What is Third-Party Risk Management?
Third-Party risk management is the process in which a company manages the risk-prone by third-party service providers. On this day, there is no company that does not utilize third-party services. Third parties are used for different services, which are not just limited to helping the organization achieve its goals. Outsourcing activities to third-party providers is the commonplace that an organization performs. However, there are also different forms of associated risks with the third-party. Hence, it is vital to use third-party risk management services. Through this, your organization can reduce the amount of risk. However, organizations are determined to carry out services from a third-party. There is a lot of uncertainty with the amount of risk present in a third-party service provider. Hence organizations require using third-party risk management services.
Advantages of Third-Party Management Services
A third-party is also known as a vendor. There are specific strategic advantages of using third-party providers. An organization can concentrate on the important priorities of the business. Business outsourcing activities can focus on the priorities of the business. For example, a law firm providing property law and conveyance services can outsource the documentation work to an external provider. By carrying this out, the law firm can work on conveyance documents such as contracts and different registers. One of the significant advantages of this is the law firm can reduce the fee earners' workload. Apart from this, less time and expense goes into the administrative costs of the firm. The law firm can take on more retainers with different clients and not compromise the service provider's clarity.
An organization can establish competitive advantages by using third-party services. Using third parties can have its benefits. Companies can enjoy profits and value-added services from outsourcing work to a third party. For example- Third-party services can also be in the form of collaboration with another party to provide the service. An NBFC (Non-Banking Financial Company) collaborates with a fintech company to get a competitive advantage by using the software and Artificial Intelligence to deliver banking services to customers. An NBFC not using third-party collaboration with a Fintech company would not get any advantage of this.
Outsourcing work to third parties improves the progress of the business. However, the risk is also prone to develop when third parties are involved in carrying out the business. Hence developing an effective framework for third-party risk management is required for the company.
Organizations using third-party services can take significant benefits such as professional advantage from the outsourcing provider. The third-party provider will ensure that work is completed professionally.
Types of Third-Party Risks (Third-Party Risk Management)
There are different forms of risk with the use of third-party services. Hence, a proper framework has to be developed for third-party risk management services. If an organization does not have third-party risk management services, then the following issues can arise. The type of third-party risks are as follows:
Strategy risk is an issue that affects the primary strategy or goal of an organization. When major outsourcing work is given to third parties, they are prone to make errors that increase strategic risk. A common example of strategic risk is when an organization uses an external auditor to audit the accounts of the company. A mistake in the audit will change the strategies that affect the organization. As accounting practices, such as negligence is not permitted under any accounting authority. However, errors such as this will reduce the shareholder confidence in the organization. This will directly affect the sales pattern of the company. If the company is a public company with its shares registered in a recognized stock exchange, it will also have reputational damage, and investor confidence will reduce. An organization requires a third-party risk management framework that can effectively reduce the number of strategic risks.
Every organization has some form of regulatory issue. To mitigate such issues, organizations use legal consultants and law firms to reduce the regulatory burden. Lawyers and advisors are experts at providing legal advice to a company. Not only is a lawyer, but even a chartered accountant is also used for regulatory advice on the company. Organizations that want to outsource their regulatory work to lawyers can reduce the number of regulatory risks. However, regulatory problems can arise even if an organization has an external lawyer. For example- a company wants to acquire another company. The company approaches a law firm to help in transactional work, such as advisory and due diligence. Due diligence is a complex process, and a small mistake can cause operational and reputational loss to an organization. It can lead to the merger or transaction from not proceeding, and the parties can walk away from the deal. To reduce such risk, third-party risk management framework has to be enforced within an organization. To reduce the amount of risk, the organization can recruit skilled in-house counsel to advise on the merger. However, in a complex merger and acquisition process, different law firms and parties would be involved. Hence regulatory risks are prone to arise in some form of transactions. However, the organization should use effective third-party risk management services to reduce the amount of risk within the organizational framework.
Operational risks are the issues that arise within the internal framework in an organization. Operational risk can happen due to a series of events. It can either arise due to internal events or external events. An organization should develop an effective third-party risk management strategy to overcome operational risks.
- Internal Events- Operational risks can affect the internal strategies which are adopted by an organization. For example- A journal company outsources work to a third-party provider. In one of the journals which are not published, there are errors in the clarity and consistency of news. This will directly affect the publishing department/ IT department of the organization. As their operational efficiency will be reduced, it will affect the way in which the company operates. Internal events such as this can be reduced if an organization uses effective third-party risk management services.
- External Events- External events are one of the major causes of operational risks in a company. Outsourcing work to an external provider can directly lead to issues in the operations of an organization. Consider the following case- when an organization outsources the Human Resources work to an HR firm provider, then it is the responsibility of the HR provider to carry out services related to recruitment, screening, performance reviews, and performance appraisal. If the company does not recruit the proper workforce for the organization, then its operations will get disrupted.
Organizations must ensure that a proper third-party risk management framework is streamlined to avoid operational risks.
Reputation can be understood as the goodwill of an organization in the minds of consumers. Reputational loss is detrimental to an organization. Any form of loss can be mitigated; however, the reputational loss cannot be changed. Reputation can either be the loss of profits due to reduced goodwill or trademark infringement or patent infringement. This will be on account of the negligence caused by the law firm. Usually, the reputational loss comes to a picture when an organization has given the authority to another party. Consider the case where an organization has given a portfolio of securities to a securities brokerage firm. The main aim of the brokerage firm is to manage the portfolio diligently. Due to an error in the brokerage firm, the securities are sold at a higher price than the market value. When it comes to regulation selling securities at a price higher than the market value is an offense. Due to this error, the organization gets fined by the authority for selling the prices of securities higher than the quoted market price. This is a reputational loss for the company. To reduce this, third-party risk management protocols should be implemented within the organization. An organization can reduce reputational loss through this practice.
On this day, an organization cannot function without effective technology. Technological risks arise when an organization outsources its work to an IT organization. An organization outsourcing IT work can be due to various reasons. The organization may want to implement a cybersecurity protocol within the organizational framework. Apart from this, an organization may want to change how it works, thereby making changes to the IT infrastructure. The third-party organization may not know the amount of risk that the organization is prone to. In a large organization, the loss of electronic data can be a big problem. An IT outsourcing provider would not be able to quantify the IT risk for the organization. Here it is essential to have a third-party risk management protocol. The amount of IT risk within an organization can be reduced. The strategy which is used in third-party risk management would form a risk assessment. In this risk assessment, the company will be categorized into a large or small organization. Based on this, the technological risks will be categorized and allocated.
Transactional Risks are bound to occur in an organization. The transaction can be integrated between the business side and the IT side. A transaction takes place when funds are transferred into a business. A third-party vendor manages the payment interface in an organization. Due to such payment issues, there can be informational breaches.. This can be detrimental to an organization as it is a data breach. Having efficient third-party risk management services can reduce the number of transactional risks in an organization.
Third-Party Risk Management Service
At Enterslice, professionals know that every organization is prone to some form of third-party risk. We have developed protocols to manage any form of third-party risks for your organization. The following process has been developed by Enterslice to understand third-party risks:
Based on the type of work given to third-party, we would assess the amount of risk present with the vendor.
Analyze the amount of risk
The risk is divided into lower risks or higher risks. Based on this, an analysis will be conducted to measure the risks as per the given situation.
Vetting contracts in advance would understand the level of risk what the organization is facing. This will also include an action plan which is put in place in case the risks arise.
We will constantly monitor the progress of the third-party risk management framework in your organization. We ensure optimum efficiency in the third-party risk management protocol.
- Enterslice provides effective third-party risk management services to organizations such as NBFCs, Fintech Companies, and Software Companies.
- We are a recognized management consultant in India.
- Experts at Enterslice have conducted third-party risk management services with the primary objective of adding value to your organization.
- We have multifaceted teams of professionals comprising of IT professionals, lawyers, and Risk Management Advisors.