How to design a third-party risk management framework
Most organizations focus on securing routers, servers, firewalls, and other endpoints, but threats can also arise from unfamiliar sources such as third-party networks, which can be used by hackers to attack an organization. Through a strong TPRM framework, companies gain insights into the risk profiles of their partners, thus safeguarding operations.
An effective third-party risk management framework ensures that an organization is not derailed by vendor risks and vulnerabilities. It protects assets, ensures compliance with regulations, and protects an organization’s reputation.
1. Engaging stakeholders and partners
First and foremost, you must assemble a cross-functional, competent team to create the framework. Make sure that representatives from each department – operations, risk management, IT, procurement, legal, cybersecurity, compliance, etc. – are included.
By doing this, you can ensure that every team is aligned and has the right resources to contribute to efficiently managing third-party and vendor risks.
2. Categorize all your third parties
Make a list of all third-party service providers and vendors in your organization. Categorize them according to different parameters: product, nature of their service, type of data they access, the extent of data access they have and if it’s essential, and any further fourth party relationship they have.
Some third-party vendors are crucial for your organization’s success, and some don’t matter. By grouping them, you will be able to separate the relationships that are vital for your organization to succeed. You should also categorize vendors based on geographic location, to account for geopolitical instabilities and regulatory differences.
3. Define your risk tolerance and scope
Right after you categorize your third-party vendors based on their importance to your organization, next you must define the scope of your third-party risk management services and framework by identification of the type of third parties involved and the risk factors posed by them. Also, some amount of risk is always present, and you have to come up with the level of risk acceptable by your company.
Determine risk tolerance and appetite levels for compliance, cybersecurity, and disruption in operations. Make sure to keep your industry-specific standards and regulations in mind when you define the scope of your TPRM framework.
4. Establish a process for third-party risk management
Organizations with central third-party risk management in place report better risk understanding and faster actions. Over 64% of organizations following centralized TPRM perform control assessments in 30 to 60 days. You must draft guidelines for vendor onboarding and a pre-screening process to enlist vendors based on their risk profile.
Your questionnaire must focus on areas like regulatory compliance, access control, data encryption, financial health, and more. Make sure to customize questionnaires to check whether a vendor aligns with your organization’s needs.
5. Risk identification and mitigation
To have an efficient TPRM framework in place, you need to systematically identify and assess risks. For this, you categorize risks depending on their likelihood and overall impact and then conduct assessments to improve your mitigation strategies.
To mitigate risks effectively, you must enhance your contractual provisions or implement security controls better. This way, you can enhance your cybersecurity team and identify and fight risks on time before they can wreak havoc on your organization.
6. Conduct due diligence
Before you finalize a relationship with any third-party vendor, you must check the partner’s reliability and suitability for your organization.
For this, you must monitor and evaluate a vendor’s performance, verify compliance with necessary regulations, and check whether they adhere to all obligations in the contract. If you are proactive and alert when managing your vendors, you’ll reduce risks and enter strong partnerships.
7. Have incident response plans in place
Develop the right incident response plans or corrective actions to properly handle data or security breaches if (when) they happen. A contingency and business continuity plan should be in place so you can minimize the effect third-party failures or disruptions may have on your organization’s operations.
You can be as alert as you want, but threats can arise anytime, and you should be ready to tackle them.
8. Compliance
You must comply with the applicable regulations and laws, industry standards, and obligations in contracts with your third-party vendors. There should be open communication between the stakeholders, board members, executive managers, and regulators of your third-party relationships.
This ensures that you can stay aligned with them regarding TPRM activities, along with the status and effectiveness of the program.
9. Continuous monitoring and improvement
For maximum efficiency, you need continuous monitoring and evaluation of your third-party risk management services. This will help you better understand the lessons from your past experiences and improve accordingly.
You can also identify emerging changes or risks in your business environment and use them to enhance your risk assessment, procedures, policies, and overall TPRM framework.
10. Training
If every member of the organization, from executive management to operational staff, is not on the same page, then your TPRM framework will not be successful.
Conduct awareness sessions and build training modules to ensure employees are well-versed in their responsibilities and roles in managing third-party risks. By promoting risk awareness and mitigation, you can foster security-first in your organization, ensuring each member is alert and accountable.
Conclusion
With the right TPRM framework, your organization can achieve better risk awareness, better regulatory compliance, protection of confidential data and organizational assets, improved reputation, and better decisions regarding third-party partnerships. You can also reduce data breaches, system vulnerabilities, and financial loss.
To uphold your industry’s competitiveness and resilience, develop a third-party risk management framework and ensure that every member of your organization is aligned in the process.