A recent report published in WSJ established the worst-kept secret in the corporate world: "How a business manages its third-party relationships has a direct, sometimes even exponential bearing on shareholder value in an organization; depending on the level of engagement and the type of services provided!" Confirming the long-held notion of there being an intimate connection between third-party relationships and shareholder value in an organization.
Yet, despite the growing complexity and the ever-evolving nature of threats within the enterprise, only a handful of companies invest adequately in the vendor risk management area. While the risk function and risk intelligence assessment need to mature across the global business ecosystem, the digitization of risk is causing a significant shift in Third-Party Risk Management (TPRM) models.
Key Challenges in Third-Party Risk Management
Several factors have necessitated a new approach to TPRM. These include:
- External Factors: Beyond the enterprise, regulatory bodies are placing a greater emphasis on third-party risk intelligence and accountability, while certain legislations treat third-party transgressions as core enterprise violations. Moreover, geopolitical changes, the increasing cost of environmental violations and their impact, and the shift from audit-based to continuous compliance models are adding new variables of uncertainty to the risk management function.
- Internal Factors: Some of the intra-organizational factors that make TPRM expensive and inefficient include:
- A reactive rather than a proactive approach
- Static, manual, fragmented, and siloed processes
- Lack of visibility into the extended enterprise
- Expansion of threat exposure with remote working during pandemic times
- The pace of technological change and evolving ways of work
The Shift in Risk Management Function
The TPRM operating models in most companies do not fare well on a maturity scale today. However, newer approaches to TPRM, enable businesses to effectively manage new challenges and drive greater value back into the enterprise. Advancing the enterprise's TPRM operating model calls for a board-level focus, investment in current technology that would enable centralized risk management, and the simultaneous evolution of the key personas that drive the risk management function across business units, functions, and verticals.
While a siloed approach is driven by a tactical stance on risk and compliance, a strategic approach is driven by a board-level focus and visibility into the TPRM operations. A forward-looking TPRM strategy must:
- Leverage a consumption-based service model
- Monitor risks in real time by leveraging technology
- Put into effect a proactive approach for managing risk and compliance issues
- Streamline the risk management function, embedding it into a wider risk and compliance management framework
- Intelligently automate repetitive processes within workflows
Moving Towards an Integrated Approach to TPRM
Moving from ownership of the TPRM function to an integrated risk and compliance management can help enterprises streamline the risk management function — from third-party onboarding to termination — in an efficient, standardized, and continuous manner. All this, while reducing the overhead costs and turnaround time for key processes. Taking a managed services approach to TPRM calls for careful selection of a TPRM managed services partner.
Here are a few ways in which an integrated model redefines key TPRM processes:
- Intelligence: A highly mature, integrated TPRM model leverages data from third-party sources to continually monitor a variety of risks associated with third parties, and then maps them along with the enterprise's critical business functions, products, and services.
- Workflow: Moving away from fragmented and siloed processes to a centralized risk management approach calls for rearranging of an upskilled workforce along with an industry-leading platform that leverages AI, automation, and a connected architecture to standardize and expedite key processes like third-party qualification, contract reviewing, performance monitoring, etc.
- Assessment Process: It is critical to prioritize third parties based on inherent risk and then create risk profiles. It is also important to ask the relevant assessment questions to get better risk and compliance insights, as a cookie-cutter approach often leads to ‘too-less’ or ‘too-many’ questions that do not provide a clear line of sight into the risk posture of third parties.
- Metrics: Redefined processes require novel metrics that measure and align performance to value. Moving away from static stats to real-time scores, the new metrics of a mature TPRM model will measure vendor resiliency, trending risk factors for critical vendors, residual risk, and alignment to insurance coverage.
Uncovering the Business Benefits
Most companies invest in third-party risk management solutions to reduce costs in reaction to the increasing scope of regulatory scrutiny. However, a shift to a managed services approach can help enterprises drive efficiency by reducing capital expenditure and expanding the GRC workforce.
In addition to increased risk intelligence and visibility into the extended enterprise, a managed services approach to TPRM can also help boost compliance levels, improve customer centricity through continuous monitoring and reporting, and enhance customer satisfaction by achieving sustainable sourcing. Lastly, a strategic approach to TPRM helps the enterprise thrive by building a reliable ecosystem of partners and manage evolving risks in the ecosystem; based on their scope and value of impact on stakeholders.
While the cost of the third-party risk management function is increasing with the evolution of the extended enterprise, the risk management function cannot sustain at its current maturity levels. The cost of dealing with compliance-related violations can further the inertia of retaining traditional TPRM models.
Moreover, as stakeholders across the value chain demonstrate greater consciousness towards brand ethics, data privacy, and environmental concerns, companies must undertake a strategic approach to third-party risk management to drive value and build a sustainable ecosystem beyond the enterprise.
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