Here’s What You Need to Know to Manage Third-Party Risks

These days, you just can’t stay in business without the help of a third-party vendor or supplier. Whether they’re bringing you the raw materials you need to manufacture a product, or supplying you with a vital service like security or data storage, you need strong relationships with third-party vendors and suppliers to thrive and grow as a business.

But those third-party relationships don’t come without risks. Whenever your business depends on a third-party for business-critical products and services, you’re running the risk that something will go wrong with that third-party relationship, which could jeopardize your business. Often, neither your company nor the third-party has any control over the risks that could affect you both — you can’t prevent natural disasters, civil unrest, acts of war, pandemic diseases, or other issues that could affect vendor security, supply chains, or reliability. But you nevertheless have a responsibility to do your best to manage third-party risks, to avoid them or mitigate their effects.

Understand the Third-Party Risks You’re Facing

When you have a relationship with a third-party supplier or vendor, you may have to share sensitive business information in order to help them perform the service you’ve contracted them for. If you rely on them for business-critical supplies or products, you assume supply-chain risks when you work with that vendor. Some of the risks you face include:

• Reputational risks: that could occur when a third-party vendor doesn’t live up to your customer service standards
• Operational risks: that arise when a third party’s internal processes aren’t secure
• Credit risks: if they can’t fulfill their financial obligations
• Compliance risks: if they don’t adhere to regulations, legal requirements, and industry ethical standards
• Strategic risks: that can come into play if the benefits of using the third-party vendor don’t outweigh the risks of the relationship

Of course, each vendor relationship is different and, depending on the factors involved, unique risks could also present themselves. That’s why there’s no such thing as one-size-fits-all third-party risk management. You need a third-party risk management strategy that’s tailored to your situation and needs.

Use Best Practices to Manage Them

Third-party risk management should be a three-part process that includes first identifying the risks, assessing them, and finally mitigating them. Start by running a risk model to understand the vulnerabilities inherent in the way you interact with third-party vendors and suppliers. Do they have access to sensitive information? Do you need a backup plan for if your supplies from this vendor fall through? Does the vendor present a credit risk? Figure out where and how third-party vendors enter your interaction, where they exit it, and what they have access to in between. Rank each vendor according to how critical their services are to your business operations.

Once you have identified the risks your third-party relationships represent, you can assess them and rank them according to how much of a threat each vulnerability represents. A vendor might have access to sensitive customer information, but the more pressing issue could be that they’ve never paid their bills on time. Figure out the potential business impact of each risk, preferably with the help of an unbiased third party, so you can make decisions as to which risks to address first.

Finally, implement a standardized third-party risk management strategy. You should apply the same mitigation strategies to every vendor relationship your company has. Document vendor relationships and their interactions with the company. Review third-party agreements and NDAs regularly. Assign dedicated staff members to each vendor to manage risks within the relationship.

When bringing a new vendor or supplier into a relationship, communicate your risk management strategy and expectations upfront. Transparency makes it easier to meet expectations on both sides and can make raising issues easier, too. Audit security controls regularly, including a review of access permissions, key management, data security, and on-site staff and activities.

Third-party vendor and supplier relationships can be the key to your company’s success, as these relationships allow you to drive innovation while saving money and building a strong reputation in the marketplace. But all business relationships come with inherent risks. Learn to manage those risks, so that both your company and its vendors can benefit in the long run.

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