What Is Third-Party Risk Management (TPRM) and How to Manage It Effectively?

Introduction

In this blog, we will delve into the critical concept of Third-Party Risk Management (TPRM) and explore effective strategies for managing it. Third-party risk management is integral for organizations to mitigate the impact of risks posed by their third-party relationships.

Understanding Third-Party Risk Management

• Third party risk management is essential for organizations to establish, validate, and enhance their third-party risk management program.

• The series is based on the comprehensive guidebook for establishing a TPRM program, which will be available to TPRM professionals soon.

• The six phases of a TPRM program lifecycle are planning, oversight, pre-contract due diligence, contract review, continuous monitoring, disengagement, and continuous improvement.

• Before diving into the life cycle, it’s crucial to understand the foundations of third-party risk management, including basic definitions, risk types, calculating and evaluating risk, and addressing risk exposure from third parties.

• Third parties are broadly defined as entities providing products and services to an organization, including affiliates, subsidiaries, consultants, contractors, vendors, and more, regardless of a contractual relationship or monetary exchange.

• The evolving purpose of procuring third-party products and services now includes outsourcing critical processes, scaling services globally, focusing on strategic priorities, reaching niche markets, and gaining additional expertise.

• Third-party risk refers to the possibility of adverse impact on an organization’s data, financials, operations, reputation, or other business objectives as a result of its third parties, requiring constant monitoring and mitigation by TPRM professionals.

Understanding Third-Party Risk Management (TPRM)

• Third-Party Risk Management (TPRM) is a framework of policies, procedures, controls, and oversight designed to identify and address risks posed by third parties to an organization.

• TPRM is becoming increasingly important due to the growing complexity of the threat landscape, greater reliance on third parties for critical services, digital transformation projects, increasing regulations, and environmental impacts.

• Regulatory scrutiny of organizations has also intensified, with a shift towards requiring evidence of effective controls and compliance programs in place for third parties to operate securely and effectively.

• Organizations engaging third-party services often share proprietary and restricted data, increasing the risk to the organization, making it crucial for owning organizations to ensure third parties safeguard their data appropriately.

• The risk of doing business with a third party depends on the nature of the relationship between the organization and the third party, as well as the controls implemented by the third party.

Understanding and Managing Risks in Third-Party Relationships

• Organizations need to take security measures to understand and mitigate the risks of working with third parties.

• Failure to manage these risks can lead to regulatory scrutiny, fines, legal repercussions, and reputational or financial damage.

• Third-party risk management (TPRM) programs have expanded to include not only cyber risk but also financials, operations, and environmental and social impacts.

• Types of risks from third-party relationships include reputational, security breaches, operational, strategic, transaction, cyber security, ESG, compliance, and more.

• Organizations must evaluate controls in place for third parties to avoid, mitigate, share, or transfer these risks.

Understanding and Evaluating Third-Party Risks

• An organization’s risk management framework is based on its risk appetite, which refers to the level of risk the organization is willing to accept.

• Third parties pose different types of risks to organizations, and evaluating these risks is crucial for decision-making and ongoing monitoring.

• Assessing the nature of services provided by third parties helps in understanding their impact on the organization, enabling proactive planning for any potential failures.

• There are two types of risk associated with third parties: inherent risk, which is calculated before assessing the third party and provides a worst-case scenario, and residual risk, which evaluates the effectiveness of implemented controls.

• Risk is calculated based on the level of impact and the likelihood of occurrence, and the velocity at which the risk could occur may also be considered.

Options for Addressing Third-Party Risk

• Once an organization has calculated the risk of a third party, they may choose to accept, remediate, share, transfer, or avoid the associated risk.

• When organizations accept risk, they acknowledge that the potential loss or impact is at a level they are willing to temporarily accept, until the risk can be mitigated or a secondary control can be put in place.

• To remediate risk, organizations work with their third party to create and implement an achievable action plan to enhance control and lessen the impact of the risk.

• Risk sharing allows an organization to distribute the responsibility of a risk across multiple organizations and individuals, reducing the impact felt by any single organization or individual.

• Risk transfer occurs when an organization transfers the risk to another better-suited organization, such as an insurance company, especially when the impact of risk is high but the likelihood of occurrence is low.

• An organization can choose to avoid a risk by disengaging with the third party and terminating services to prevent the risk from materializing.

• Regardless of the chosen approach, organizations must have strong processes in place to discover and assess third-party risks through the implementation of a robust third-party risk management program.

Conclusion

To conclude, Third-Party Risk Management (TPRM) is a crucial aspect of organizational risk mitigation. By understanding the significance and implementing effective TPRM strategies, organizations can safeguard themselves from potential risks arising from their third-party relationships, ensuring secure and effective operations.

undefined