The procurement technology landscape is getting more exciting–and more confusing. In this series of guides, we take you through common areas of procurement being tackled by new solution providers. Read on to learn about third-party risk management (TPRM): a basic definition, what makes it painful, common use cases, and how procurement orchestration applies.
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What Is Third-Party Risk Management
Third-Party Risk Management is the practice of identifying, assessing, and mitigating risks associated with engaging external suppliers or service providers.
TPRM covers a broad range of risks, including supply chain, financial, regulatory, cybersecurity, geo-political, and environmental, social and governance (ESG). Third parties can be the organization's external partners, vendors, and suppliers.
Vendor risk assessment and due diligence
Continuous monitoring of third-party relationships
Risk mitigation and remediation strategies
Compliance management and reporting
The Current State of Third-Party Risk Management
Many organizations struggle to gain a comprehensive view of their third-party risk exposure.
Increased regulatory scrutiny
Regulations such as GDPR, CCPA, and HIPAA have placed greater emphasis on how organizations manage their third-party relationships, particularly concerning data privacy and security. Non-compliance can result in severe financial penalties and reputational damage.
Lack of visibility into vendor risks
Many organizations struggle to gain a comprehensive view of their third-party risk exposure. This challenge is compounded by the difficulty in obtaining accurate and up-to-date information from vendors.
Manual, time-consuming processes
Traditional risk assessment methods often rely on manual questionnaires and spreadsheets, which are resource-intensive and prone to human error. This approach is increasingly unsustainable as the number of third-party relationships grows.
Inconsistent risk assessment methodologies
Without standardized risk evaluation processes, different departments within an organization may assess and classify risks inconsistently, leading to gaps in overall risk management efforts.
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Consequences of Ineffective Third-Party Risk Management
Regulatory non-compliance and fines
Failure to implement robust TPRM practices can result in significant fines. For example, in 2020, Morgan Stanley was fined $60 million for improper management of third-party relationships related to data center decommissioning.
Data breaches and cybersecurity incidents
Third-party access to sensitive data increases the risk of breaches, which can be more costly and complex to address than internal incidents. Managing these risks is essential to safeguarding business operations.
Reputational damage and loss of customer trust
The long-term impact of a third-party incident on brand perception and customer loyalty can be devastating. In fact, an IDC study found that 80% of consumers would stop doing business with a company if they had concerns about its security practices.
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A Better Approach to Third-Party Risk Management
A comprehensive TPRM framework
Implement a systematic framework to identify and categorize vendor risks, streamline due diligence processes and execute ongoing assessments.
Streamlined, automated processes
Automate data collection and risk scoring to improve efficiency. Enable real-time tracking to address issues quickly. Simplify risk mitigation tasks with automated workflows.
Real-time risk intelligence
Use real-time insights to identify risks early. Respond proactively to vendor issues. Make data-driven decisions about vendor relationships.
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Benefits of Effective Third-Party Risk Management
Enhanced regulatory compliance
A robust TPRM program helps organizations stay up to date with changing regulatory requirements, streamline audit processes and reporting, and demonstrate due diligence to regulators and stakeholders.
Improved risk visibility and mitigation
By implementing comprehensive TPRM practices, organizations can achieve a holistic view of third-party risks across the enterprise, prioritize risk mitigation efforts based on potential impact, and develop proactive strategies to address emerging risks.
Stronger vendor relationships and performance
Effective TPRM fosters collaboration with strategic vendors by establishing clear expectations and performance metrics, facilitating open communication about potential risks, and driving continuous improvement in vendor relationships.
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Third-Party Risk Management Use Cases
To illustrate the impact of effective TPRM, consider these example scenarios:
Vendor onboarding and due diligence
When onboarding vendors, an effective TPRM approach would include conducting thorough risk assessments before engagement, identifying potential red flags early, and ensuring alignment with organizational risk tolerance.
Contract negotiations and risk-based pricing
Procurement professionals can incorporate specific risk mitigation requirements into contracts, negotiate pricing that reflects the vendor's risk profile, and establish clear performance metrics and SLAs.
Supply chain risk management
When scaling the business involves adding new suppliers, partners, or third-party vendors, TPRM helps organizations map and assess risks across the entire supply chain, identify critical dependencies, and develop contingency plans for potential disruptions.
Data privacy and security assessments
When engaging new vendors or handling sensitive data, TPRM enables procurement teams to evaluate vendor data handling practices and security controls, ensure compliance with regulations, and mitigate risks associated with data sharing and processing.
Procurement Orchestration for TPRM
Procurement orchestration solutions coordinate teams, systems, and processes across any procurement use case. Risk management is one of the most compelling use cases for procurement orchestration.
Orchestration technology can have a profound impact on how enterprises coordinate teams, systems, and processes to assess, mitigate, and remediate risks.
Single point of visibility
Coordinate the pulling of risk scores from all TPRM tools and services. Consolidate, display, and view them all together in one place.
No-code editor for custom assessments
Leverage intuitive no-code tools and templates to customize your own highly tailored supplier risk questionnaires and assessment forms for legal, IT, and ESG functions.
Automated qualification workflows
Configure approval workflows based on supplier risk profiles. Customize onboarding processes without relying on IT support. Make continuous updates to risk scores based on new information.
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Automated risk response workflows
Perform proactive risk monitoring. Automatically trigger the right alerts and workflows when risks or threshold violations are identified.
AI-powered bank fraud prevention
Execute AI-powered fraud checking, identity validation, and composable risk scoring. Have confidence in the validity of every supplier bank payment.
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Secure cross-department collaboration
By automating risk mitigation tasks across teams, systems, and processes, you can ensure that vendor information is secure when sharing across tools.
That’s a Wrap
As third-party relationships continue to grow in complexity and importance, effective TPRM has become a critical competency for enterprise procurement professionals. By implementing robust TPRM practices, organizations can enhance compliance, improve risk visibility, and foster stronger vendor relationships.
Looking ahead, emerging technologies such as AI and machine learning promise to further enhance TPRM capabilities, enabling more sophisticated risk analysis and predictive modeling. Procurement orchestration platforms play a crucial role in this evolution by connecting disparate systems, automating workflows, and providing a unified view of third-party risk across the enterprise. Procurement professionals who embrace these advancements and prioritize TPRM will be well-positioned to drive strategic value for their organizations.
