Did you know that failure to properly identify and manage third-party risks can result in significant financial costs? Fines and compensation costs for organizations can range from $2-50 million. This highlights the critical importance of effective governance in third-party risk management.
Today, organizations rely heavily on third-party ecosystems to gain strategic advantages. However, along with this reliance comes the risk of reputational damage and regulatory action caused by these third parties. Implementing best-in-class practices and leveraging the extended enterprise can enhance organizational value while mitigating associated risks.
In this article, we will explore the role of governance in third-party risk management and uncover the steps to building a well-governed program. By understanding the threats and opportunities of third-party governance and risk management, organizations can protect themselves while harnessing the benefits of these partnerships.
What Is Governance and Oversight in Third-Party Risk Management?
Governance and oversight play a critical role in effective third-party risk management. Governance involves identifying, establishing, managing, monitoring, and improving processes within an organization. To guide the third-party risk management program, it is essential to have a governance framework and standards in place. The National Institute of Standards and Technology (NIST) Cybersecurity Framework 2.0 draft guidance provides a comprehensive framework for governance and oversight in third-party risk management, specifically the Govern function.
The Govern function oversees various aspects of the cybersecurity strategy, including roles, responsibilities, policies, processes, and procedures. By establishing clear objectives, policies, and processes for third-party risk management internally and communicating roles and responsibilities to external participants, organizations can ensure a well-governed third-party risk management program. Additionally, integrating cybersecurity supply chain risk management into enterprise risk management is crucial for comprehensive governance and oversight.
To summarize, effective governance and oversight involve establishing a governance framework, aligning with the NIST Cybersecurity Framework, and implementing clear objectives, policies, and processes for third-party risk management. These steps contribute to building a well-governed third-party risk management program that enables organizations to proactively identify and manage risks associated with their third-party relationships.
Steps to Building a Well-Governed TPRM Program
Building a well-governed TPRM program involves several key steps. Here is a comprehensive guide to help organizations establish a strong framework for third-party risk management:
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Establish Program Strategy: Begin by defining the program’s strategy, objectives, policies, and processes. Ensure that these align with the overall risk management and compliance programs.
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Communicate Roles and Responsibilities: Clearly communicate the roles and responsibilities to both internal and external stakeholders. This communication should focus on establishing accountability for tasks and expectations for third-party participants.
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Integrate Cybersecurity Supply Chain Risk Management: It is crucial to integrate cybersecurity supply chain risk management into the larger enterprise risk management strategy. By doing so, organizations can address comprehensive TPRM.
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Priority-Based Approach: Prioritize suppliers based on their criticality to the business. This approach allows organizations to allocate resources effectively and concentrate efforts on higher-risk entities.
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Incorporate Requirements in Supplier Contracts and Agreements: Include explicit requirements for addressing cybersecurity risks in supplier contracts and agreements. This practice ensures that third-party participants understand and acknowledge their responsibility in mitigating risk.
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Perform Due Diligence: Before entering formal relationships with suppliers, perform thorough due diligence. This step involves conducting background checks, evaluating their cybersecurity posture, and assessing their financial stability.
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Continual Risk Assessment and Monitoring: Continually assess and monitor the risks posed by suppliers throughout the relationship. Regularly review their cybersecurity controls and potential vulnerabilities.
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Implement Controls and Remediation Measures: Implement appropriate controls and remediation measures to mitigate identified risks. This proactive stance helps prevent potential disruptions and breaches in the future.
By following these steps, organizations can establish a well-governed TPRM program, ensuring effective management of third-party risks.
The Threats and Opportunities of Third-Party Governance and Risk Management
In today’s interconnected business landscape, organizations are realizing the critical importance of effective governance and risk management practices within their third-party ecosystem. Poor governance in third-party relationships can lead to severe consequences, including reputational damage, regulatory non-compliance, and breaches of sensitive customer data. However, organizations that implement robust governance and risk management strategies can also unlock powerful opportunities.
By adopting a structured approach to third-party governance, organizations can harness the specialized skills and knowledge of their external partners. This collaboration can drive innovation, enhance operational processes, and ultimately achieve a sustainable competitive advantage in the market. Organizations must recognize the urgent need to bridge the execution gap by investing in tools, technologies, and streamlined processes that facilitate the successful management of third-party risk.
The prevalence of third-party incidents emphasizes the critical importance of prioritizing third-party governance and risk management at the board-level. Proactive measures, such as conducting comprehensive due diligence, continuously assessing and monitoring risks, and implementing robust controls and remediation measures, are imperative to ensure the integrity and security of the organization’s third-party ecosystem. By embracing effective third-party governance and risk management, organizations can navigate the complex landscape of third-party relationships with confidence and position themselves for sustained success.
