Third party services are necessary for business but come with certain risks. Third party risk management solutions exist to protect your business from being held liable for the actions of others. Learn about the potential risks and how third-party risk management solutions can protect your business.
What is a third party?
In business, a third party is an outsider goods or services provider that helps the main business fulfil its contractual obligations by handling part or most of the work. For example, a stationery supplier company will contract a manufacturer to supply writing pads instead of manufacturing those items in-house. The manufacturer is the third-party goods supplier in this scenario.
What are third-party risk management solutions?
Working with third parties is necessary, as such arrangements afford you benefits like:
- Speeding up your order-fulfilling capabilities
- Making it possible to handle larger orders
- Cushioning you during times when demand is higher than normal
- Saving you from having to invest in expensive equipment
- Supplying you with technical expertise and experience you lack
- Allowing you to focus on your core specialities
However, interacting and aligning with third parties exposes your business to risks, such as security breaches, legal liabilities, and a tarnished image by association. Third-party risk management is identifying those risks and installing risk management information system software to minimise these as your working relationship continues.
Types of third-party risks
Most risks from third parties to your business are by association. You can institute the best risk mitigation solutions in your business, but your influence over the third party’s operations and organisation is limited. Therefore, their actions, lack of action, or policies can expose your business to:
If a third party fails to comply with laws and regulations that oversee products and services you supply to customers, you’ll be exposed to compliance risks.
A third party’s internal operations may fail or prove ineffective, thus crippling its ability to fulfil its obligations to you. Additionally, external factors like natural disasters or acts of terrorism may cripple their operational capabilities, thus affecting your business.
A third party’s actions or decisions may fail to align with your organisation’s policies and principles.
A third party’s systems and processes may have vulnerabilities that expose your company and client’s data to cyberattacks and breaches.
Financial and credit risks:
A third party may face financial challenges that affect its ability to consistently supply you with goods and services that meet the set standards.
A third party’s negative image in the industry can rub off on your organisation. An example of the fastest way to damage your reputation is if the third party faces a data security breach.
How does third-party risk management work?
How big your business is and the type and number of third parties you work with influence your approach to third-party risk management. Nonetheless, an effective risk management information system software will:
Identify all third parties
You can only completely understand what risks your business faces when you list all third parties you deal with, no matter how small or seemingly inconsequential. Focus on what areas of your business engage with each and how deep that engagement is.
Determine what risk each poses
Different third parties present different levels of risk to your business. A good approach here is to consider the types of risk and assess each third party’s risk potential in those different categories.
Discuss those risks with the respective third party
You need to discuss those vulnerabilities with the third party concerned to find the right solutions. Alternatively, obtain additional information from the third party to help formulate an action plan.
Establish risk mitigation steps
You may need to modify how you engage with a third party and how much you share with that entity, to reduce risk exposure. Additionally, you may have to demand that the third party updates or installs better security protocols to curb those risks on their end.
Periodically review those risk management protocols
Risks change, and so does the nature of your relationship with third parties. Therefore, periodic reviews of those protocols will reveal new threats so you can institute the right solutions.
Take a proactive approach to new third parties
Your understanding of what risks third parties pose should guide you in effecting lasting solutions when you engage new third parties.
Conclusion of third-party risk management solutions
Third party risk management solutions are necessary to handling certain vulnerabilities and limitations of your business while presenting several strategic advantages to improve your revenue generation potential. You only need to manage the associated risks to protect your business. Managing the complexities of third-party risk can be supported software solutions. Alphatec can help you to choose the right risk management information system software to suit your needs. Contact us to discuss how we can help.