What is Third-Party Risk-Management in Procurement?

Third-party risk management (TPRM) can be defined as a form of practice that involves identifying and minimizing risks associated with the use of third parties. Third parties refer to as suppliers, contractors, vendors, service providers, or partners. Therefore, third-party risk management helps your business to have a better understanding of the third parties they use, how they are linked to certain potential risks, and how to mitigate those risks. In simple words, third-party risks are a broad category that involves all types of risks, including supplier risk management, vendor risk management, vendor management, or supply chain risk management.

In this article, we will uncover all the information that is linked to third-party risks and reveal why third-party risk management (TPRM) is important and how much potential it holds to revolutionize any business.

What is Third-Party Risk?

A third party is any organizational body with whom your company engages or collaborates with the intent to enhance performance and productivity. Third-party members can be the suppliers, service providers, consultants, affiliates, business partners, agents, and distributors. Third-party entities can be classified into three categories-

• Upstream - It involves suppliers and vendors that your organization sources and collaborates with to enhance the productivity of the organization.
• Downstream - It involves resellers and distributors that promote your business and generate revenue for your organization.
• Non-Contractual entities - These involve informal relationships but play a role in executing activities based on mutual understanding. For eg:-facilitating communication, providing crucial information, etc.

However, these entities possess many potential risks for an organization that collaborates with them, which are referred to as third-party risks. Major types of risk within the category of third-party risk include: -

• Financial - It comprises potential risks to the economic growth and the profitability of an organization.
• Reputational - It involves risks associated with the third party that might affect your organization’s reputation, which can lead to customer dissatisfaction and reduced purchases.
• Environmental - It involves potential threats to human health or the environment that are a result of external or third-party participation.
• Security Risks - These constitutes risk associated with the third-party intervention that can lead to potential data loss and directly influence organizations growth.

Importance of Third-Party Risk Management

Nowadays, it has become crucial for organizations to maintain third-party relationships in order to sustain business continuity and efficient business operations. These third-party relationships, including suppliers, vendors, contractors, or consultants, allow them to get direct insights about an organization’s data, resources, personnel, and systems, which also exposes areas of vulnerability within the organization.

Let’s say you rely on a service provider to host a website. Any failure in their working system will directly impact your website, which will negatively impact the reputation of your organization. Therefore, it becomes essential for organizations to incorporate strong strategies and effectively execute third-party risk management. The practice of third-party risk management will enable your organization to improve security, gain consumer trust, save costs, and mitigate risks.

Types of Risks Associated with Third Parties

Organizations increase their engagement with third-party entities to enhance their business operations, improve efficiency, drive profit, and compete with the continuously evolving market. With increased collaboration, there is also an increase in the risk associated with third-party entities due to greater reliance on outsourcing.

Mentioned below are some major types of third-party risks:-

• Cybersecurity Risk:- Potential risks associated with cybersecurity majorly involve the exposure of any confidential information of your organization resulting from a cyberattack, online malicious activity, or other security breakthroughs. Cyberattacks can lead to huge data loss within any organization. Increased usage of electronic devices such as computers, laptops, and smartphones is making organizations more prone to cyberattacks. Growing reliance on networking areas and programming activities makes things easier for a cyber threat to occur. Steps to reduce risks associated with cybersecurity include an effective onboarding process of the suppliers and consistently analyzing their performance throughout the supplier life cycle.
• Finance-related Risk: - It involves risks due to a third-party action that directly impacts the financial success of your organization. For example, poor supply chain management can have a negative impact on your organization's financial performance, which might decrease your sales.
• Reputational Threat: - Public opinion plays a major role in increasing the performance of a business that drives profit. Customers with unsatisfied experiences and bad interactions can negatively impact the image of your organization.
• Strategic Risk: - Strategic risks occur when the business operations of an organization do not align with third-party strategies. Strategic risks associated with third-party can affect your business in several aspects, including legal risks along with risks related to business operations. To avoid such operation risks, you can keep a backup vendor that supports your business in the event of a strategic risk.
• Regulatory or Compliance Risk: - It involves third-party risks that directly influence your adherence to legal and organizational policies or agreements. This is especially crucial for government corporations, financial services, and business associates.

Thus, third-party risk management is extremely important for organizations to prevent, analyze, and control risks associated with outsourcing to third-party suppliers, vendors, or service providers. An efficient third-party risk management makes sure that businesses operations are durable and resilient. It also ensures that the goals or interests of the organization are preserved and the continuity of the business is maintained. In addition, third-party risk management helps your organization to manage risks and effectively run procurement processes that align with your business objectives.

Take the much-needed step to get off the hassles of risks associated with TPRM!

Procurement Resource understands the rigmarole and inconvenience of “practically” applying the strategies to get the risks and threats with the third party off your way. Elevate your business processes, identify ways to cut costs, implement effective procurement strategies, and recognize and minimize risks with respect to the use of third parties with our top-performing experts at Procurement Resource. We share our considerable market research, sourcing strategies, and procurement expertise with you and uncover the finest methods for analyzing purchase patterns, optimizing costs, spend analysis, and effective risk management techniques. We welcome you to reveal the secrets of saving costs and managing risks efficiently. If your organization is on a mission to find services that help your business shift towards a more efficient procurement, effectively mitigate risks, and enhance business performance, Procurement Resource is the right step towards that!

Author

Ayushi Raj Prabhakar (Associate Business Analyst in Procurement Resource)