Comprehensive Guide For Formulating Third Party Risk Management Policy

A study indicates that a total of 98 percent of organizations worldwide have a relationship with at least one third party vendor that has been breached in the last two years. Such is the severity of the issue.

A well-structured third party risk management policy becomes vital and critical. There is need to identify and mitigate the risks arising from third party relationships across the whole ecosystem. What a comprehensive TPRM policy does is it provides standardized processes for the same.

What is Third Party Risk Management?

Third party risk management is a way that structures the whole process through which organizations easily identify, analyze, mitigate and monitor the risks associated with their business partners and third party relationships. Since a great amount of risk is posed by third parties, third party risk management assesses this risk with respect to cybersecurity, service delivery, data protection, regulatory compliance, confidentiality, and more.

The standardized procedures are laid down by an effective TPRM policy to select third parties and define risk management responsibilities between parties. It also emphasizes regularly assessing third party risks and tracing risk metrics on an ongoing basis. This makes TPRM a vital aspect of an organization’s overall risk management strategy.

Steps to Formulate an Effective TPRM Policy

This detailed guide covers the essential steps you need to take to formulate an effective, organization-wide TPRM policy.

1) Defining Goals and Securing Buy-In

Clearly Articulate TPRM Policy Goals

Start by defining the specific risk management goals you want to achieve through the TPRM policy. Typical goals include:

• Preventing data breaches and cybersecurity risks for businesses through third parties
• Ensuring regulatory and contractual compliance
• Monitoring service levels and performance
• Assessing risks linked to third party financial stability
• Protecting intellectual property and critical assets

Articulating precise TPRM goals will provide the focus for risk assessments and mitigation efforts.

Obtain Executive Buy-In and Support

In order to implement a successful TPRM solution it is important to gain the endorsement of your senior leadership. After discussing the cybersecurity, operational, and reputational consequences of inadequate vendor governance it is crucial to make a solid business case explaining why effectively managing third party risk is important.

Resources are to be provided for policy development, implementation, and ongoing administration therefore securing the necessary executive buy-in and commitment becomes vital.

2) Structuring TPRM Policy Development and Execution

Appoint a Dedicated TPRM Team

Proper execution of third party risk management policy template is necessary. Spearhead the development of the same by designating an internal team led by a senior leader. The team should encompass representatives from functions like legal, finance, IT, procurement, enterprise risk management, and information security that deal directly with third parties. Also, having a dedicated tprm software solution leads to effective third party risk management

Identify and Catalog All Third Party Relationships

Perform a complete inventory of all the third parties your organization deals with. The list should include suppliers, vendors, contractors, service providers, consultants, intermediaries, agents, and other business partners. Document key details like relationship scope, contracts, services provided, and access to sensitive data for each.

3) Conducting Third Party Risk Assessments

Classify Third Parties by Risk Level

Once you have inventoried all third party relationships, categorize them into high, medium, and low risk tiers using defined criteria like criticality of services, data access granted, past performance issues, financial stability, etc.

Define Risk Analysis Criteria

Determine the specific risk factors and criteria that will be applied to evaluate each third party relationship. Examples include cybersecurity practices, compliance controls, service quality metrics, financial strength, cultural fit, and strategic alignment.

Develop Risk Assessment Processes

Outline what your third and fourth party risk analysis process will involve particularly when running – self-assessment questionnaires, onsite assessments, document reviews etc. as well as the frequency of reviews and renewals for high, medium and low risk vendors.

Perform In-Depth Assessments

Leverage the defined risk assessment processes to thoroughly evaluate and document the comprehensive risk profile of high and medium risk third party relationships.

4) Risk Mitigation, Monitoring and Reporting

Create Risk Mitigation Plans

For higher risk third parties, detail the specific risk mitigation strategies you will implement – contractual terms, security controls, business continuity requirements, insurance coverage, etc.

Design Performance Monitoring

Define key performance and risk indicators for continuously monitoring the health, business impact, and risk exposure associated with high and medium risk third party relationships.

Institute Ongoing Reporting

Implement regular TPRM reporting for senior management and process owners on risk assessments conducted, critical metrics, emerging issues, policy compliance, and recommended improvements.

Prepare Incident Response Plans

Document incident response protocols in case a cybersecurity breach, service disruption, regulatory lapse or other significant incident arises at a critical third party. Include escalation procedures and contingency plans.

5) Maintaining Effective Documentation and Oversight

Centralize TPRM Documentation

Maintain thorough, up-to-date documentation on each third party relationship – contracts, risk assessments, due diligence artifacts, correspondence, monitoring logs etc. in a central repository.