Third-Party Risk Management: What It Is And Why You Need It

Even the smallest companies rely on vendors to provide them with the supplies and services they need to stay in business themselves. Strong vendor relationships can allow your company to save money and work towards business goals while mitigating risk — and all vendor relationships come with inherent risk. The more essential the vendor is to your business, the greater those risks can be, and many of them are out of your control.

There’s the risk that the vendor won’t come through, that supply chains will be compromised, or that the vendor will damage your reputation, fail to comply with regulations, be affected by a natural disaster, or get hacked. Third-party risk management is the discipline of managing risks like these to prevent, or at least mitigate, any potential damage to your operation. A strong third-party risk management strategy will increase transparency, streamline operations, and cut costs.

Ins and Outs of Third-Party Risk Management.

In today’s business world, many companies rely on their relationship with one another to survive. It’s this very interconnectedness that has made third-party risk management so important for so many companies. Vendors and their clients often work together toward mutual business goals, with vendors privy to much of their clients’ sensitive data and operational strategies. Working closely with vendors is beneficial for many companies — for example, it’s cheaper to contract with a security vendor than to hire several new staff members, invest in security cameras and other equipment, and assume the costs of maintaining and replacing that equipment and keeping security positions staffed.

Third-party risk management, also known as supplier risk management or vendor risk management, seeks to mitigate the inherent risks in working closely with a vendor by ranking vendors according to the level of risk the relationship presents, and then taking steps to address those risks. That should involve hiring dedicated staff to manage vendor risks, perform due diligence when taking on new vendors, document the vendor relationship, and even put together the necessary contractual language to, for example, obtain a certain level of data security, or put other measures in place to mitigate risk.

Before you embark on a relationship with a vendor, perform your due diligence by screening the vendor for regulatory compliance, data security, reliability, and other factors that could make them too risky to work with. Designate an employee to steward each aspect of the relationship. Don’t be afraid to rely on vendor management software and other risk management technology — and be sure to standardize your risk management strategy so that the same guidelines are applied to every vendor relationship your company forms.

Benefits of a Strong Vendor Risk Management Strategy.

The obvious benefit of a strong vendor risk management strategy is that your company will thrive and enjoy a strong reputation, access to greater innovation, and increased profits. Laying out clear guidelines when a vendor relationship begins allows the vendor to meet and exceed your performance expectations — it fosters an atmosphere of transparency that allows everyone involved to complete their allotted tasks within the timeframes prescribed. When concerns come up, this transparency allows for issues to be raised through an established process.

A strong third-party risk management strategy can make your business operations more efficient, allowing you to go ahead and outsource aspects of your operations that would be too time-consuming or expensive to handle in-house. Partnering with vendors offers unique opportunities to fill gaps in expertise, finances, or time. You can cut costs by minimizing the number of employees and departments you have, paring them back to just what you need to accomplish only those things that your staff can do better and cheaper than anyone else. A strong internal oversight process can take the place of needing to control everything yourself.

Contracting with third-party vendors can help your company save time, reduce the need to buy expensive equipment or train new staff, and even give you access to the very supplies you need to run your business. These relationships can be risky, and that’s why you need a strong third-party risk management strategy. With the right oversight in place, you can enjoy all the benefits of your vendor relationships and experience none of the downsides.

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