What Are the Most Effective Strategies for Managing Third-Party Risks in 2024?

Managing third-party risks has never been more critical, especially in 2024, as businesses increasingly rely on vendors and third parties to provide essential services, technologies, and products. The interconnected nature of modern supply chains means that a disruption, data breach, or failure in one link could have wide-ranging consequences. In this comprehensive guide, we will explore the most effective strategies for managing third-party risks, presented step by step, with robust descriptions, actionable steps, and expected outcomes.

Step 1: Establish a Third-Party Risk Management (TPRM) Framework

Description:

Before managing third-party risks, organizations must develop a solid framework. This framework should outline the roles, responsibilities, and processes for identifying, assessing, mitigating, and monitoring third-party risks. The framework should align with your organization’s broader risk management strategy and regulatory requirements.

Actionable Steps:

• Define scope and objectives for the third-party risk management framework, ensuring it covers all relevant areas (e.g., operational, financial, compliance, cybersecurity risks).
• Engage key stakeholders from legal, compliance, procurement, and information security to define roles and accountability.
• Develop policies and procedures for the identification, assessment, monitoring, and mitigation of third-party risks.
• Ensure the framework aligns with existing governance models and complies with industry regulations (e.g., GDPR, CCPA, SOC 2, etc.).

Expected Outcome:

A comprehensive TPRM framework will establish a consistent and structured approach for managing third-party risks across your organization. It will ensure clarity in roles and responsibilities and provide a roadmap for managing vendor-related risks.

Step 2: Conduct Thorough Due Diligence

Description:

Performing detailed due diligence on potential and existing third parties is key to mitigating risks. This involves assessing the third party’s financial stability, legal standing, cybersecurity practices, and compliance with relevant regulations.

Actionable Steps:

• Create a due diligence checklist that covers financial, operational, compliance, and cybersecurity risks.
• Engage subject matter experts (e.g., legal, finance, cybersecurity) to evaluate the third party’s risk profile.
• Request and review documentation such as SOC reports, financial statements, compliance certificates (ISO 27001, PCI-DSS), and legal contracts.
• Perform background checks and review publicly available information (e.g., news articles, sanctions lists).

Expected Outcome:

Thorough due diligence will provide a comprehensive understanding of the third party's capabilities and potential risks. It will reduce the likelihood of entering into risky or non-compliant partnerships.

Step 3: Categorize and Prioritize Third Parties Based on Risk

Description:

Not all third-party relationships carry the same level of risk. By categorizing third parties based on the potential risk they pose to your organization, you can allocate resources more effectively and focus on high-risk relationships.

Actionable Steps:

• Classify vendors based on risk criteria such as access to sensitive data, critical business functions, and compliance requirements.
• Prioritize vendors into categories like low, medium, and high risk, and develop a specific risk management plan for each category.
• Use a risk matrix to evaluate the likelihood and impact of potential risks associated with each third party.

Expected Outcome:

Risk categorization ensures that the organization focuses on high-risk third parties, deploying more intensive oversight and resources to those vendors that pose the greatest risk to business operations or data security.

Step 4: Implement Robust Contractual Safeguards

Description:

Contracts are your first line of defense when managing third-party risks. A well-structured contract can include provisions that mitigate risks such as data breaches, non-compliance, and service disruptions.

Actionable Steps:

• Include key provisions in contracts, such as Service Level Agreements (SLAs), compliance with cybersecurity standards (e.g., NIST, ISO 27001), data privacy obligations (e.g., GDPR), and incident response protocols.
• Incorporate audit rights that allow your organization to conduct regular assessments or reviews of the third party’s practices.
• Define penalties or exit clauses in case of non-compliance, breach of contract, or poor performance.

Expected Outcome:

Well-drafted contracts with robust clauses will legally protect your organization and ensure that third parties adhere to required standards and practices. In the event of an incident, clear contractual provisions will help mitigate legal and financial exposure.

Step 5: Establish Continuous Monitoring and Risk Assessment

Description:

Managing third-party risks is not a one-time exercise. Continuous monitoring ensures that third-party risks are identified, assessed, and mitigated over the life of the relationship. This includes monitoring for changes in third-party operations, financial stability, regulatory compliance, or cybersecurity posture.

Actionable Steps:

• Implement monitoring tools and technologies that track third-party risks in real time (e.g., cybersecurity monitoring, financial health tracking).
• Schedule regular reviews and audits of third-party performance, including compliance audits, security assessments, and service reviews.
• Establish incident response processes to quickly address any breaches, compliance failures, or other issues that may arise with third parties.
• Use Key Performance Indicators (KPIs) to monitor the third party’s adherence to agreed SLAs and compliance obligations.

Expected Outcome:

Continuous monitoring allows for proactive identification and remediation of risks. By maintaining real-time visibility into the performance and risk profile of third parties, your organization can act swiftly to mitigate issues before they escalate.

Step 6: Foster Strong Vendor Relationships and Collaboration

Description:

Strong, collaborative relationships with third parties can significantly reduce risks. Engaging in regular communication and transparency fosters trust and ensures that both parties are aligned on risk management practices.

Actionable Steps:

• Schedule regular meetings with key vendors to discuss performance, compliance, and emerging risks.
• Share relevant updates regarding your organization’s risk management strategy and expectations.
• Engage in joint risk assessments and offer resources to help third parties improve their security or compliance posture.
• Provide training for third parties on compliance requirements or security best practices.

Expected Outcome:

Strong relationships with vendors create a culture of transparency and accountability, leading to better risk management outcomes. Vendors will be more proactive in addressing risks if they feel supported and valued.

Step 7: Integrate Third-Party Risk Management with Enterprise Risk Management (ERM)

Description:

Third-party risks should be integrated into your organization’s broader ERM strategy. This ensures that vendor risks are managed in conjunction with other enterprise risks, and that senior leadership has visibility into these risks.

Actionable Steps:

• Align TPRM with ERM frameworks to ensure consistency in risk identification, assessment, and reporting.
• Include third-party risks in the organization’s risk register, and ensure they are regularly reviewed by the risk committee.
• Use aggregated data from TPRM and ERM to inform strategic decisions, including investments in vendor relationships or adjustments to risk mitigation strategies.

Expected Outcome:

Integrating third-party risk management with ERM provides senior management and the board with a holistic view of risks across the organization. It ensures that third-party risks are not managed in isolation, but as part of the overall risk landscape.

Step 8: Ensure Compliance with Relevant Regulations and Standards

Description:

Third-party risk management must comply with industry regulations and standards. Failure to manage vendor compliance can lead to fines, legal penalties, and reputational damage.

Actionable Steps:

• Map your TPRM program to relevant regulatory requirements (e.g., GDPR, CCPA, PCI-DSS).
• Ensure vendors undergo regular compliance audits and provide evidence of compliance with applicable standards.
• Maintain updated records of third-party compliance status, and ensure that this information is accessible during audits or regulatory reviews.
• Develop a remediation plan for vendors who fail to meet regulatory or contractual compliance standards.

Expected Outcome:

Compliance with regulations and standards reduces legal and regulatory exposure. It also ensures that vendors adhere to required practices, protecting your organization from potential fines, breaches, or operational disruptions.

Conclusion

By following these steps, organizations can build a robust third-party risk management strategy that minimizes exposure to vendor-related risks. The result is a more resilient business, better vendor performance, and stronger regulatory compliance in an increasingly complex risk landscape.

This step-by-step guide offers a comprehensive approach to managing third-party risks effectively, helping organizations safeguard their operations while fostering beneficial vendor relationships.

-

#enterpriseriskguy

Muema Lombe, risk management for high-growth technology companies, with over 10,000 hours of specialized expertise in navigating the complex risk landscapes of pre- and post-IPO unicorns.? His new book is out now, The Ultimate Startup Dictionary: Demystify Complex Startup Terms and Communicate Like a Pro?