might reduce this to 10 hours per vendor, freeing up staff for other tasks and potentially saving hundreds of thousands of pounds annually in labour costs.
A centralised TPRM system provides a clear, complete view of your third-party relationships and associated risks. This visibility simplifies reporting and supports audit preparedness.
For instance, a multinational corporation might use its TPRM dashboard to quickly generate reports on vendor compliance with GDPR, simplifying the process of demonstrating compliance to auditors and potentially reducing audit duration and costs by 25%.
Regular monitoring and assessment of vendors can lead to improved performance and lower overall risk.
A manufacturing company might use its TPRM programme to identify a key supplier that consistently delivers materials late. By addressing this issue proactively, they could improve their own production timelines, potentially increasing output by 15% and avoiding costly production delays.
While Zendata isn't specifically TPRM software, our platform complements TPRM efforts by highlighting third-party risks throughout your infrastructure. This supports:
For interconnected businesses, third-party risk management has become an important component of overall business strategy. A reliable TPRM programme protects your company from a wide range of third-party risks, helps you make informed decisions about vendor relationships, complies with evolving regulations and improves operational efficiency and vendor performance.
As you evaluate or improve your TPRM efforts, start by assessing your current third-party risk landscape. Then, develop a thorough TPRM strategy that aligns with your business objectives. Use tools and processes to automate and simplify TPRM activities and create a culture of risk awareness across your organisation.
Remember, third-party risks aren't stagnant. New technologies, changing regulations and shifting business models all contribute to a dynamic risk environment. Your TPRM programme must remain flexible and adaptable, evolving alongside these changes.
When you prioritise TPRM, you don't just protect your organisation from potential threats — you position it to thrive in an increasingly complex business world.
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Third-Party Risk Management (TPRM) protects your organisation from risks linked to external partners. A well-designed TPRM programme safeguards your operations, reputation and finances in today's interconnected business world.
TPRM involves identifying, assessing and controlling risks that stem from your organisation's relationships with external parties. These parties might provide products and services or perform business functions on your behalf.
Today's businesses increasingly rely on outsourcing, cloud services and global supply chains to deliver their solutions. This shift has expanded the network of third-party relationships for many companies, simultaneously increasing their exposure to potential risks, which range from cybersecurity threats and data breaches to operational interruptions and compliance violations.
You might encounter various terms in this field, such as vendor risk management, supplier risk management and third-party vendor management. While these terms are often interchangeable, they all fall under the broader umbrella of TPRM, which covers the management of risks associated with any external entity that has access to your systems, data or operations.
This article will discuss:
By the end, you'll understand how TPRM can help protect your organisation and support your business objectives.
The need for effective TPRM has grown significantly in recent years. Cybersecurity incidents involving third parties have become increasingly common and sophisticated across industries. A stark example of this trend occurred in 2013 when Target experienced a massive data breach affecting 41 million consumers, traced back to a compromised third-party HVAC vendor.
Simultaneously, organisations have become more reliant on outsourcing business functions to external partners. This increased dependence was brought into sharp focus during the 2020 SolarWinds supply chain attack. The breach, which affected thousands of companies worldwide, including government agencies, demonstrated the far-reaching consequences of third-party vulnerabilities in an interconnected business landscape.
Adding to these challenges are unpredictable events that can significantly upset third-party operations. Natural disasters, geopolitical conflicts and global health crises all pose potential threats to supply chains and business continuity. The COVID-19 pandemic, for instance, exposed weaknesses in many organisations' supply chains and business continuity plans, underscoring the need for solid TPRM strategies that can adapt to unforeseen circumstances.
When TPRM falls short, the consequences can be severe:
Implementing TPRM helps you spot potential issues early, make informed decisions about your third-party relationships, meet regulatory requirements and maintain business continuity when faced with disruptions.
Modern businesses rely heavily on outsourcing to gain competitive advantages in a fast-paced market.
One of the primary drivers is cost savings. By partnering with external providers, companies can significantly reduce their operational expenses. For instance, a mid-sized tech company might cut its development costs by collaborating with an overseas software development firm, taking advantage of lower labour costs in certain regions.
Access to specialised expertise is another compelling reason for outsourcing. External partners can offer skills and knowledge that might not be available in-house or would be costly to develop internally. A retail chain, for example, might use a third-party logistics provider to manage its complex supply chain more efficiently than it could on its own, benefiting from the provider's years of experience and specialised systems.
Flexibility and scalability also play key roles in the decision to outsource. Third-party relationships allow businesses to adapt quickly to market changes without the need for significant long-term investments. A growing e-commerce startup, for instance, can use cloud services to rapidly scale its infrastructure during peak shopping seasons, avoiding the need for substantial upfront investment in hardware and maintenance.
However, these benefits come with risks. Without a proper TPRM programme, you might face:
A solid TPRM programme helps you with these risks while still reaping the benefits of outsourcing. By doing the due diligence on your third-party partners, you can build a risk management program that supports innovation and growth while managing and mitigating potential downsides.
Not all vendors pose the same level of operational risk to your organisation. Segmenting third-party vendors based on their risk profile helps you allocate resources effectively.
Consider this tiering model:
To determine vendor tiers, start by assessing the inherent risk associated with each vendor and evaluating the potential impact if something were to go wrong in your relationship with them.
Next, examine the business function impact by analysing how important the vendor is to your core operations. Finally, take into account the contract value to understand the financial exposure linked to each vendor relationship.
Take this as an example: A financial services firm might place its payment processing partner in Tier 1 due to the sensitive nature of the data involved and the role it plays in operations. In contrast, its office cleaning service might be in Tier 3.
Automation can simplify various aspects of TPRM:
While cybersecurity is important, a reliable TPRM programme considers various risk types:
Consider fourth-party risk as well — the risks from your vendors' subcontractors or service providers. For instance, if your cloud service provider uses a third-party data centre, that data centre's security practices affect your risk profile. This is where due diligence becomes very important.
The TPRM lifecycle provides a structured approach to managing third-party relationships from start to finish.
In this initial phase, you identify and catalogue all your third-party relationships. This involves creating a centralised vendor inventory, gathering basic information about each vendor and assigning initial risk tiers based on preliminary information.
For example, a hospital might start by listing all its vendors, from medical equipment suppliers to cafeteria food providers, in a central database.
When you need a new third-party service, this phase helps you choose the right partner. You'll develop and distribute Requests for Proposals (RFPs), evaluate potential vendors based on specific criteria and conduct initial risk assessments. A software company looking for a new cloud provider might send RFPs to several providers and then evaluate them based on factors like security measures, regulatory compliance, uptime guarantees and cost.
Once you've selected a vendor, you'll conduct a thorough risk assessment. This involves using standardised assessments, considering risk exchanges for pre-completed assessments and evaluating the vendor's responses and supporting documentation. For instance, a financial institution might require its new payment processing vendor to complete a detailed cybersecurity questionnaire and provide recent audit reports.
Based on the risk assessment, you'll need to address any identified risks. This includes flagging high-risk areas, calculating risk scores and developing and implementing mitigation plans. If the assessment reveals that a vendor lacks proper encryption for data in transit, you might require them to implement stronger encryption protocols before allowing them access to your systems.
This phase involves finalising the agreement with the vendor. You'll include key terms for risk management, confirm the contract addresses identified risks and mitigation plans and obtain necessary internal approvals. A retailer contracting with a customer service outsourcing firm might include clauses about data protection, service quality metrics and the right to conduct periodic audits.
Maintain detailed records of your TPRM activities by documenting all risk assessments, mitigation plans and monitoring activities. Develop TPRM metrics and dashboards, and prepare regular reports for stakeholders. An energy company might create a monthly dashboard showing risk scores for all Tier 1 vendors, incidents reported and mitigation actions taken.
Vendor risk management is an ongoing process. Continuously monitor vendor performance against contractual obligations, stay alert to risk-changing events and conduct periodic reassessments. A bank might use automated tools to monitor its vendors' cybersecurity scores daily, with alerts set for any significant drops.
When a vendor relationship ends, you need proper offboarding. Make sure all company data is returned or securely destroyed, revoke access to systems and facilities and update your vendor inventory. For example, when ending a contract with an IT support provider, a law firm would make sure all client data is removed from the provider's systems, deactivate any access credentials and document the completed offboarding process.
The ownership of TPRM can vary depending on your organisation's structure and industry. However, it typically involves several stakeholders:
Regardless of which department formally "owns" TPRM, cross-departmental collaboration is key. For example:
By thoroughly vetting and monitoring your vendors, you reduce the risk of data breaches and other security incidents. This protects your organisation and builds customer confidence.
For example, after using a TPRM programme, a healthcare provider might see a 30% reduction in security incidents related to third-party vendors over a year. This improvement can be highlighted in patient communications, strengthening trust in the provider's data protection practices.
Automating TPRM processes can significantly reduce the time and resources required for vendor management.
Consider a financial services firm that previously spent an average of 40 hours manually reviewing each vendor's annual cybersecurity risk assessment. By implementing an automated TPRM platform, they might reduce this to 10 hours per vendor, freeing up staff for other tasks and potentially saving hundreds of thousands of pounds annually in labour costs.
A centralised TPRM system provides a clear, complete view of your third-party relationships and associated risks. This visibility simplifies reporting and supports audit preparedness.
For instance, a multinational corporation might use its TPRM dashboard to quickly generate reports on vendor compliance with GDPR, simplifying the process of demonstrating compliance to auditors and potentially reducing audit duration and costs by 25%.
Regular monitoring and assessment of vendors can lead to improved performance and lower overall risk.
A manufacturing company might use its TPRM programme to identify a key supplier that consistently delivers materials late. By addressing this issue proactively, they could improve their own production timelines, potentially increasing output by 15% and avoiding costly production delays.
While Zendata isn't specifically TPRM software, our platform complements TPRM efforts by highlighting third-party risks throughout your infrastructure. This supports:
For interconnected businesses, third-party risk management has become an important component of overall business strategy. A reliable TPRM programme protects your company from a wide range of third-party risks, helps you make informed decisions about vendor relationships, complies with evolving regulations and improves operational efficiency and vendor performance.
As you evaluate or improve your TPRM efforts, start by assessing your current third-party risk landscape. Then, develop a thorough TPRM strategy that aligns with your business objectives. Use tools and processes to automate and simplify TPRM activities and create a culture of risk awareness across your organisation.
Remember, third-party risks aren't stagnant. New technologies, changing regulations and shifting business models all contribute to a dynamic risk environment. Your TPRM programme must remain flexible and adaptable, evolving alongside these changes.
When you prioritise TPRM, you don't just protect your organisation from potential threats — you position it to thrive in an increasingly complex business world.
