What is Third-Party Risk Management?

The links established by the organization with third parties imply a risk factor. Vendor risk management identifies and deals with eventualities that may affect the organization, due to its relationship with suppliers, partners, investors, concessionaires, and contractors, among others.

Third-party risk management helps an organization understand what the people or organizations with whom it establishes relationships are doing, how they are doing it, and how those actions may affect their ability to achieve business objectives by keeping an eye on critical risk areas.

In some organizations, third party risk management applies only to suppliers, forgetting employees and contractors. This relates to regulatory or industry requirements.

In one way or another, knowing the importance of this task, and the best practices to carry it out, is of great importance in an increasingly globalized world, in which the relationship with organizations and people in distant geographical areas is inevitable.

Third Party Risk Management—Why is it important?

That relationships with third parties involve a level of uncertainty is not something new. But it is something that today has a greater impact and causes greater concern in the corporate world.

Two reasons explain why third-party risk management is given greater importance today: the first is the dependence that, due to globalization, we have on relationships with organizations or people in other countries and on other continents. Secondly, we cannot fail to mention the impact of increased regulations and the severity with which infractions are punished.

A modern organization of the 21st century, which intends to lead in its sector and achieve a level of sustainable growth, will have to support this project in hundreds or thousands of third parties. If these third parties have trouble meeting their commitments, or adopting internationally generally accepted codes of conduct, the organization will be in big trouble.

But should a small or medium-sized organization, which does not have operations in other countries, or even in a community other than the one in which it is established, also worry about the risks to which its third parties are exposed or the problems they could cause?

Of course yes. In fact, small or medium-sized organizations are more vulnerable to the negative impact that the conduct or lack of foresight of a third party may cause.

Third Party Risk Management Best Practices

There are some basic principles, or best practices, that need to be adopted before launching a third-party vendor due diligence system or risk management program. Three of them can be implemented now:

Prioritize third parties

Not all third parties have the same importance. As we commented at the beginning, some organizations do not consider employees as third parties. Not even contractors. And there is a reason for this: over these types of third parties they have control and a level of authority that allows them to exercise constant vigilance and supervision.

The same does not happen with suppliers, partners, investors, distributors or franchisees, for example. This is a high risk third party group. We could say that employees and contractors are low risk.

Even within the group of suppliers, partners and other assailable, we can categorize and prioritize according to the real risk that each third party implies, and the dependence that the organization has on the products or services that they supply.

Prioritization allows, first of all, to focus resources on the management of third parties that imply greater risk. But it also establishes criteria to know if it is possible to share confidential business information, data, or access to certain physical or virtual areas.

Train specialized professionals in the area of risk management

The effectiveness of risk management, in general, depends on the consistency of the processes that are implemented. And this is directly related to the capacity, training and experience of the professionals in charge.

But it is also important to assess training needs at all levels of the organization. An officer from the purchasing area, for example, should have sufficient training to know how to proceed in some supplier contracting processes, from the risk management approach.

Focus management on all possible risks

The first trend when talking about third-party risk management is to think about information security and data protection risks. But the spectrum is much broader: damage to reputation, legal litigation, interruption of supply, business continuity... these are just some of the threats that can affect an organization through a third party.

In practice, all the risks that are considered when we evaluate our organization can affect third parties and these can impact us in return.