Effective third-party risk management recognizes that vendor relationships bring both value and potential risk exposure. That’s why integrated risk management — coordinating efforts and data across operational, compliance, and risk and control functions — is so important.
Financial institutions without an integrated approach often contend with significant challenges and consequences, ranging from compliance penalties to data breaches to reputational damage, because they don’t have a holistic view of their third-party network and the risks they pose to the organization.
Let’s take a look at some management practices that support healthy vendor relationships and risk awareness:
Third-party risk is the whole organization’s risk. Developing standardized methods for risk management across business functions ensures that stakeholders have a complete and accurate understanding of your institution’s risk landscape.
Gartner research indicates that risk monitoring is a common gap in third-party risk management programs, due to fragmented risk ownership. However, a shared framework for defining, assessing, and monitoring risk helps institutions avoid the pitfalls of siloed risk management and poor vendor oversight.
As reliance on service providers grows, institutions struggle to keep up. A third-party risk report from Ponemon Institute found that more than 60% of organizations don’t have a comprehensive inventory of all their third parties, and less than half (43%) frequently review their third-party management policies and programs.
Furthermore, a Gartner survey of legal and compliance leaders found that 83% of organizations don’t identify risks associated with their third parties until after due diligence and initial onboarding processes are complete.
Taking on a relationship without first understanding its risk profile puts your institution in a precarious position. Establishing policies and processes for third-party evaluation, risk scoring, contract reviews, and other aspects of the vendor management lifecycle helps protect your institution from operational surprises and risk exposure.
Plus, with increased regulatory focus on third-party risk and due diligence, mature governance, risk, and compliance (GRC) programs are more important than ever.
Monitoring vendor risk levels, health, and performance is an essential stage in the third-party risk management lifecycle. In addition to monitoring risk, keeping tabs on vendor cybersecurity is another gap in many programs. Half of organizations don’t monitor the security and privacy practices of vendors with whom they share sensitive or confidential data, according to Ponemon Institute.
Because third-party relationships, especially poorly managed ones, can significantly compound risk exposure, it’s important to maintain visibility into all vendor partnerships. Maintenance and monitoring efforts — including initial and periodic due diligence, performance reviews, contract management, and data management, among others — must be ongoing throughout the relationship. A vendor management system that automates processes such as compiling answers from due diligence questionnaires and generating reports makes this step more efficient and less time-consuming.