Third-Party Risk Management Framework: Steps to Select

Over 80% of legal and compliance leaders stated that they discover third-party risks after the initial onboarding and due diligence. This indicates that traditional risk management methods fail to identify new and changing risks.

As businesses grow,  including third-party vendors in their operations is not uncommon. While this expands their horizons, it also widens their risk exposure.

Every new vendor brings numerous risks in financial liability, cybersecurity gaps, legal issues, and performance failures, which could disrupt your organizational structure.

In this article, we’ll take a look at what a third party risk management framework or TPRM framework is.

What is the TPRM Framework?

Third party risk management framework is the process of analyzing and controlling risks associated with your third-party vendors or service providers. These risk profiles could include unnecessary access to your intellectual property or other sensitive information and operational and financial risks.

Here are some potential impacts you can have according to industry standards:

• Any external outage that will affect different parts of your supply chain
• Any internal disruptions
• Operational deficiencies
• Vendor outages that expose your organization to supply chain vulnerabilities

Note that modern companies heavily depend on third parties to ensure smooth operations. Therefore, the consequence of an exploited risk from one can be severe. 

Why do you need the TPRM Framework?

You need a third-party risk management program to ​​ensure consistency in managing third-party risks. This is now an important component of every organization’s risk management strategy to safeguard from data breaches.

This is because today’s companies rely on a vast network of suppliers and vendors worldwide.

Consequently, they are vulnerable to several business disruptions. This ranges from minor inconveniences to severe crises, including bankruptcies, geopolitical incidents, and data breaches. 

Hence, more than focusing solely on operational factors like performance, quality, delivery times, KPIs, and SLA measurement is required. Reputational and financial risks are now higher, including labor practices, information security, and financial stability.

This is why you need to understand the legal and regulatory requirements.

As a bonus, download the “Third-Party Risk Management Policy” to protect your business. This important document outlines how to manage third-party risks and secure vital information.

Things to consider while choosing TPRM Framework

The third-party risk management program you choose will be based on your company’s regulatory requirements. It should include your business processes, acceptable risk levels, and compliance requirements.

Also, remember that only a few frameworks can cover all your regulatory or risk management needs. Hence, many companies derive a framework from multiple sources, like NIST or ISO, when finalizing their TPRM program.

That said, selecting the right TPRM framework can be difficult, and here are a few pointers to get you started:

• Does the framework you choose support data gathering with automation?
• Will the framework integrate with your existing workflows?
• Does it provide benchmarks for reference?
• Assess the adoption of the TPRM framework in the industry and its ability to address fourth-party risk concerns.
• Will it be regularly updated to address rising risks, such as cybersecurity and legal changes?
• Are there standardized risk definitions (starting from high, medium, and low)?
• Consider your customers’ preferences and requirements for TPRM frameworks.
• Does the framework include predefined remediation processes?

Components of TPRM Framework

Different TPRM frameworks are available to meet different needs, and they can vary from basic manual methods to advanced, all-in-one software solutions.

So, no matter which framework you pick, they all share five essential elements that form the basis of any TPRM approach:

• Risk identification
• Risk assessment
• Risk monitoring
• Risk mitigation
• Continuous Monitoring

1. Risk identification

The initial step in choosing a TPRM framework is to check whether it has risk identification. This helps in recognizing and comprehending potential risks linked to third-party engagement.

Hence, when you assess the relationship’s nature, scope, and involved parties, you can identify and document risks to your operations and compliance.

2. Risk assessment

Once risks are identified, the TPRM process proceeds to Risk Assessment. Each identified risk’s potential impact and likelihood are carefully evaluated during this phase.

You need to analyze risk severity and likelihood to prioritize and allocate resources effectively for risk management.

3. Risk monitoring

This continuous process utilizes specialized tools to track, assess, and analyze risk factors over time against internal controls.

Ongoing monitoring keeps organizations informed about changes in the risk landscape, detects emerging risks, and proactively addresses vulnerabilities in third-party relationships.

4. Risk mitigation

The final stage of the TPRM process will focus on reducing the risks you identify to an acceptable level of third-party data breaches. Again, here, you need to plan for implementing controls, contingency planning, clear contractual agreements, regular audits, and open communication with third parties.

Overall, it aims to minimize your risk impact and ensure the ongoing integrity and security of operations throughout the third-party relationship with contingency plans.

5. Continuous monitoring

In TPRM, the process continues once vendors are approved to work with your organization. Ongoing vendor security monitoring is critical to TPRM, especially if these vendors have access to your internal systems and sensitive data.

Continuous Security Monitoring (CSM) is a tool that automates the monitoring of your information security controls and addresses if any potential cyber threats arise. Usually, companies implement CSM for their security and to keep an eye on vendor risk management security practices.

If you decide to go ahead with continuous monitoring, you can use a compliance automation platform like Sprinto. 

Sprinto updates your security status daily, highlighting any new risks that might affect your company’s regulatory compliance and sends you alerts for timely action like it’s mentioned below.

This way, you can be ahead of any potential level of risk or bad actors trying to sabotage your operations.

6 Steps to create a TPRM Framework

Creating a TPRM framework means you are potentially taking a huge step to minimize the financial and reputational damage to your company, even if any damage does occur with cybersecurity risks.

Now, let’s take a look at the steps we’ve outlined for you to establish the TPRM framework:

1. Talk to your important stakeholders first

Building a customized TPRM framework begins by working closely with IT, Legal, Operations, and Compliance departments. This collaboration with external stakeholders ensures that different risks and requirements are considered, resulting in a well-rounded approach to avoid scenarios.

In this cooperative process, you need to identify any areas that may be overlooked, prioritize your organization’s goals, and create a TPRM framework tailored to your specific needs. This collaboration shouldn’t be a one-time thing; it should continue throughout the TPRM lifecycle to keep improving and adapting as necessary.

The insights gathered during this process give you a sense of how your program compares to industry best practices. You also get a report describing your current TPRM program and specific recommendations for making it more mature.

2. Then, conduct a risk assessment

The next important step in creating your custom TPRM framework is assessing risks. Here is where you need to look into potential dangers and uncertainties when dealing with third-party vendors. 

Because, after all, you are relying on them for various services.

This risk assessment sets the stage for deciding which strategic risks need attention (risk appetite) and how to deal with them.

Let’s say you’re running a business and rely on a few key suppliers. To make sure everything goes well and avoid any reputational risks, you need to assess any risks associated with those suppliers.

Common tools for risk assessment include SWOT analysis, FAIR, or parts of the NIST Cybersecurity framework.

If you’re particularly concerned about cybersecurity, there are specific tools with security posture management ratings and vendor questionnaires that can be helpful too.

These insights help you fine-tune your TPRM framework to manage your company’s most important concerns.

With Sprinto’s compliance program, automation is at your service. Our risk assessment model automatically assigns tasks to designated task owners and alerts them when a risk is detected.

A central dashboard also keeps track of your compliance tasks and informs the right people when required.

3. Sort and prioritize the risks

After completing the risk assessment, the very next step is to sort and prioritize those operational risks based on their potential impact on your organization. To do this, look at the findings to identify the most serious risks and vulnerabilities that could affect your business and reputation.

You can group these risks into different levels, considering how likely they are to happen, how bad the consequences could be, and how well your current safety measures work.

Once you’ve categorized the risks, align them to your company’s larger objectives with the right security measures. These objectives include following regulations, protecting data, guarding against cyberattacks, and keeping customers happy.

For example, if your top goal is to meet regulations, you might prioritize risks that could lead to legal troubles or fines. If you’re all about customer satisfaction, then risks related to data breaches or service disruptions could be at the top of your list.

4. Create your customized TPRM framework

Once you’ve done all the groundwork, it’s time to create your customized TPRM framework. This is where all your previous planning, third-party risk assessments, and prioritization work together in an organized way. Building the TPRM framework involves the following steps:

Identify risk categories

List out the different types of risks specific to your organization, like cybersecurity, compliance, or financial risks. These were identified during the third-party risk assessment phase.

Define KPIs

Choose Key Performance Indicators (KPIs) that can help you measure how well your TPRM framework works and how your third-party vendors perform.

Establish controls

Based on the most important risks, decide on the controls that need to be in place. These controls can be things that prevent issues (like security procedures), detect problems (like monitoring systems), or correct things when they go wrong (like legal actions or penalties).

Set up reporting

Decide how and when reports will be created to evaluate your third-party vendor risk assessments and risk status. Pick the formats and ways that work best for your organization. You can even consider hiring a managed service to handle this program.

Create a template

Combine all these elements into an organized template. This template will be the foundation of your TPRM framework.

5. Set up continuous monitoring

Continuously watching a vendor’s security is crucial once they’re on board. Since they have access to your sensitive data and systems, use CSM to monitor their security. Regularly check the CSM findings and make necessary security updates.

CSM is a technique that automatically identifies new vulnerabilities and security control issues. It gives organizations insights into your security strengths and weaknesses and helps you improve.

If you’re curious about how continuous monitoring works, here’s a video to prove its effectiveness:

6. Test and improve

In the end, make sure to test and improve your new custom TPRM framework. Start small by rolling it out on a limited scale or using a pilot program to see how well it works and how easy it is.

Real-world testing helps you spot any problems, inconsistencies, or areas where it’s not working efficiently. This makes your company more cyber-savvy and reduces compliance risks.

Based on what you learn and the feedback you get, make adjustments to refine the TPRM template, making it even better for broader use. This is an ongoing process, so your customized TPRM framework can keep evolving to meet your organization’s changing needs and inherent risks.

Benefits of Third-Party Risk Management Framework

The benefits of a third-party risk management framework are that it will allow you to address any risk in very little time with already available or fewer resources.

By now, you should know that TPRM programs are about staying ahead of problems, not just reacting to them. They will help keep your company safe and boost security for everyone. When done right, TPRM programs offer many benefits for companies working with external partners.

• Get more information to make better and faster decisions
• Make smarter decisions by gaining important insights and data
• Ensure third parties have the right skills and credentials
• Meet regulatory rules and standards
• Keep an eye on your service quality, performance, finances, and security
• Control what third parties can access, like networks and sensitive data
• See and manage risks linked to third-parties more clearly
• Help vendors do better by being open about risks and responsibility
• Detect and prevent fraud
• Build trust with stakeholders, like investors, regulators, and business partners

What Next?

Managing third-party risks is crucial for any organization that deals with outside vendors. To do it right, organizations should start by learning about TPRM, exploring various frameworks, and conducting regular audits. Being diligent and thinking ahead is the key to effective TPRM.

Sprinto simplifies the management of various risks, such as information security, industry compliance, and financial concerns.

This compliance automation tool takes care of your third-party relationships, ensuring ongoing monitoring and compliance throughout their lifecycle.

It offers automated workflows, security standards, scheduled assessments, questionnaire templates, and automatic alerts, users, and notifications assignments.

If you want to implement a TPRM, Sprinto can automate a significant portion, saving you up to 80% of the work. It puts your compliance efforts on autopilot and monitors risk from third-party providers.

To see how Sprinto can help your TPRM, request a demo today to smoothen your business operations!

FAQs

1. What is an example of a third-party risk?

A good example of a third-party risk is when your software vendor is breached; they could face significant downtime. A natural disaster could impact your supplier’s organization, and this will impact your systems too.

2. What is the need for third-party risk management?

The need for third-party risk management goes beyond what you can imagine. It helps you keep track of all your contractors and vendors and meet all the security requirements.

3. What is the purpose of third-party management?

The purpose of third-party management is that it enables you to monitor and assess the risks posed by all the third parties you have to deal with. Now, you can make proper decisions to reduce the risks vendors pose.

4. Who is responsible for third-party risk?

There is no one person responsible for third-party risk. There are a variety of stakeholders you have to deal with in your company, as they need greater visibility into compliance and other operations.