Mastering third-party risk management: Strategies, challenges, and digital solutions
What is third-party risk management?
Third-party risk management is the process of identifying, assessing, and mitigating risks associated with external vendors, suppliers, and service providers. These risks can range from regulatory non-compliance and data breaches to financial instability, operational disruptions, and reputational harm.
An effective third-party risk management strategy includes maintaining a centralised repository of vendor information, continuously monitoring compliance and performance, and conducting regular risk assessments to identify and address vulnerabilities. By implementing structured processes and leveraging automation tools, organisations can enhance oversight, strengthen vendor relationships, and protect their operations from potential third-party threats.
What are the types of third-party risks that can occur?
Third-party risks can arise from a wide range of issues that impact an organisation’s operations, compliance, and reputation. Understanding these risks is essential for developing a robust third-party risk management strategy. Below are key types of risks organisations may face:
- Compliance risk - Non-compliance with regulations, industry standards, or contractual obligations leading to legal actions, fines, or sanctions.
- Reputational and ESG risk - Brand damage from third-party unethical behaviour or misalignment with your organisation’s ESG standards, including environmental impact, labour practices, diversity, and governance.
- Cybersecurity & data privacy risk - Data breaches, security vulnerabilities, or mishandling of sensitive information by third parties. This includes unauthorised access, malware distribution, and failure to comply with data protection standards.
- Operational and delivery risk - Disruptions from a vendor’s inability to meet performance, quality, or delivery standards including financial instability can impact an organisation’s ability to deliver to its own customers.
- Supply chain risk - Disruptions in the supply chain due to vendor issues like delays, geopolitical instability, natural disasters, or resource shortages, impacting overall business continuity.
- Legal & contractual risk - Risks from poorly defined contracts, ambiguous terms, or lack of legal enforceability. This includes disputes over intellectual property, service levels, or liability clauses.
- Geopolitical & regulatory risk - Exposure to political instability, trade restrictions, or regulatory changes in the regions where third parties operate. Sanctions, tariffs, and changes in local laws can disrupt operations.
What are the challenges in third-party risk management?
Effectively managing third-party vendors is critical to organisational success but comes with several complex challenges. One of the primary difficulties is achieving full visibility into vendor risks ranging from compliance breaches and data security vulnerabilities to operational failures. These can have widespread impacts across the organisation. Ensuring vendors consistently meet regulatory and contractual obligations requires continuous monitoring, regular assessments, and swift responses to any issues.
Managing a diverse vendor base across industries, geographies, and tiers adds further complexity, as varying risk profiles make it difficult to standardise processes. Additionally, the dynamic nature of global supply chains and evolving regulatory landscapes demands that organisations remain agile in identifying and mitigating emerging threats. These challenges highlight the need for a robust third-party risk management framework to protect operations, ensure compliance, and safeguard organisational reputation.
What is a third-party risk management policy?
A third-party risk management policy outlines the framework an organisation uses to identify, assess, and mitigate risks associated with vendors, suppliers, and external partners. It establishes clear guidelines for evaluating third-party relationships to ensure they meet compliance, security, and performance standards. By covering key areas such as due diligence, risk assessments, contract management, and ongoing monitoring, the policy helps protect the organisation’s operations, data, and reputation.
Implementing a third-party risk management policy is more than just a set of rules, a policy creates a structured system that empowers organisations to proactively manage potential risks. With the right tools and processes, the policy fosters stronger, more transparent vendor relationships, ensures alignment with organisational objectives, and simplifies the complexities of managing diverse third-party partnership
What are the best practices in third-party risk management?
Effective third-party risk management requires proactive strategies to mitigate risks and foster strong vendor relationships. Here are six essential practices explained in more detail:
- Define risk criteria: Establish clear, consistent benchmarks to evaluate vendors’ financial stability, regulatory compliance, cybersecurity protocols, and operational performance. This standardised approach ensures all vendors are assessed objectively, reducing the likelihood of unexpected risks.
- Conduct thorough due diligence: Before engaging with a vendor, perform comprehensive due diligence to verify legal, ethical, and regulatory compliance. This includes reviewing certifications, conducting background checks, and assessing alignment with your organisation’s sustainability and governance standards.
- Categorise vendors by risk: Implement a tiering system to classify vendors based on their risk exposure, criticality, and industry. This approach allows you to prioritise resources, focusing more rigorous assessments and monitoring on high-risk or strategically important vendors.
- Monitor continuously: Vendor risks evolve over time. Continuous monitoring through audits, performance reviews, and real-time alerts ensures emerging risks are promptly identified and managed, maintaining compliance and minimising disruptions.
- Leverage technology: Utilise advanced third-party risk management tools, such as Synergi Life, to automate risk assessments, incident tracking, and compliance reporting. These technologies provide real-time insights, streamline workflows, and simplify the management of complex vendor networks.
- Plan for disruptions: Despite preventive efforts, risks can still materialise. Develop robust incident response and contingency plans to swiftly address vendor-related disruptions, ensuring minimal operational impact and safeguarding business continuity. Tools such as Synergi Life can also support incident management including recording and tracking responses.
How can you establish a third-party vendor risk management process?
Establishing a third-party vendor risk management process begins with defining a clear framework for identifying, assessing, and mitigating risks. Start by developing a vendor onboarding process that includes due diligence steps such as evaluating financial stability, legal compliance, cybersecurity measures, and alignment with your organization’s values and objectives. Use a risk-based approach to categorize vendors based on their criticality and potential exposure to risks. This ensures that high-risk or high-impact vendors receive greater attention and resources while maintaining efficient oversight for lower-risk vendors.
Once the framework is in place, implement tools and processes for continuous monitoring and management. Utilize software solutions like Synergi Life to automate key aspects, such as risk assessments, performance tracking, and compliance reporting. Establish regular review cycles and communication channels with vendors to address any issues promptly. Finally, document and train relevant stakeholders on incident response plans and contingency measures, ensuring that your organization is prepared to handle vendor-related disruptions with minimal impact. A well-structured process not only safeguards your operations but also builds trust and collaboration with your vendors.
What are the benefits of a third-party risk management digital tool?
Implementing a digital tool for third-party risk management brings efficiency, consistency, and deep insight into vendor relationships. These tools automate repetitive tasks such as risk assessments, compliance tracking, and performance monitoring, saving time and ensuring a more structured approach to managing third-party risks. Features like real-time dashboards and automated alerts provide better visibility into vendor risks, enabling organizations to respond swiftly and effectively to potential issues.
A key benefit of advanced tools like Synergi Life is the inclusion of vendor survey functionality. This feature allows organizations to distribute targeted surveys based on vendor tier or industry, gathering valuable feedback and performance data. By analysing survey results, organisations can identify areas of improvement, ensure compliance, and foster stronger partnerships with vendors. Additionally, these tools centralise vendor data, eliminate manual errors, and provide actionable insights through robust reporting and analytics. With a digital tool in place, organizations can build resilience, enhance collaboration, and safeguard their operations against third-party vulnerabilities.
Mark Richmond is a Global Process Improvement Manager at DNV, where he leads a team focused on the design, implementation, enhancement, and automation of processes for both internal tools and customer-facing solutions. Mark brings a wealth of expertise to driving operational excellence and innovation. He joined DNV in 2008 and has been serving in his current role since 2020, delivering impactful improvements that support the organisation's strategic goals.
