This article is part three of a series – for more in-depth information about managing risk, check out part one and part two.
Let's talk tightropes
Picture this: a daring tightrope walker maneuvers gracefully across a thin wire. Suspended high above a bustling circus, each step is deliberate, each movement a calculated risk.
In many ways, managing third-party risks mirrors this high-stakes performance. Every decision carries weight – and one misstep could result in a dangerous fall.
So, how do you maintain this precarious equilibrium? Is your organization the tightrope walker or the tightrope?
What is third-party risk management?
Before we dive too deep, let’s set the stage by defining third-party risk management.
Far from simply being a subcategory of general risk management, it's a unique, multifaceted discipline. Imagine a chess match, but instead of only trying to checkmate your opponent, you're also working together first to defeat a common enemy.
Here, vigilance isn’t optional. It's a necessity.
Third-party collaboration can offer specialized skills, open doors to new products and markets, and boost growth. Every organization, from a small organic grocery chain to a multinational tech conglomerate, knows this. However, in the same way a glass of expensive wine can leave a sour taste in your mouth, third-party associations without the proper screening and audits in place can become a vulnerability faster than you can say "data breach".
Third-party risks are as prevalent and varied as any internal risk – and even more unpredictable since they’re wrapped up in another entity’s actions and the veil of all the other operations and processes you don’t have insight into. Sweeping these risks under the rug? Big mistake.
Third-party collaboration can offer specialized skills, open doors to new products and markets, and boost growth.
Recommended reading: Risk Management 101: Turning 'Oh No' Into Opportunity
Subcategories of third-party risk
Navigating third-party risk isn't a one-size-fits-all endeavor, so there isn’t one single field to watch out for pitfalls underfoot.
Let's break the major risk areas down:
- Cybersecurity – With the increasing number of cyberattacks every week, there’s no glossing over how big a risk cyberthreats are to anyone, anywhere. The best crisis management processes in the world can’t prevent a risk brought through the front door by a partner you thought you could trust.
Evaluate and press the buttons of security measures like you would your own, keeping in mind you may not have access on a daily basis – and the cyberthreat landscape is always one step ahead. Some of these factors are easy to check, while others are more subtle. For example, are your partners using outdated software? Do they regularly train their staff in cybersecurity best practices?
- Compliance – Regulatory pitfalls are everywhere. Your third-party partners need to meet the same local, regional and international standards that you do. Why? Because if they slip up, you're implicated too. Use compliance management systems to continuously monitor their activities, identify where risk areas lie and assess risk on an ongoing basis.
- Financial – The financial stability of your third-party partners can directly impact your operations. If suppliers or vendors suddenly go bankrupt or face cashflow problems, you're left holding the empty bag. Ensure you regularly review your third parties’ financial health through credit reports, audits and other financial assessments to confirm cash flow is healthy from A to Z.
A playbook for third-party risk management
Your next move is to create a clear-cut plan that lays out how you'll identify, assess, monitor and respond to third-party risks. Think of this as your treasure map: it outlines the terrain, warns you of pitfalls and guides you to your destination – which is nothing less than robust risk management!
The following points are your directions to get you through the maze of complexities that come with dealing with third parties:
- Identify and classify – This is your first filter. Separate the wheat from the chaff by understanding the nature and degree of risk each third-party brings:
- High-risk – These entities require extensive audits and frequent check-ins
- Medium-risk – Adequate due diligence is enough
- Low-risk – Minimal oversight is required – just don’t get complacent
- Conduct due diligence – You're the detective; your third parties are the subjects. Use tools like background checks, credit reports and compliance certificates to verify credentials and screen partners for concerns.
- Monitor and review – Ever heard of the saying "Trust but verify"? In other words, to scan while you sustain, implement automated governance, risk and compliance solutions to track performance metrics and flag risks and anomalies. Known risks mean you’re aware of what to watch out for; no risks on your radar means there’s something (or several things) you aren’t seeing.
- React and revise – If you discover a risk, don’t just put a band-aid on it. Dig deep, find the root cause and revise your approach to either prevent it from reoccurring or manage it to avoid damage, escalations or losses to your organization.
Tools and technologies
Technological advancements have changed the world – including how organizations can manage third-party risks. From automated oversight to real-time auditing, today's tools are light-years ahead of clunky manual processes that struggle to sort a mountain from a molehill.
Whether you're a seasoned pro or new to the field, there's a suite of digital solutions designed to make your life easier and your strategies more effective:
- AI-based analytics platforms – Your secret weapon for sniffing out third-party vulnerabilities, these platforms use advanced algorithms to detect potential external risk areas before they escalate.
- Contract management systems – Keep track of every term and condition with your external vendors. These systems make sure compliance is upheld and financial agreements are clear, agreed in advance and subject to airtight non-disclosure agreements and data security. If you've ever been burned by the fine print, you know how vital contract management is. These systems help you monitor and manage every agreement with third-party vendors, ensuring that compliance is maintained, and any financial implications are clear from the get-go.
- Collaboration portals – Secure spaces to share sensitive information and collaborate on risk assessments with your third parties.
- Risk management software – When risks can change in days rather than weeks, the adaptability of an integrated risk management can’t be underestimated. Automated alerts for periodic assessments and can help you keep you on top of the risk admin work that keeps current data feeding into the system.
- Audit solutions – Get real-time snapshots of third-party compliance. These tools alert you to potential issues before they blow up, helping you keep your eyes on any potential problems on the horizon.
The view from the tightrope
Managing third-party risk is more than a one-time task. It’s an ongoing act of agility, awareness and adjustment on both your part and the part of your partners and suppliers.
As you contemplate the path ahead, remember that it’s always better to be proactive than reactive. There are both internal and third-party risks in your organization’s future – that’s a fact. It’s how you manage them that keeps your organization safe.
Check out NAVEX third-party risk management solutions to see how we can help you strengthen your defenses.
