In today's digital-first business environment, organisations rely heavily on third-party applications and software to operate efficiently.
This reliance introduces significant risks that need careful management. A staggering 98% of companies “have at least one third-party vendor that has suffered a data breach,” underscoring the critical need for an effective Third-Party Risk Management (TPRM) programme. The first step to put in place a viable programme is having a comprehensive yet actionable TPRM policy in place - one that comprehensively addresses risk management framework, roles, responsibilities, and procedures.
This article will guide you through and clearly define these elements, ultimately creating a TPRM policy that acts as a clear roadmap for all stakeholders involved in the TPRM process, from risk managers to business unit leaders.
Understanding the Basics of TPRM
Third-Party Risk Management (TPRM) is the process of identifying, assessing, and controlling risks that arise from your organisation's relationships with external parties. While this includes various third-party relationships, our focus will be on the corporate supply chain, or the risks associated with third-party vendors and business partners.
TPRM is crucial because it helps you to:
- Protect your company's data and assets.
- Ensure compliance with legal and regulatory requirements.
- Maintain your reputation.
- Prevent costly breaches and operational disruptions.
A well-structured TPRM policy serves as the foundation for managing these risks effectively. It provides a framework for decision-making, establishes clear protocols, and ensures consistency in your approach to third-party relationships.
Creating Your TPRM Policy Framework
Your TPRM policy framework should outline the overall approach to managing third-party risks. Key components include:
- Risk Identification: Establish methods for identifying potential risks associated with third-party relationships, including risks like data breaches or service disruptions.
- Risk Assessment: Define criteria for evaluating the severity and likelihood of identified risks, considering factors such as data sensitivity and operational dependency.
- Risk Mitigation: Outline strategies and controls to reduce or manage identified risks, including specific measures like access controls and data encryption.
- Monitoring and Review: Set up processes for ongoing monitoring of third-party security controls, and periodic review of your suppliers’ own TPRM policies.
- Incident Response: Develop procedures for responding to risk events or breaches involving third parties.
- Reporting: Establish guidelines for internal reporting on third-party risks and incidents.
When developing your framework, consider industry standards and regulatory requirements specific to your sector, particularly those related to data protection, cyber security and outsourcing.
Defining Roles and Responsibilities
Delineating roles and responsibilities is crucial for effectively implementing your TPRM policy. A well-defined TPRM structure ensures that all aspects of third-party risk management are covered, with clear accountability and efficient processes. Let's delve deeper into the key roles and their responsibilities:
Risk Manager
- Develops and maintains the overall TPRM strategy
- Coordinates with different departments
- Analyses risk data and prepares reports for senior management
- Recommends risk mitigation strategies
- Ensures the TPRM policy remains up-to-date and effective
TPRM / IT Security teams
- Conduct security assessments on third-party vendors
- Implements and maintains security controls for third-party access
- Monitors for potential security breaches or vulnerabilities
- Provides expertise on emerging cyber security threats and best practices
- Collaborates with third-party vendors on security incident responses
Compliance Officer
- Monitors changes in relevant laws and regulations
- Conducts regular compliance audits of third-party relationships
- Guides regulatory requirements to other teams
- Develops and delivers compliance training programs
- Liaises with regulatory bodies when necessary
Procurement Team
- Integrates TPRM considerations into the vendor selection process
- Negotiates contracts with third parties, incorporating risk management clauses
- Maintains a database of approved vendors
- Conducts initial screenings of potential third-party partners
- Coordinates with other teams to ensure vendor compliance with TPRM policies
Legal Team
- Drafts and reviews contracts to ensure they include appropriate risk management provisions
- Provides legal advice on third-party relationships and potential liabilities
- Assists in interpreting complex regulatory requirements
- Supports the organisation in case of legal disputes with third parties
- Helps develop legally sound TPRM policies and procedures
Business Unit Leaders
- Identify operational needs that require third-party involvement
- Provide context on how third-party services integrate with business processes
- Participate in risk assessment and mitigation planning for their areas
- Ensure their teams adhere to TPRM policies in daily operations
- Communicate potential risks or issues observed in third-party relationships
To ensure these roles work together effectively, consider implementing these strategies:
- Conduct regular cross-functional meetings to discuss TPRM issues and updates
- Develop a centralised TPRM dashboard accessible to all relevant parties
- Establish escalation procedures for when risks exceed predefined thresholds
- Create a feedback loop to improve TPRM processes based on insights from all roles continuously
When assigning responsibilities, it's crucial to:
- Document specific duties and expectations for each role in the TPRM policy
- Provide training to ensure each team member understands their responsibilities
- Regularly review and update role definitions as the TPRM landscape evolves
- Encourage a culture of accountability and proactive risk management
By clearly defining these roles and fostering a collaborative environment, your organisation can create a robust TPRM framework that effectively manages the complexities of third-party relationships.
Establishing Procedures
Your TPRM policy should outline clear procedures for managing third-party risks. These procedures form the backbone of your risk management strategy, ensuring consistency and thoroughness. Let's explore each key procedure in detail:
Contractual Agreements
Contract Review and Procurement
Draft and review contracts that clearly define responsibilities and expectations regarding security controls, data protection, compliance, and incident response. Ensure these contracts are signed and agreed upon by both parties
Risk Assessment
Developing a standardised process for vetting potential third parties and ensuring their security is crucial at all times during a business relationship. Your due diligence procedure should cover the following:
Define Risk Domains:
- Security Governance controls.
This domain covers how your security governance is designed, implemented, and maintained. - Security Certifications
This domain covers how your organisation maintains compliance with key security certifications. - HR Security
This domain covers the security controls you have implemented to mitigate security risk from your employees. - IT Operations
This domain covers the security controls you have implemented to maintain the health of your IT systems and processes. - Software Development
This domain covers the security controls you have implemented during the development of your IT applications. - Network and Cloud Security
This domain covers the security controls you have implemented to maintain the security and integrity of your corporate network and any cloud infrastructure. - Physical Security
This domain covers the physical security controls you have implemented to protect your organisation's physical premises.
Financial risks (e.g., vendor insolvency, cost overruns) - Business Resilience
This domain covers the processes and plans you have in place to ensure a quick recovery if a failure occurs. - Supply Chain Management
This domain covers the processes and controls you have in place to ensure the security risk from your supply chain is mitigated. - Data Protection
This domain covers compliance with data protection legislation.
And potentially also some non-security domains, including:
- Environmental, Social and Governance
This domain covers how your organisation manages and governs its environmental and social impact.
- Financial Risk
This domain covers the financial controls you have implemented to prevent, identify, and respond to evidence of financial risk.
Establish Risk Rating Criteria:
- Develop criticality criteria
- Consider both quantitative and qualitative factors
Risk Scoring Methodology:
- Use a risk matrix to combine likelihood and impact scores
- Implement weighted scoring for critical risk factors
- Develop a standardised risk calculation formula
Risk Thresholds:
- Define acceptable risk levels for different types of relationships
- Establish escalation triggers for high-risk scenarios
- Create guidelines for risk mitigation requirements based on scores
Documentation and Reporting
- Documentation
Maintain comprehensive records of all assessments, due diligence activities, contracts, and communications related to third-party risk management. This documentation serves as evidence of compliance and due diligence efforts. - Reporting
Establish mechanisms for reporting on third-party risks, including regular updates to stakeholders.
Continuous Monitoring
Implementing ongoing monitoring procedures in the meantime ensures that third-parties maintain compliance with your standards over time. Your monitoring process should include:
- Regular Re-Assessments
- Conduct semi-annual re-assessments
- Compare reviews with past reviews
- News and Public Records Monitoring
- Set up automated alerts for relevant news about your third-parties
- Regularly check for changes in ownership, leadership, or financial status as well as security controls
- Monitor for any legal or regulatory actions affecting your third-party, or your relationship with them
- Key Risk Indicators (KRIs)
- Identify specific metrics that signal potential risk increases
- Establish thresholds for KRIs that trigger further investigation
- Implement dashboards for real-time KRI monitoring
- External Security validation
- Conduct regular vulnerability scans and penetration tests
- Review third-party software updates and patch management practices
- Assess ongoing compliance with security standards and best practices
Incident Response
Developing clear steps for responding to risk events or breaches involving third-parties is crucial. Your incident response procedure should outline:
Escalation Protocols:
- Define incident severity levels and corresponding escalation paths
- Establish clear roles and responsibilities during an incident
- Set timeframes for each escalation stage
Communication Plans:
- Develop templates for internal and external communications
- Identify key stakeholders to be notified at each stage
- Establish protocols for coordinating communications with the third-party
Containment and Mitigation:
- Outline immediate actions to limit damage or data loss
- Provide guidelines for preserving evidence for later analysis
- Define steps for service restoration or alternative arrangements
- Post-Incident Review:some text
- Conduct a thorough root cause analysis
- Document lessons learned and update procedures accordingly
- Implement corrective actions to prevent similar incidents
Offboarding and Exit Strategy
- Third-Party Offboarding
Develop procedures for securely terminating relationships with third parties. This includes ensuring proper data transfer or deletion and minimising risks during the transition.
When establishing these procedures, be mindful of potential challenges such as complexity, resource constraints, and data management. To keep your procedures current, schedule regular reviews, stay informed about evolving best practices, gather stakeholder feedback, and be prepared to update your approach in response to significant changes in the risk landscape.
Conclusion
Developing a comprehensive TPRM policy is essential for safeguarding your organisation, data, employees, and clientele. By clearly defining your risk management framework, roles, responsibilities, and procedures, you're building a strong defence against potential threats.
Apply the guidelines discussed above to create a robust TPRM policy that will help secure your business relationships and protect your business’s interests.
Further Reading
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