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January 6, 2022

TPRM, Explained

Introduction to Third-Party Risk Management (TPRM)

Modern business relies on key relationships with your supply chain, vendors, and other third parties. Yet every single one of those relationships is also a potential risk for your organization. This has never been more true than in our current digital age, with the reliance on IT tech.

We cannot run a business without sharing both confidential information and operational data with trusted partners. Yet, every time we do so, we introduce another channel through which information can be lost. No matter how robust our own cybersecurity, for example, it only takes one supplier opening an infected link to pass on the infection.

Third-Party Risk Management, or TPRM, focuses on finding, assessing, and managing these risks. Not just at the beginning of a relationship, but throughout the entire duration of the partnership, including any exits from contracts.

There’s a lot that can go wrong besides immediate data leaks. Think hits to your reputation, delays in your workday, and even issues in your financial turnover. Anything from compromised data and illicit use of information through to lack of legal compliance and supply-chain irregularities has immense impacts on your business. TPRM is there to make sure it doesn’t happen.

Why is TPRM Important?

What makes third-party risk management so important? We are solidly in a digital age, and supply chain management is now heavily reliant on new tech like hosting and cloud services, and vendor/supplier chains that take place online.

Even where you thoroughly trust your partners, that doesn’t mean their infrastructure can’t be exploited- and that risk kicked down the road to you. Yet many of our businesses run with far too many people able to access far too much of our networks and the confidential data within, with no real reason for that access either.

TPRM involves asking key questions like what data these third parties you work with can access, whether that’s digital or physical access, what risks come with that access (and the knock-on effects on your business), and how much confidential information leaks could hurt you.

Common Third-Party Risks

With that in mind, let’s look at some of the most common third-party risks.

Common Risk #1 - Cybersecurity

Especially since companies were left scrambling to institute work-from-home solutions, cybersecurity has become one of the fastest-growing areas of risk. Every attack is smarter and faster, yet a frightening number of companies have no cybersecurity measures of their own in place, let alone assessing their risk from third parties.  

Common Risk #2 - Financial

Third-party financial risk occurs when vendors suffer either excessive costs or lost revenue. Excessive costs cramp growth and lead to debt accumulation. Audits and regulated pathways are needed to ensure vendor spending stays in line with expectations.

Lost revenue occurs when vendors directly impact your revenue-producing capabilities. For example, issues with delayed or lost revenue because a system tracking sales fails to record activity correctly.

Common Risk #3 - Operational

Operational risk occurs when vendor processes stall. Many enterprises are so intertwined with their supply chain, that a failure from a vendor to provide service means your daily activities stall too. Here business continuity plans are needed to help you stay ahead of the risk.

TPRM Best Practices

It’s best to think of TPRM as a continuous business cycle, similar to ones already in place in your organization. It’s never a one-and-done item, but rather a daily process. Let's look at some TPRM best practices that should be in place.

Best Practice #1 - Identify and Classify

You can do nothing to protect yourself without knowing where your risks lie. You need to understand where your third-party channels are and the risks they present. Then, you need to assess and classify these risks, depending on how catastrophic the consequences are, how much data is involved, what level of access to your systems they have, how important to you they are, and so on.

Best Practice #2 - Assess and Manage

Knowing is important, but not all. Now you must assess the security ‘posture’ of those third parties. Then, you must develop policies, acquire relevant software and other measures, make emergency plans, and so on.

Best Practice #3 - Monitor

The job is never fully done. Make sure you have a continuing plan to evaluate risk and seal loopholes while keeping security best practices in hand.

TPRM is a critical part of modern business, so making sure you have the right software and business partners in place to manage issues before they hurt you is essential.

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