Once upon a time, Third Party Risk Management was little more than a one-off box-ticking exercise, undertaken before entering into a new commercial relationship. The thoroughness of this due diligence relied heavily upon past experience between the business and the Third Party and drew upon the knowledge of employees and personnel. Today, however, Third Party Risk Management is a significant part of core business processes. Modern business practices have necessitated its evolution from being a single part of a contracting system to being essentially its own discipline, contributing in a highly significant way to effective, overall Contract Management.
This evolution has occurred in response to the rapid increase in connection through the global marketplace. Technological advancement has created a commercial world in which businesses are much more closely related, and in which Third Party relationships are easier to forge. Contract Management is today geared toward speed and efficiency, so the evolution of Third Party Risk Management has had to keep pace. This has been a vital development – a constant function designed to protect day-to-day operations as much as it is designed to protect the bottom line.
What is Third Party Risk Management?
In essence, Third Party Risk Management is the steps a business takes to insulate the operation against costly disruption and damage. On the face of it, this sounds relatively straightforward, but once we start to explore the various aspects of the discipline, it becomes clear that Third Party Risk Management is a complex set of processes that impact Contract Management and compliance obligations to quite a notable level. This makes Third Party Risk Management a high priority for all businesses.
The prioritization of Third Party Risk Management is essential precisely because of the increased connectivity of the modern world, combined with the volatility of global markets. It is now more important than ever before that businesses be able to withstand supply chain disruption, without the creation of additional vulnerabilities in terms of cybersecurity, reputation, and timely contract fulfilment. Business agility and continuity with reduced risk is the goal, and this is why Third Party Risk Management plays such a big role in Contract Management.
This modernized, dynamic approach to Third Party Risk Management has a number of benefits for the overall business operation.
- Increased efficiency – The implementation of a comprehensive Third Party Risk Management program helps to increase efficiency across the operation because the program requires a high degree of automation and consistency in performance monitoring. Keeping these aspects of the business so tightly and proactively controlled means that issues and incidents can be captured at the earliest opportunity, and remedial action can be taken.
- Increased compliance – Compliance is also a very high priority for all businesses, and especially those operating across more than one region. A comprehensive approach to Third Party Risk Management supports compliance by ensuring that the business is protecting itself, its supply chain and its customers from potential damage from external and internal sources. This includes, most importantly, protection against the threat of cyber crime.
- Better security – Stringent Third Party Risk Management involves the thorough vetting of all businesses and individuals that have access to your business, as well as of the internal processes utilized in the operation. This means better security is a direct consequence of those measures.
- Data-based decisions – When thorough due diligence is completed and upheld during Third Party Risk Management steps, the outcome is that the business is able to make fully informed decisions that are based on accurate and up-to-date information. With such due diligence being undertaken on an ongoing, consistent basis, then the business can be confident that all decisions are based on data and that the operation can be flexible enough to withstand changes in circumstances and adjustments in internal and external risk profiles.
What are the essential elements of a Third Party Risk Management program?
With Third Party Risk Management delivering such important benefits to modern business, it is vital for commercial operations to implement a comprehensive Third Party Risk Management program. This is a range of processes that work in conjunction with the Contract Management system of the business – recognizing the close relationship between the two. There are essential elements within the Third Party Risk Management program, to ensure the system is fit for purpose.
- Definition and identification of risks
In order to develop a comprehensive Third Party Risk Management program that works well, the concept of risk as it specifically relates to the business must first be defined. Here, it is important to consider both the risk appetite and the risk tolerance of the operation.
- Risk appetite – This is the broad, maximum level of loss exposure that the business believes to be acceptable.
- Risk tolerance – This is the degree of variation around the risk appetite level that the business believes it can tolerate; the level that the business can withstand without damaging impact on the operation.
Both risk appetite and risk tolerance are generally measured in terms of revenue loss so, in defining these levels, the business needs to examine its operation and revenue streams and identify the types of risk that can cause revenue loss. While this will vary in some ways between industries, it is likely to include issues of cybersecurity, such as fraud, theft of intellectual property and the deployment of malware. It should also incorporate the consideration of supply chain issues, ranging from low-level to high-level disruption – all of which can lead to revenue loss. Furthermore, the definition and identification of risk in these terms should also include Contract Management issues such as delays and conflict. This is because these issues can lead to financial penalty as well as long-term revenue loss through reputational damage, delivery disruption and a reduction in efficiency and productivity.
- Risk assessments and profiling
Having examined, defined and identified risk as it specifically relates to the business, the Third Party Risk Management program must facilitate the completion of thorough risk assessments and risk profiling in relation to both existing and potential Third Party relationships. Using the risk appetite and risk tolerance of the operation as a framework, all Third Party relationships must be assessed within those parameters, with a flexible risk profile prepared. This element of the Third Party Risk Management program requires stringent due diligence, utilizing all pertinent information regarding the Third Party in question. That includes data gathered from external databases, such as Refinitiv, LexisNexis, Dow Jones and Dun & Bradstreet, detailing everything required for comprehensive background checks on individuals and organizations. The most effective strategy for the administration of this program element is the design and build of intelligent risk questionnaires which apply the bespoke risk framework of the business to the risk investigation of the Third Party.
- Awarding of contracts
A central function of any Third Party Risk Management program is to inform the awarding of contracts, so any program requires a mechanism by which risk assessments and risk profiles can be applied to decision-making in this regard. This is where the Third Party Risk Management program and the Contract Life Cycle Management system intersect to protect and insulate the business from damage and disruption. By thoroughly vetting all Third Parties prior to and during commercial relationships, the business is assured that the relationship falls within acceptable risk parameters while also maintaining quality of service for customers and end users. This is also a vital element in terms of increasing efficiency across the operation – something that also helps prevent loss of revenue.
- Incident capture
The purpose of a Third Party Risk Management program is to mitigate and reduce risk, but it is also essential to incorporate incident capture tools in order to maintain a proactive approach. This enables the business to take remedial actions quickly, as necessary, to minimize costs of damage caused. Incident capture tools intersect closely with the Compliance program of the business, as well as the Contract Life Cycle Management System, and addresses the risks posed by issues of non-compliance – either internally, or externally. Non-compliance incidents can relate to the meeting of contractual obligations along with the adherence to regulations and legislation and can incur significant financial outlay in addition to revenue loss.
- Continuous monitoring
Among the essential elements of a Third Party Risk Management program is the scope for continuous monitoring. Both the efficacy of the program as a whole and the risk profiles of Third Party relationships need to be tracked to ensure optimum performance is being achieved. Not only does this element help to ensure a proactive approach to risk within the business operation, but it also helps to build scalability into the business model – contributing to the future-proofing of the enterprise in a significant way.
A high degree of automation is essential to any Third Party Risk Management program because it reduces the potential for human error, thereby enhancing efficiency within the operation. Automating the basic administrative processes of Third Party Risk Management speeds up the system and avoids workflow bottlenecks, delays and resource wastage. This also helps to ensure compliance with both internal and external regulations, legislation and guidelines, and creates the necessary audit trails.
Third Party Risk Management for Efficiency and Compliance
When Third Party Risk Management is prioritized within the business operation and deployed through a comprehensive program of essential processes and strategies, efficiency and compliance levels are increased. This proactive approach to risk assessment and risk reduction ensures that the most accurate information is used in decision-making, and the business operation is optimized. To enable businesses to achieve this, Symfact Contract Management Software delivers an end-to-end Contract Life Cycle Management platform that incorporates all essential Third Party Risk Management elements in a single product.
The browser-based software incorporates an entire Third Party Risk Management program as part of an overall Contract Management system. Using cloud technology, it speeds up the contracting process by enabling permission-based access – allowing authorized personnel to access the system from any internet-connected location, anywhere in the world. This not only cuts costs in terms of travel and administration, but it also increases security of critical contract and Third Party data. The permission-based access feature is optimized by the fact that the product is built around a centralized repository – gathering all documentation and data into a single storage location.
This centralized repository creates a valuable data source that informs Third Party Risk Management. The gathered documentation can be transformed into actionable data using the powerful filtration and reporting tools of Symfact’s Contract Management Software. Active and inactive contracts can be analyzed for performance and compliance in order to inform decisions about future Third Party relationships, while the template library feature can be used to design and build intelligent questionnaires to inform risk assessments and profiles.
These powerful filtration and reporting tools harness the strength of automation to enable businesses to closely track performance of the system itself and also of individual contracts and Third Party relationships. This continuous monitoring feeds back into the pool of vital Risk Management data, further building scalability into the heart of the operation. The ability to respond to fluctuations in both supply and demand, in a scalable way, is essential for all modern commercial operations, and ensures that the business can continue to function in even the most unprecedented of circumstances – whether that takes the form of environmental, political, financial or public health issues.
This is the extent to which Third Party Risk Management strategies protect and insulate business operations – enhancing compliance, security and efficiency in conjunction with effective Contract Management. To that end, Symfact’s Contract Management Software is the ideal solution for businesses seeking to take greater control of both the current operation and the future of their enterprise. The highly configurable product uses cross-platform open API architecture, ensuring that the software can be easily integrated with existing systems to deliver a bespoke and fully customizable package. Contact Symfact today to arrange a demonstration of Contract Management Software and find out how this end-to-end solution can revolutionize your corporate approach to Third Party Risk Management.