Third-party risk management is the process of controlling activities that could potentially lead to positive or negative results due to outsourcing specific functions and processes to outside parties. It is important for organizations to set up an internal control system and have it reviewed for compliance by an external third party just as organizations have their financials audited by a third party on a regular basis. The capacity of third-party risk management teams is unlocked as data becomes cleaner and more linked, improving risk management and enabling organizations to pivot towards high quality, forward-looking activities.

Vendor Management

Vendor management comprises all of the processes required to manage third-party vendors that deliver services and products to financial organizations. By relying on a third-party vendor, it also means that confidential data and information about your organization will have to be handled by a third party, which could lead to serious consequences. In short, good risk management balances the cost of preventing or dealing with (mitigating) a risk against the likely cost of doing nothing, of simply taking the risk.

Likely Party

Third-party risk management has started to gain much importance, as organizations turn more toward outsourcing to reduce operating costs and put more emphasis on core competencies. An effective third-party risk management function also includes the identification and evaluation of fourth parties, that is, the downstream vendors, suppliers, and contractors used by your own third parties.

Objectives Program

Information technology (IT) plays a critical role in many businesses. A vendor risk management program is a formal way to evaluate, track, and measure third-party risk, to assess its impact on all aspects of your business, and to develop compensating controls or other forms of mitigation to lessen the impact on your business if something should happen. Once a shared vision is articulated, overall risk management goals and objectives must be defined.

Your approach should be risk-based and proportionate, taking into account the nature, scale, and complexity of your organization operations. Risk management is aimed at reducing the gross level of risk identified to a net level of risk, in other words, the risk that remains after appropriate action is taken.

Program risk management addresses any individual risks at project level that, if realized, will have a wider impact. These types of quality plans/agreements have typically been more reactive than proactive, in that their focus has been more on issue management, audits, and inspections than on proactive risk management. They can help enable you to assess your organizational maturity and determine a clear way.

Practical Implementation

In many cases, sourcing and offshoring activities are becoming more extensive and sophisticated in order to capture the next level of service delivery, processing efficiency, and cost savings. Integrated risk management is your organization-wide approach to managing risk at the strategic, operational, and project level, supported greatly by an excellent knowledge of the subject and a good grasp of the practical challenges the business world faces in implementation. Consider each of the stakeholders and specific roles in implementing a quality management process to be evaluated.

Want to check how your Third Party Risk Management Framework Processes are performing? You don’t know what you don’t know. Find out with our Third Party Risk Management Framework Self Assessment Toolkit: