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As organizations expand the realm of their services and products, their dependence on third parties to helm certain functions have gradually increased. As a result, the importance of third-party risk management (TPRM) has grown more than ever before. A third party is an entity in the organization you work with, and it might include suppliers, manufacturers, service providers, business partners, agents, and distributors.
Over the last few years, we’ve seen how third parties are addressed, and the risks occur. But at present, the major challenge is the supply chain and cyber threats. Businesses are assessing and reviewing their dependence on third and fourth parties. Today, in all organizations, risks related to information and data are becoming more sophisticated with data, analytics, and digital tools. The TPRM can change their operating models and their approach to third-party risks. As the supply chain and ecosystems continue to expand, the need for TPRM programs expands. The future of third-party risk management depends upon the successful integration of particular pursuits.
What’s Next in Third-Party Risk Management?
Third-party risks may arise from third parties employed in the organization that may affect your supply chain network or even impact cyber security. Every business relies on third parties for a particular job as it’s often cost-effective to outsource to an expert. Key trends associated with the TPRM are mentioned below:-
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Increased Focus on Cyber security Risk
Since the pandemic, several organizations have been looking to continue their business operations remotely. This is because, during the onset of the pandemic, remote work gained success. But as the business operations remained online, the cyber security risks have also increased. Many data breaches and attacks have taken place and already surpassed the total number of breaches in the previous year. As the threats have increased, increasing your focus on cyber security risk is quite important. The majority of incidents occur from third parties. With cyber attacks targeting vendors and suppliers, third-party cyber incidents have consequently increased. Businesses face a significant impact if they do not invest in proper risk management tools.
All these third parties pose a risk to your business. However, it is difficult to manage the supply chain’s inherent risks when the network expands. Therefore, it is essential to work on specific aspects to mitigate it.This includes identifying and managing the products/services, conducting due diligence on parties, assessing the different risk areas, and reviewing SOC 2/SOC 3 reports. It helps understand the control effectiveness of the supply chain and other factors.
The cyber security risk insurance premium has risen significantly as cyber risks have become serious concerns for the organization. The cyber risk insurance premium protects against cyber frauds and ransomware. Therefore, there are various platforms to understand the overall cyber risk exposure of a third party. These platforms include BitSight, Security Scorecard, etc. These platforms provide cyber security ratings as well. Firms can also use SOC 2 or SOC 3 reports to enhance control within a third-party organization.
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Assessing the Environmental, Social, and Governance (ESG) Risks in TPRM
Businesses are witnessing a paradigm shift in their focus on Environmental, Social, and Governance (ESG) risks. ESG risks are not only within the organization, but these risks are also associated with third parties. Recently, the European Union announced mandatory legislation to encourage companies to take action to ensure that human rights are protected. They have also encouraged companies to reduce environmental impacts in their supply chains.
Assessing these ESG risks of a third party is no longer straightforward. If you incorporate ESG into your third-party risk management assessments, it avoids regulatory actions. It also protects businesses from various regulatory fines and penalties that may damage their brand reputation. When incorporating ESG into your organization’s processes, several factors must be considered. These factors include policy updates, contracts, risk assessments, etc. Before incorporating, businesses need to examine policies, statements, and metrics.
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Third-Party Risk Management Expands to Fourth or ‘N’ Number of Parties
The benefits of third-party suppliers have made organizations increasingly dependent on their networks. As business systems become more complex, the dependency on third parties is growing daily. However, businesses today do not depend on the network of consultants and vendors alone but also on their suppliers and ‘n’ number of parties.
All these third parties pose a risk to your business. However, it is difficult to manage the supply chain’s inherent risks when the network expands. Therefore, it is essential to work on specific aspects to mitigate it.This includes identifying and managing the products/services, conducting due diligence on parties, assessing the different risk areas, and reviewing SOC 2/SOC 3 reports. It helps understand the control effectiveness of the supply chain and other factors.
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Adopt According to the Changing Regulations in the Environment
Nowadays, the regulations and policies are constantly changing to keep up with the digital ecosystem of how businesses function. The regulatory environment is transforming dynamically by creating compliance risks and pressure. It leads to a lot of challenges in controlling operational efficiencies. The major challenge of an organization is to track and manage third-party compliance.
Most third-party relationships are controlled by regulators, such as OCC, FINRA, CFPB, etc. These regulators are holding organizations responsible for their actions and their relationship with third parties. Organizations need to adapt to the changing environment. A good TPRM program must include assessments to assess the compliance of the regulations for all the activities performed by the third party.
Takeaway
In 2023, the third-party risk won’t be a ‘procurement department issue’. Today, events, such as a security breach or a risk incident, affect the supply chain management of organizations. It also includes actions taken by your vendors that can have lasting consequences and could be financially or legally. The other trends that the TPRM can use include mitigating long-term effects on the supply chain, building protection and resilience, embracing a proactive approach to risk management, using good data, and using predictive analytics to reduce claim costs.
These are the trends that might mitigate third-party management. Managing and mitigating emerging and evolving third-party risk requires a connected, integrated, and proactive approach. To conclude, third-party management is essential because failure to mitigate third-party risks in an organization leads to supply chain attacks, data breaches, and reputational damage. You can rely on ComplyScore to identify, analyze, and mitigate third-party risks. To know more about their services, visit https://complyscore.com/.
