Companies are increasingly reliant on Third Party Risk Management (TPRM) to help them with a multitude of services. This guide will help you understand the basics of third-party risk management so you can protect your company from potential problems down the road.
What is Third Party Risk Management
Third party risk management (TPRM) is a process of evaluating, documenting, and monitoring the risks associated with interacting with a third party. It involves analyzing whether the third party can be trusted to deliver services in line with their contractual obligations and commitment to service quality. It also requires assessing any potential risks relating to reputation or business continuity that may arise from associating with them. By implementing an effective TPRM program, organizations can protect themselves and create value through better management of relationships with their business partners.
Third Party Risk Management Process
TPRM is an increasingly important part of business operations. It involves identifying and managing risks associated with third-party relationships. This process helps organizations effectively manage potential risks to their data, intellectual property, finances, and reputations.
The various stages of this process include:
- Companies should develop a standard strategy/framework before they start working with third parties. This standard framework should be flexible and able to accommodate different scopes of work and risk
- Determining the scope of the relationship with the third party
- Conducting due diligence to identify potential third party risks
- Implementing controls to mitigate the identified risks
- Monitoring and testing the effectiveness of the controls
- Reviewing to ensure ongoing compliance with contract terms and conditions
Determine Scope of Third Party Relationship
The first step in the TPRM process is to determine the scope of the third party relationship. Companies must assess which services they need from a third party and what level of risk they are willing to accept in order to meet their goals. They should also consider any potential conflicts of interest that may arise between them and the third party, such as the third party’s existing relationships with competitors.
Conduct Due Diligence to Identify Potential Third Party Risks
Companies should conduct due diligence on the third parties they are considering working with. This allows them to identify any potential risks associated with engaging them in a business relationship. The due diligence process typically includes gathering information about the third parties’ financials, operations, and processes. Companies should also consider any potential reputational risks associated with the third party.
Develop an Appropriate Risk Management Strategy & Framework
Once the scope of the relationship has been determined and potential risks identified, companies must develop an appropriate risk management strategy and framework. This includes setting clear objectives and risk appetite, as well as implementing controls to mitigate the risks associated with the third party. The risk management strategy should be reviewed on an ongoing basis to ensure it is still fit for purpose.
Implement Controls to Mitigate Identified Risks
Companies must implement appropriate controls to mitigate the identified risks associated with engaging a third party. These controls may include financial reporting requirements, regular audits and reviews of the third party’s operations, use of technology to monitor performance, and contractual terms that require the third party to comply with certain standards.
Monitoring & Testing the Effectiveness of Controls
Companies should also monitor and test the effectiveness of the controls they have implemented. This may involve regular audits to ensure the third party is complying with contractual terms and conditions, or reviews of their financials. Companies should also have procedures in place for responding to any potential incidents that may occur as a result of working with a third party.
Reviewing to Ensure Ongoing Compliance
TPRM requires ongoing review and assessment to ensure that controls remain effective and that the third party is complying with contractual terms and conditions. Companies should also review their risk management strategy regularly to ensure it is still fit for purpose.
TPRM is an important part of any business’s operations, and companies must take steps to ensure they are effectively managing the risks associated with engaging third parties. This includes evaluating
Third Party Risk Management Benefits
Engaging in effective TPRM provides numerous benefits for companies, such as:
- Improved compliance with regulatory requirements - Companies can ensure they are compliant with applicable regulatory requirements by following a TPRM process.
- Protection from reputational risks - Engaging in TPRM can help protect companies from potential reputational risks associated with engaging third parties.
- Improved operational efficiency - TPRM can help companies identify potential areas of improvement in their operations, resulting in increased efficiency.
What Companies Need TPRM Most
TPRM is valuable for any company that engages third parties to provide services or products. However, it is particularly useful for large companies in industries such as finance, healthcare, and cybersecurity which are heavily regulated. TPRM can prevent issues that could significantly impact business operations for companies in these areas.
Certa is a third-party risk management platform that can help companies manage their third-party relationships. Certa provides visibility into third parties, streamlines the due diligence process and helps automate risk monitoring and oversight. With Certa’s workflow automation tool, you can speed up third-party onboarding by up to 300% while also giving you complete control.