Are your third-party vendors fulfilling their contractual obligations? How would you know if they aren’t? When was the last time that you assessed your third-party risk? Was it during the initial vetting and onboarding stage?
According to a joint study between ORIC International and McKinsey & Company1, third-party risk must be monitored throughout the relationship lifecycle, not just at the onboarding stage. Additionally, ongoing monitoring should capture material changes after the third party has been onboarded and limit the implications of potential failures in the due diligence process. This is just one of many reasons why taking a proactive approach to third-party risk management is so important.
Why Being Proactive Is an Important Strategy
A proactive third-party risk management strategy incorporates both risk management and risk mitigation elements. Risk managers responsible for third-party risk must assess the potential risks, identify the root causes and key risk drivers, and calculate the probability of loss.
They also develop contingency plans to prevent damage from both current and future risks. Proactive third-party risk management allows organizations to prioritize risk and implement robust risk mitigation and prevention controls. Furthermore, risk managers can make more informed business decisions through greater awareness of risk drivers.
To successfully implement a proactive risk management approach for third-party risks, an organization must automate assessments and incident response to reduce cost and time. Organizations should automate incident response by investing in mature tools and processes that reveal potential impacts by continuously tracking, scoring and managing cyber, business, reputational and financial risks in a single platform2.
As mentioned earlier, ongoing monitoring is a key element of a proactive approach to third-party risk management. That’s because environments change, and therefore your vendors’ risk and threat landscape changes as well. Continuous monitoring helps you stay ahead of threats by alerting you to changes in your third-, fourth-, and fifth-level suppliers, partner, vendors and other parties so you can take preventive action3.
Reactive Approaches Are Limited
In contrast, reactive third-party risk management is a response-based risk control strategy. It focuses on events rather than root causes, and is mainly about reacting to a risk and reducing the fallout to the company4. This approach investigates past or known risks while a proactive approach aims to mitigate future occurrences. Moreover, a reactive approach is typically manual in nature and tends to incorporate rigid analysis instead of predictive and creative problem-solving.
From prior personal experience, I can attest that a reactive approach to third-party risk management can be labor-intensive and very limited. For instance, a lengthy narrative-based vendor questionnaire is not easily scored and requires manual efforts to review, analyze, assess, follow-up and finally score. This is not sustainable and limits the assessment to only the onboarding phase. Alternatively, automated tools and continuous monitoring allow for more informed decisions and more effective risk management overall.
Best Practices to Modernize Your Third-Party Risk Management
Are you interested in learning more about how to improve and ultimately modernize your third-party risk management program? In addition to taking a proactive approach, there are six other best practices:
- Ditch Your Questionnaires
- Get Real-Time Data
- Standardize Your Scoring
- Share Intelligence Across the Organization
- Rank Your Vendors
- Update Your Due Diligence
Read about each of these in depth in the eBook “7 Best Practices to Modernize Your Third-Party Risk Management“.
Keep in mind that all successful third-party risk management programs incorporate automation wherever possible. We recommend implementing a robust risk management tool that includes third-party vendor risk. See how the RiskOptics ROAR Platform can help automate your third-party risk management today!
Resources:
1 Improving Third-Party Risk Management – McKinsey & Company and ORIC International Study
2 Third-party risk management programs at a crossroads – Security Magazine
3 7 Best Practices to Modernize Your Third-Party Risk Management
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