The State of Third-Party Risk Management: A Comparison of Before and Now
Over the years, third-party risk management (TPRM) has evolved in a way that mirrors the changing landscape of global business operations. While in its nascent stages, the focus was predominantly on managing the immediate and direct risks associated with key suppliers and vendors, and even then, it was often done in an ad-hoc manner.
Today, TPRM has transformed into a comprehensive and strategic discipline. The industry is no longer just about mitigating risks; it now encompasses a broader mandate of ensuring operational resilience, protecting brand reputation, and upholding environmental, social, and governance (ESG) principles, among other strategic objectives.
In this article, we shed light on four ways in which TPRM practices have evolved so you can gauge how far along your TPRM programs are in terms of maturity.
Shift in Focus
Prior to the shift towards a proactive and risk-based approach, TPRM used to focus on addressing risks as they emerge. It was highly reactive, and consisted primarily of short-term fixes. The following are some useful indicators that an organisation has a traditional approach to TPRM:
- There is no system for ongoing monitoring of third-party activities – the organisation relies solely on periodic reviews
- Limited engagement or communication with third parties regarding risk management practices, expectations, and performance
- Slow or minimal adaptation of TPRM practices in response to past incidents, audit findings, or feedback
The massive failing in this reactive approach lies in its inability to prepare organisations to anticipate and adapt to future challenges.
The modern, more effective approach to TPRM involves continuous third-party risk monitoring, fostering a risk-aware culture within the organisation, and employing advanced analytical tools to predict and mitigate potential risks before they materialise. The modern way is aimed at reducing the likelihood and impact of third-party risks whereas the conventional approach is focused on only the latter.
Expansion in Scope
The range of third-party relationships encompassed in TPRM has expanded considerably. In the past, TPRM typically focused on risks associated with direct suppliers and vendors, primarily third-parties with significant financial transactions or direct operational impact. Now, the scope of TPRM encompasses a much wider range of third-party relationships, including but not limited to the following:
- Joint ventures partners
- Affiliate marketing partner
- Customers and clients
- Government agencies
- End users
- Credit unions
- Venture capitalists
- Service providers (e.g. IT support, logistics, marketing, consulting, or legal services)
This broadened scope stems from a growing recognition that risks can emanate from any level within the supply chain, including fourth- and fifth-parties and reflects a holistic understanding of how interconnected and multifaceted business risks have become in a globalised economy.
Adoption of Technology and Automation
When it comes to managing third-party risks, organisations that still cling to manual processes for third-party risk assessments, monitoring and reporting suffer an extreme disadvantage for the simple reason that the business decisions they end up making are based on information that no longer accurately reflects their current risk landscape, which in turn leaves them vulnerable to unforeseen threats.
Risks evolve rapidly, and data can become obsolete almost as soon as it is collected. Manual processes, typically slower and less dynamic, struggle to keep up with the pace at which risk factors change.
The modern approach embraces the adoption of technology and automation to perform traditionally time-consuming tasks such as:
- Gathering and analysing data – financial health, compliance status, and cybersecurity measures – about third-parties
- Aggregating and processing relevant information about third parties, from legal background checks to regulatory compliance reviews
- Monitoring of third-party performance and risk status
- Management of contracts with third parties, including the tracking of expiration dates, renewal terms, and compliance with contractual obligations
- Generating risk reports
- Keeping track of changing regulatory requirements
The use of advanced technologies like AI, machine learning, and data analytics has also been known to help with identifying critical correlations and interdependencies between different risk factors, leading to more comprehensive risk assessments and ultimately, more effective decision-making.
If you are considering adopting software to help augment your TPRM programs, check out our article on The Top 10 Third-Party Risk Management Software for 2023 Reviewed.
Greater Collaboration and Transparency
Perhaps one of the more significant shifts from past TPRM practices is evidenced by the rise of collaboration and transparency both within the organisation and in relation to third-parties.
For one, some organisations have fundamentally altered how they engage with their third parties. The foremost relationship between businesses and their third-parties is transactional in nature. This is traditionally characterised by limited communication in order to fulfil the basic requirements of the agreement. In instances of more collaborative partnerships, third-parties share information about their risk management practices, and they work together with you to jointly develop risk mitigation strategies, and maintain a constructive ongoing dialogue about performance and compliance.
Internally, within the organisation, we see a paradigmatic shift as well. There is a growing recognition of the importance of cross-departmental collaboration in effective TPRM. Departments such as IT, legal, compliance, operations, and finance are increasingly working together to share insights, pool expertise, and develop a comprehensive understanding of third-party risks. This integrated approach ensures that different perspectives are considered, enhancing the overall risk assessment and management process. It also promotes a risk aware culture within the organisation, where all departments understand their role in TPRM and are committed to its success.
Modern TPRM practices emphasise the importance of collaboration and transparency in vendor relationships rather than blame – we rather think it is the way forward.
The functions of TPRM have evolved to align more closely with the overall strategic objectives of the modern business. Besides safeguarding the organisation against conventional and emerging risks, modern TPRM strategies strive to enhance overall operational resilience and protect brand value in the long run.
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