Sourcing and Procurement
Cutting supplier risk through versed Third-Party Risk Management
The recent cyberattacks on private companies, such as FireEye, and the US Government departments, led to red alerts across continents about the security loopholes that happen to exist despite all the measures in place. However, it was the cyberattack on one of the world’s largest aerospace and defence companies that drew focused attention towards risks involved in third-party vendor relationships.
With globalization widening the scope of interconnected supply chains, a study suggests that nearly 59% of data breaches result from third-party vendors. Till today, the majority of the organizations continue to remain exposed to risks related to third-party vendors, despite putting in place robust security systems to monitor threats. The lack of due diligence, compliance, and associated risks have led banks and insurance providers to incur fines to the tune of $13.8 billion in 2020, while losses amounted to over $5 billion in 2021.
The situation thus demands organizations to become more resilient by effectively predicting and protecting against such risks. They must prevent potential disruptions and losses from third-party vendors by creating a culture of risk-aware decision making. However, while organizations consider Third-Party Risk Management (TPRM) to be a critical business decision in present times and many have implemented TPRM programs to some extent, just about 10% of the organizations are confident of their risk management programs.
Need for change
Currently, organizations are intending to invest in TPRM but are apprehensive about wide-ranging challenges and inadequate awareness about the implementation of programs. Unlike the general presumption towards TPRM being a one-time task, it must ideally evolve in nature. Non-standardization of processes and high costs are the primary factors that can incur varying operational & financial risks to a company, ranging from cyber data breaches to compliance violations. While non-standardization curtails a company’s ability to assess and evaluate vendors leading to non-availability of real-time visibility, high costs impede the adoption of new technology advancements. Additionally, with increasing emphasis on standardization of processes and harmonizing of the system, TPRM programs must be integrated with the digital landscape of the organization, which is found to be missing in several cases.
Other factors, such as limited guidance in addressing industry standards, complex vendor network, as well as lack of policy awareness also impede an organization’s capability to plan and implement a TPRM program. Therefore, addressing these challenges must be the first step towards the adoption of a sound TRPM program.
Sharpen the edge
Considering the rapid evolution in the business environment, it has become crucial for TPRM programs to meet the modern and dynamically changing needs of an organization. While TPRM programs are already leveraging emerging technologies, such as Artificial Intelligence (AI) and Machine Learning (ML) to assess the impending risks from unethical practices, compliance breaches, or the ones emerging from the poor financial health of suppliers/vendors, the addition of the following factors is paramount to ensure their growth in terms of maturity and evolution:
Cross-functional teams: Collaboration between internal teams is crucial for the success of TPRM. The interconnection will allow companies to identify the gaps and loopholes across processes and mark the risks needing human intervention.
Focus on being comprehensive: Owing to factors, such as regulatory obligations, multiple stakeholders, a wide variety of third-party vendors, among others that a TPRM program is often thought to be complex. However, developing a comprehensive framework of questions for each of these factors will help in standardizing content and will ease the process of assessment.
Easy adoption: Companies are on the lookout for TPRM programs that can be extended to every division. For scalability, a program must be easily implemented, adopted, and managed. While companies are inclined to adopt modern, cloud-based programs, the interface must also be easy to deploy and use.
Agile and resilient: With technology advancements and the growing demand from clients for integrated digital services, businesses are having to operate at a faster rate, which increases the chances of incurring risks. In this scenario, centralizing the vendor database, outsourcing assessment of top-vendors to identify potential risks, and making use of shared services to channelize the focus of the teams, can help in staying agile and be resilient in the long run.
Integrated tools: A standalone solution is not recommended for a TPRM program. To extract meaningful benefits from a TPRM program, it is essential to integrate the program with core solutions. Creating a network of connected solutions will allow companies to also improve the risk visibility across functions.
The current competitive and challenging times demand TPRM programs to be more empowered and be able to predict future risks while adapting to business dynamics. Thus, a versed TPRM program that has analytics capability built-in, backed by sophisticated AI, can offer real-time risk insights to organizations, and enhance the risk management process, thereby enabling companies to take more risk-averse decisions.