Third party risk management has become increasingly important for businesses today. With companies relying more on third parties like vendors, suppliers, and partners, they are exposed to significant risks if these relationships are not properly managed. Around 84 percent businesses believe that third party misses actually resulted in operational disruptions. While third party relationships can provide tremendous value, they can also expose businesses to cybersecurity, financial, regulatory, and reputational risks if not handled carefully. The stakes are so high the more and more businesses are embracing robust third party risk management frameworks for their business. Nowadays there has become a web of interconnectedness that large businesses rely on third parties for some functions while third parties rely on fourth parties for some of their functions.
TPRM Challenges and Overcoming Them
There is a comprehensive and significant list of challenges posed in front of effective third party risk management. In this blog, we will discuss some of the key challenges in managing third party risks and strategies to overcome them.
Lack of Visibility into Third Party Practices
One of the biggest challenges for businesses is the lack of visibility into a third party’s policies, procedures, and controls. Without an understanding of how third parties operate, manage internal risks, and handle sensitive data, it is difficult to gauge the level of risk exposure. Many third parties may not be transparent about their practices or may have immature risk management programs. Building visibility into their operations, cyber maturity levels, and risk culture is crucial but difficult without their cooperation. Lack of visibility is often the first challenge of third party risk management. Unclear and shoddy picture of third party ethics and practices make it difficult to frame and scale the third parties according to third party risk management framework.
Businesses can overcome this by conducting comprehensive due diligence on third parties before partnering with them. Detailed risk assessments and questionnaires help better understand their controls. Regular site visits, audits, and testing procedures also provide visibility. Being proactive and asking third parties to get independent validations like SOC 2 reports can also help gain assurance. Once the veil is taken off from the third parties and everything becomes crystal clear then it becomes easier for businesses to grade third parties into risk categories.
Resource Intensive Risk Assessments
While assessing third party risks is critical, the process can be quite intensive in terms of time, effort, and resources. Large organizations may have thousands of vendors and conducting in-depth risk assessments on each can be extremely challenging. The dynamic nature of third party relationships also means that assessments have to be updated regularly.
Businesses can deal with this by adopting risk-based approaches, where third parties are categorized based on criticality and prioritized for assessments accordingly. Automation tools can also help streamline and speed up risk assessments by providing questionnaires, document collection, and standard templates. Focusing assessments on vendors handling sensitive data or critical services helps optimize resources.
Complex Regulatory Requirements
Navigating different regulatory compliance requirements around third parties also poses challenges. Regulations like GDPR in the EU, CCPA in California, and others have specific obligations around vendor risk management and data protection. Understanding regulatory expectations and translating those to workflow processes and contractual terms with global third parties makes compliance difficult.
Partnering with legal counsel and compliance experts is important to interpret regulatory guidelines related to third parties. Monitoring regulatory changes and adapting policies and procedures is also key. Implementing robust data protection measures, audits, and due diligence aligned to leading regulations can help meet global compliance standards.
Lack of Standardization in Risk Management Practices
While regulatory standards help provide guidelines, many businesses still struggle with the lack of standardization in third party risk management practices across the industry. Risk assessment questionnaires, KRIs, audits, and contracts vary significantly. This makes benchmarking difficult and also creates additional burdens for third parties working with multiple clients.
Aligning with industry frameworks and standards like the ISO 27001 or NIST cybersecurity framework can help organizations benchmark against peers. Joining industry groups to collaborate on risk management practices is also beneficial. Partnering with third parties to create standardized self-assessment questionnaires helps reduce their burden too. A test-once philosophy and mutual acceptance of standard certifications and reports enable efficiencies.
Oversight of Subcontractors
With long and complex supply chains, businesses have to contend with ‘fourth party risk’ created by third party subcontractors. However, companies often have little visibility or control over subcontractors, making risk oversight very tricky. Fourth party risk management is also an effective component of a robust TPRM framework. In fact a sense of safety and security must prevail throughout the whole supply chain ecosystem.
Requiring third parties to disclose their use of subcontractors and include flows down of contractual terms is important. Conducting spot checks or audits of critical subcontractors provides some visibility even if limited. Exploring emerging technologies like blockchain to enhance supply chain transparency can also help with the oversight of subcontractors.
Ineffective at Scaling Across Large Network
Finally, addressing third party risks often remains a fragmented, manual process. This makes scaling risk management across a large, global network of third parties nearly impossible. Lack of automation and data integration poses challenges.
Moving to platform-based solutions for vendor risk management introduces automation in risk assessments, documentation, and analytics. This approach scales seamlessly across the network and provides comprehensive visibility through integrated data. Machine learning also allows benchmarking risks and predicting non-compliance. Integrating GRC tools with procurement and P2P systems also helps embed risk early during the sourcing stages.
Conclusion
Managing third party risk is complex but critical for business resilience. While there are many challenges, taking a proactive, pragmatic approach focused on transparency, automation, standardization, and smart resource allocation can help companies overcome roadblocks. The solutions lie in assessing risk continuously, collaborating across the ecosystem, utilizing enabling technology, and maintaining rigorous oversight. By making third party risk management a strategic imperative backed by senior leadership support, companies can effectively scale their vendor assurance programs.
Author Bio:
Nagaraj Kuppuswamy is the Co-founder and CEO of Beaconer, an esteemed enterprise specializing in managed third-party risk using the cloud-native AI-based solution. With an extensive portfolio of accolades and industry certifications, Nagaraj stands out as a seasoned expert, boasting over 16 years of dedicated involvement in the field of Cybersecurity. Throughout their career, he has predominantly focused on elevating the realm of third-party risk assessment. You can connect with him through Linkedin.
