What is Third Party Risk Management and Why is it Important?

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All Contract Management is an exercise in risk mitigation because contracts govern the flow of resources and money within the business and to outside interests. To manage that flow is to manage risk. Risk is not only found in the specific details of contractual obligations, however. There are many other factors that impact the variable level of risk throughout the operation. Third Party Risk Management is a process that takes all of those factors into account and allows for a comprehensive approach to the identification and categorization of different types of risk. It is a particular discipline that is designed to provide a dual layer of protection to commercial enterprise – protecting both the business, and the Third Party.

Who are Third Parties and how do they relate to risk?

In business, Third Parties are external organizations, agencies and individuals with which the operation has a commercial relationship. These can include vendors, suppliers, contractors, partners and service providers. The term ‘Third Party’ is essentially an overarching label that encompasses all of these types of external operatives. This means it also encompasses sub-sets of Risk Management strategies such as Vendor Risk Management, relating to that specific type of Third Party.

Third Parties are an integral part of Risk Management because every business relationship with an external organization, agency or individual creates a vulnerability to commercial risk. If Third Party relationships are governed and regulated by the agreement of the terms of that relationship, then any disruption to the ability to meet those terms can further disrupt the operation of the business. If a business enters into a relationship with a Third Party for the purpose of that Third Party supplying a critical service, for example, and that Third Party is either negatively impacted by outside circumstances, negatively impacted by internal issues, or is the victim of cybercrime, then the original business suffers consequences directly linked to that issue. This is because the ability of the Third Party to meet the obligations associated with that commercial relationship is reduced.

What do the consequences look like for the original business? Well, if a Third Party is unable to meet its contractual obligations on time, or at all, then the day-to-day operation of the original business is affected. If supplies are delayed, or there is a disruption to a service, or a contractor is unable to work, then the business cannot properly fulfil its own obligations. Its other contractual relationships are affected, increasing the likelihood of financial penalty and lasting reputational damage. It is the lasting impact of negative consequences that makes Third Party Risk Management so important.

The importance of Third Party Risk Management

With the spectre of lasting repercussions in mind, we can see that Third Party Risk Management is a strategy that is vital to the success of the business in both the long and short term. This strategy is important for a number of specific reasons:

  • Reputational protection

When a business undertakes a comprehensive Third Party Risk Management programme, its reputation is enhanced and protected. The steps required for Third Party Risk Management demonstrate to existing and potential collaborators that the business is diligent, methodical and effective in contractual compliance and in security, making the business a safe option for partnering. Just as risk assessments and profiles form part of the Third Party Risk Management conducted by the business, so Third Parties should be completing the same due diligence about the business. It should be a priority to ensure that such due diligence on the part of a Third Party provides only reassurance about the candidacy of the business.

  • Business continuity

If the services or supplies provided by a Third Party are disrupted, the original business is also disrupted. Business continuity planning helps to prevent such situations when it incorporates Third Party Risk Management, because it ensures that the risk of disruption is minimized. By conducting the due diligence involved in Third Party Risk Management, the business can confirm that the Third Party has policies and processes of its own in place to avoid interruptions in service provision.

  • Revenue protection

Steps that ensure business continuity and reputational protections also help to protect revenue. This protection is in terms of both profits made from contractual agreements, and also in terms of financial penalties avoided. The protection of revenue is essential for the future commercial success of the business as it provides secure scope for adaptation to wider market developments.

  • Operational streamlining and optimization

The processes that are required for thorough Third Party Risk Management also contribute to the streamlining and optimization of the overall operation. As a cyclical strategy in itself, Third Party Risk Management closely supports the end-to-end management of the contract lifecycle and, in doing so, aligns the entire system with optimal methodologies. The drive of Third Party Risk Management focuses attention and resources on the prevention of delay, the maintenance of compliance levels, and the avoidance of catastrophic failure.

The best solution for Third Party Risk Management

Given the importance of Third Party Risk Management, and its close relationship to Contract Lifecycle Management, it follows that the very best solution for ensuring best practice is achieved and maintained is the implementation of a comprehensive and agile digital solution for both. This is made possible with the utilization of cloud technology, which allows for flexibility while delivering a high level of cybersecurity.

Contract Management Software, such as that designed by Symfact, is one such digital solution. It is built on the principles of Third Party Risk Management and the understanding of the connection this discipline has with the legal agreements of the business. Most importantly, it is constructed around the knowledge that stringent Third Party Risk Management is a core part of the business defence against disruption and reductions in revenue. The Symfact platform boasts many features that address the intersection of Contract Management and Third Party Risk Management, including:

Centralized repository

In terms of Third Party Risk Management, a software solution built around a centralized repository facilitates a number of risk mitigation measures.

  • Permission-based access – Having all contract documentation stored digitally in a single location means that a permission-based access system is required. This allows the business to determine exactly who can access sensitive information and ensures that all activity is logged and recorded. That means that, not only is compliance maintained, but also stricter version control can be achieved. It also allows personnel to log in from any web-connected device, in any location that is connected to the internet.
  • Standardization – When all contract documentation is centrally stored, the business can agree and implement a comprehensive policy of standardization. A template library can be created, allowing authorized personnel access to a set of standardized clauses and language, suitable for all types of agreement. In addition, the application of standardized metadata and data tagging transforms the contract collection into a valuable data source. These facilities of standardization combine to create powerful risk mitigation opportunities.
  • Intelligent questionnaires – In addition to a centralized library of templates and approved language, a centralized repository supports the building of intelligent questionnaires. These are vital Risk Management tools, made accessible by the repository, that specifically help the business to complete thorough risk assessments.

Automated workflows

By deploying a high degree of automation into Contract Lifecycle Management workflows, software platforms can further reduce risk. This facility ensures that the right task is flagged up to the right person at the right time, which increases efficiency and productivity and delivers business continuity. In addition, it allows for the early identification of workflow bottlenecks, mitigating the risk of delays and failures in compliance.

External database links

The most thorough risk assessments include comprehensive background checks on individuals and organizations, so the best digital solutions will include links to external databases, such as Refinitiv, LexisNexis, Dow Jones and Dun & Bradstreet. These empower the business to gather and consider all relevant information, including the presence of Politically Exposed Persons and the incidence of past failures in compliance. This process ensures that all decisions are based in current, granular data and provides the very best protection against risk.

Customized reporting

Third Party Risk Management is all about making informed, data-based decisions, which means that having actionable information is essential. Powerful reporting tools within a Contract Lifecycle Management software platform turn the centralized repository into a single, unified data source. This means that all documentation – past agreements and existing contracts – are used for granular data analysis. Risk assessments are more thorough, and risk-based forecasting is possible, increasing scalability and market agility along with overall resilience.

Contract Management Software by Symfact utilizes the relationship between Third Party Risk Management and Contract Lifecycle Management and delivers a digital solution that focuses on the advantages that relationship provides to business. Harnessing the combination of the two disciplines creates a system that is streamlined, optimized and highly efficient, and which is entirely geared toward scalable business continuity. Contact Symfact today to find out more, and to book your demonstration.