Tag: Risk management

Unlocking the Value of Third-party Risk Management | Blog

Organizations are increasingly relying on third parties for various functions to cut costs and leverage external expertise, which can introduce significant security risks. This blog explores how effective third-party risk management (TPRM) is crucial for identifying, analyzing, and controlling these risks, ensuring protection against potential breaches and vulnerabilities. Read on, or get in touch if you have specific queries on this topic.

In the rapidly evolving business landscape, there has been a significant transformation in the way businesses operate. This shift includes moving away from traditional methods and adopting SaaS/cloud services, increased remote work, etc., which has led many organizations to rely more heavily on third parties for various functions, ranging from marketing to manufacturing. This approach not only saves costs but also provides a straightforward means to leverage expertise that the organization might not have in-house.

While outsourcing to third parties can help organizations enhance operations efficiently, it also introduces the risk of security breaches. Each third party/vendor has the potential to introduce vulnerabilities by expanding access points into the organization’s digital footprint. Moreover, these third-party attacks and breaches are difficult to detect and more expensive to mitigate compared to a regular incident.

To manage and mitigate these risks, organizations implement third-party risk management (TPRM) programs or strategies, which is the process of identifying, analyzing, reducing, and controlling the risks that are associated with outsourcing to third-party service providers or suppliers. These third parties could include contractors, sub-contractors, vendors, suppliers, joint ventures, business channels, and any noncustomer entity with which the organization has established a relationship to outsource certain functions.  The scope of TPRM programs depends on many factors, including regulatory guidance, industry, etc.

Key factors influencing the evolution of TPRM (not exhaustive)

1. Growth of remote work and expanding supply chains
2. Rising prevalence of third-party vulnerabilities
3. Increasing Cyber threats and regulatory expectations
4. Complex inter-organizational processes
5. Lack of up-to-date inventory and security patches

Given the complexity of implementing and managing a TPRM program, it is crucial to understand the best practices and key parameters that influence the sizing of TPRM services. We have observed enterprises often facing challenges in rightly sizing the TPRM ecosystem due to the involvement of multiple factors. Among these, we understand that the number of vendors, their size, and their control lists significantly influence the scope of managed services and, consequently, the managed services pricing.

Challenges faced by enterprises while developing the TPRM program: (not exhaustive)

1. Lack of standardization: Inconsistent risk assessment methodologies and varying levels of risk tolerance across different departments can lead to fragmented TPRM practices
2. Data quality and integration: Poor data quality and challenges in integrating data from multiple sources can lead to inaccurate risk assessments and monitoring
3. Regulatory complexity: Navigating the complexities of various regulatory requirements across different regions and industries can be challenging, especially for global enterprises
4. Dynamic risk landscape: The ever-changing risk landscape, with new threats and vulnerabilities emerging regularly, requires continuous updates to the TPRM framework, which can be resource intensive
5. Risk prioritization: Deciding which risks to address first, especially with limited resources, requires a clear understanding of which third parties pose the greatest risk and which areas of risk are most critical to the enterprise

Best practices for third-party risk management

1. Vendor inventory: Maintaining a detailed record of all third-party vendors associated with the organization helps organizations gain insights into the scope of their external partnerships, making it easier to manage and assess risks effectively
2. Vendor classification: Classifying vendors into critical tiers can be done based on the level of access/ integration, the risk factor they introduce, and their impact on business operations. This can help organizations to prioritize their risk management efforts
3. Risk assessment: Risk assessment involves evaluating the potential risks associated with each vendor relationship, such as cyber risks, operational risks, financial risks, compliance risks, etc.
4. Risk mitigation: Once risks are identified, strategies for risk mitigation should be enforced, such as contractual provisions, security audits, or monitoring activities to reduce the identified risks
5. Developing risk management framework: Establish clear Policies and Procedures for vendor risk management, including assessment methodologies, reporting requirements, and escalation procedures
6. Leverage technology, tools, and automation: TPRM tools can help an organization to automate risk assessments, evaluate vendor performance and monitoring, etc., which ultimately enhances the efficiency of the risk management program. They can also provide insights into vulnerabilities and compliance gaps, making it easier to take appropriate actions
7. Continuous monitoring: Continuous monitoring of vendor relationships is vital to ensure that risks are managed effectively over time. Regular review of vendor performance, security posture, and compliance with contractual agreements should be performed. This proactive approach helps in detecting and addressing emerging risks before they escalate into critical issues

Delivery models for TPRM

We’ve observed service providers to typically offer below delivery models:

1. Build and transfer: Service providers develop only the TPRM framework and capability for the client, which will be ultimately transferred to the client’s team
2. Managed services: Service providers manage the end-to-end operations of the TPRM program as per the defined SLAs
3. Staff augmentation: Service providers offer only the skilled resources to the client for their TPRM program
4. Project-based: Service providers access the third parties of the client for a fixed cost or on a T&M basis

Key factors impacting the criticality of TPRM

1. Number of vendors: Organizations with a limited number of third-party suppliers can be managed relatively seamlessly, but as the number of suppliers grows, the process needs to be handled more strategically and centralized with a well-defined framework
2. Size of vendors: Organizations with a higher number of small-sized third-party vendors could be at greater risk compared to organizations with large-sized third-party vendors
3. Nature of vendors: The type of services provided by third parties also could impact complexity, particularly if they involve sensitive data handling, regulatory compliance, or core business operations
4. Regulatory environment: The regulatory requirements governing the industry and geographic regions in which the organization operates can impact the complexity, as non-compliance of these regulations can lead to legal and financial repercussions

Pricing models observed across TPRM-managed services

1. Fixed fee: Most of the service providers follow a fixed fee model for TPRM-managed services based on the number of vendors, number of assessments, complexity of the third parties etc.
2. Unit-based pricing: Few service providers bill customers based on a per-unit model, such as per assessment, per third-party vendor, per control, etc.

For insights on the TPRM framework, pricing, and benchmarks, please reach out to Ricky Sundrani, Vinamra Shukla, and Vamsi Krishna. You can also access our supplier management toolkit that outlines key steps for risk management in outsourcing, or catch up on the latest risk management insights in our webinar on demand, Mitigating Supplier Risks: The Power Of Advanced Tools And Technologies.