The third-party risk management lifecycle is a common term that describes the stages of risk companies need to manage with their third parties throughout their relationship. A good understanding of the third-party risk management lifecycle can help your business map out each stage efficiently to ensure you take a holistic approach and use risk management best practices.
For most organizations, relying on hundreds of third-party suppliers, partners, subcontractors, and agents to deliver their services is a matter of doing business. Relationships with third-party providers help organizations reduce costs, but they can be risky without effective management and the correct vendor due diligence. Third parties come with different types of vendor risks, including reputational, operational, information security, and compliance risks, among others, and all of these risks need to be assessed and managed.
No matter the size or industry, every company engages with third-party vendors and needs to grant them access to their network and data, expanding the risk surface. Consequently, it's not enough to secure data and implement defensive measures in your organization because your vendor may fail to protect your data and the data of your customers.
Today, third-party risk management is more urgent than ever due to digital transformation and globalization. When more third-party vendors enter your network, third-party data breaches can be more damaging, so it's imperative to have visibility and control over every data touch point to avoid them. Besides, third-party risk management regulations are on the rise in almost every industry. To comply with them, companies need to ensure their third-party ecosystem is as safe as their internal network.
Understanding your company's third-party risk management lifecycle is crucial to identifying and remediating vendor and supplier risks. But it's a common mistake to think that third-party risk management (TPRM) is a one-time risk assessment and remediation initiative.
The reality is that your company encounters distinct risks at each step of the vendor relationship. This means you need to establish a comprehensive vendor risk management program to address the entire third-party lifecycle.
Download our free step-by-step guide to help you create a management framework to identify, measure, monitor, and mitigate the risks associated with third parties.
The third-party risk management lifecycles can be extremely detailed and vary by industry, and each company has a different perspective. Most lifecycles have a five to eight-step process, and there are several general steps that organizations should have in place.
It's a mistake to view the third-party lifecycle within the limits of signing a contract, implementing a third-party product or service, and then terminating the contract. The contract is only one component of the third-party lifecycle. It's essential to consider all the steps of managing a third party throughout the entire relationship with your company.
There are three main stages of a third party's lifecycle, each of which contains many subsequent steps. These are natural points in the relationship, and it's so important to understand risk throughout them and ensure vendor risk mitigation:
Let's take a look at each of these three stages:
Pre-contract risk management starts before you enter into a contractual agreement with a third-party vendor. After identifying new third-party providers, you need to perform the third-party risk assessment to determine its inherent risk and criticality. You have to look at the types of information each third-party vendor handles and then review the potential financial, reputational, and legal impact of a data breach.
Identifying these inherent third-party risks is critical because you will use this information to conduct risk-based due diligence on them. This is also an essential step to the risk management process because it allows you to dive deeper into the third-party vendor's policies, systems, and controls. The vendor is required to respond to the questionnaire and provide relevant evidence corresponding to each control. This information helps you understand any residual risks that you need to address.
The manual approach to assessing risks during third-party lifecycle with emails and spreadsheets is highly time-consuming and frustrating for both parties.
But with START, you can simplify and scale this risk assessment process, eliminating the redundancies and making it more efficient.
If the risks can be mitigated, then it's time to negotiate the contract terms and begin working with a vetted third-party vendor. You need to develop sound contracting principles and provisions. It's important to understand which risks are being assumed by the parties and achieve the right balance in risks distribution.
A strong contract is critical for managing third-party risk, so you shouldn't rush through contracting. As you start working with a third party, you should continue to review the contract to verify if the vendor is meeting expectations and service level agreements.
Post-contract monitoring is the last stage in the third-party risk management lifecycle that starts after signing the contract. This stage is often neglected, but it's where the real risk begins. The post-contract monitoring process should include these four critical activities:
The third-party risk management lifecycle is the end-to-end approach companies use to manage third-party vendors in an organized and transparent manner. It starts before a contract is signed and continues until you determine it's time to end the relationship. It's crucial to create the right systems and controls throughout the lifecycle to identify and mitigate your risks with third parties effectively.