Third-Party Risk Management, short for TPRM, refers to the process that deals with mitigating risk when dealing with third-party vendors. Dealing with third-party vendors as a business poses a threat in many areas, such as finances, data handling, breaches, and even potential data theft.
A staggering 45% of businesses experienced some sort of third-party vendor incident in the last year. Consumers today want to have their trust in a business that will protect their data and interests.
Any vulnerability poorly dealt with in a third-party relationship can lead to long-lasting reputational damage.
At worst, if the third-party vendor incident was related to non-compliance or a data breach, severe legal and financial repercussions can occur. But don’t let the numbers scare you, as third-party vendors are indispensable in today’s interconnected world.
This is where our expertise at Captain Compliance will guide you to mitigate the risks but reap the benefits of collaborations.
This article will give you a quick overview of the daunting topic of risk management and show some of the best practices regarding proper TPRM.
Key Takeaways
TPRM is a broad topic with many nuances, yet some primary areas can warrant your focus as a business owner. Here are some of the key takeaways on the subject of reducing risk from dealing with third-party vendors:
It’s up to your business to be proactive in making steps towards risk reduction with third-party vendors. The first step is to evaluate your safety measures and risk mitigation strategies and plan incident response frameworks. Any pre-existing vulnerability can only be magnified when additional access points are established.
Conducting proper vetting of vendors before doing business is paramount. Third-party vendors can be categorized based on their risk level. When you have pre-established compliance frameworks, many of the venues for data breaches can be shut down, ensuring a smooth collaboration. Ensuring the vendors are on board with any needed safety measures is part of the vetting process.
Businesses, on average, need better visibility levels to ensure correct third-party vendor access and permissions. Many third-party vendors’ tools and systems are seldom adequately vetted for compliance, resulting in infractions. When choosing a low-risk third-party vendor, transparency is at the top of the list.
Audits, Training, and Awareness are necessary: Regular assessments and external audits play a crucial role in TPRM compliance. Continuous employee training and fostering an internal culture of compliance ensure businesses stay prepared. Knowing how to use audits can improve your internal security and, consequently, that of third-party vendor interactions.
Understanding TPRM Compliance
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Before diving into the intricacies of TPRM compliance, we must grasp its foundational concepts, their significance, and how they play a role in the broader spectrum of third-party risk management.
What is TPRM compliance?
TPRM encapsulates the standards, procedures, and best practices businesses adhere to, ensuring that third-party relationships remain secure, beneficial, and within legal and regulatory expectations.
Failure to establish proper risk management systems when collaborating with a third party can lead to many repercussions, such as consumer PII data leaks and supply chain disruptions.
Before TPRM strategies can begin, adequate corporate compliance is at the core of preventing financial losses, reputational damage, and operational disruptions arising from poorly managed third-party relationships.
The multifaceted nature of TPRM compliance
Given the surge in outsourcing and reliance on third-party vendors, several industry-specific and general regulations have emerged.
Beyond external regulations, businesses also establish their internal TPRM compliance policies and procedures. These internal directives are a guideline for monitoring vendor performance, conducting due diligence, and managing third-party risks effectively.
There are, however, multiple risk areas when it comes to outcomes that can go wrong during third-party vendor interactions.
Here are some of the top critical areas of TPRM vulnerabilities in a business:
Cybersecurity Threats: One of the most prevalent vulnerabilities in the modern business world. If third-party vendors have weak cybersecurity measures, they can become entry points for cyber-attacks targeting the primary business.
Data Privacy and Management: Third-party vendors that handle sensitive data without proper data management and protection protocols expose businesses to data breaches and legal consequences, especially under regulations like GDPR and CCPA.
Regulatory and Compliance Risks: If third-party vendors do not comply with local, national, or international regulations relevant to your business, it can lead to legal repercussions for both the vendor and the hiring business.
Operational Disruptions: Dependence on third-party vendors for critical operations can pose vulnerabilities if those vendors face operational challenges or outages.
The role of TPRM compliance in risk mitigation
Effective TPRM compliance ensures that third-party vendors align with a business’s objectives and values. This alignment is crucial for achieving strategic goals and ensuring seamless collaboration between the primary industry and its vendors.
Regarding risk mitigation, it is vital to ensure that businesses and their third-party relationships adhere to the existing legal and regulatory frameworks. By doing so, companies can avert hefty penalties, litigation, and the resulting reputational damage that could arise from non-compliance.
For example, every policy and way a vendor interacts with consumer data your business sends should also align with a strict set of data regulations (depending on their location and type).
Having the correct data compliance solutions ensures that any vendors your business chooses to work with remain within a proper legal framework.
Achieving TPRM Compliance
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More than 60% of businesses have reported that they lack complete visibility into the access and permission of their third-party vendors. This has many potential causes, among the top being low prioritization of TPRM.
Any journey to TPRM compliance should start systematically and aim to identify and exhaust all venues of non-compliance.
Identifying regulatory requirements
When it comes to understanding industry-specific regulations, every industry, be it finance, healthcare, or tech, has its own unique regulations.
Businesses must fully understand these compliance rules and regulations to ensure their third-party relationships are consistent with norms. As previously stated, it’s the sole responsibility of the business to educate the third-party vendor properly and, if needed, authorize use on a case-by-case basis.
As time goes on and new trends emerge, so will the need for regular updates, amendments, or entirely new regulations increase.
Keeping tabs without outside help can be daunting. Pre-established compliance solutions prepared for various regulatory requirements can significantly aid in keeping up with new regulations.
One noteworthy area for improvement is third-party vendors using consumer data from different countries. Regulations on data, such as the GDPR or other laws, come into effect. This situation can quickly turn into non-compliance, and thus it is best to communicate this with the vendor before condoning any business.
Establishing a compliance framework
A business’s TPRM processes should reflect the regulatory requirements. This involves aligning each process with its corresponding regulation, ensuring a seamless compliance journey.
Aligning compliance objectives should be done with risk tolerance levels in mind. Every business has a different risk threshold. Setting compliance objectives requires understanding this threshold and tailoring TPRM processes to ensure risks are always within acceptable limits.
Defining compliance roles and responsibilities
Establishing clear accountability ensures that everyone in the business ecosystem, from top leadership to operational teams, plays their part in achieving and maintaining TPRM compliance.
Outside help, such as hiring a compliance officer, is critical in ensuring the business adheres to all TPRM mandates. Compliance officers are the vanguard, ensuring that every third-party relationship aligns with internal and external standards.
A good compliance officer should also help align any third-party vendor ideals to how your business conducts regarding internal policies.
While compliance officers play a central role, compliance is ultimately an organizational responsibility.
Learn more on this topic from our article: What is an Accountability Framework? (The Complete Guide)
Compliance Processes and Procedures
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Risk assessment and due diligence are the founding prerequisite blocks of a legitimate TPRM framework. Here is a quick overview of how to go about this process:
Conducting thorough risk assessments
To ensure that third-party relationships don’t pose a threat, it’s imperative to conduct detailed risk assessments. These evaluations identify potential vulnerabilities and assess the risks associated with each third-party vendor, providing businesses with a clear picture of where attention is needed.
Almost 50% of third-party vendor-related activities are automated or done via proprietary software. All points of contact between data (especially consumer data) your business sends to these vendors must be evaluated and secured.
Ideally, your business owns and monitors the software that contains vulnerable data. That way, when you hand over your software to the vendor, you know how it works, its vulnerabilities, and how to proceed in case of compliance incidents.
However, this solution can only sometimes be implemented due to budget costs or other reasons. The concept remains the same – when a third-party vendor uses any software, ensure you get a full brief on any point of contact of that software and the data you give them.
Implement due diligence procedures
Businesses should have robust processes beyond the initial risk assessment. This means not just evaluating third parties at the onset of a relationship but continually re-assessing their compliance levels, financial health, and operational stability throughout the vendor lifecycle.
After a risk assessment has been conducted and a due diligence framework is established, the next step for businesses is to review their monitoring and reporting plan for third-party collaboration.
Here are some actionable steps your business can take:
Establish continuous monitoring mechanisms: Businesses need ongoing monitoring mechanisms to ensure that they and their third-party vendors remain within the bounds of compliance at all times. This constant oversight helps in promptly identifying and addressing any emerging issues.
Creating comprehensive reporting processes: Effective TPRM compliance requires transparency. Hence, businesses should establish procedures to compile, analyze, and report on third-party risks and compliance levels. Regular reporting not only keeps stakeholders informed but also assists in making informed decisions.
As businesses grow, many opt to outsource compliance responsibilities to experts. We at Captain Compliance can help you properly vet third-party vendors to ensure a legal framework of operation.
The next goal is establishing escalation and remediation systems when an ethical monitoring mechanism is coupled with a pre-established reporting system for any developments. Here are the general outlines of establishing contingency plans:
Define escalation protocols for compliance breaches: In instances where non-compliance is detected, clear escalation protocols must be in place. These protocols detail the steps, the stakeholders to be informed, and the urgency level associated with different breaches.
Implement remediation actions to address non-compliance: Once a breach is identified and escalated, remediation comes into play. This involves rectifying the breach, ensuring that similar violations don’t recur, and possibly revisiting and fortifying the TPRM processes to better safeguard against future vulnerabilities.
Now that most avenues of an infraction have been accounted for, the next step is to create a Training and Awareness campaign for your employees and any members of the third-party vendor you collaborate with.
Training and awareness are the bedrock of effective TPRM compliance. Ensuring that all stakeholders, especially employees, are well-versed with compliance policies and their implications is pivotal in preventing accidental breaches:
Employee training
Educate employees on compliance policies: Everyone must know the TPRM compliance policies. Regular orientation sessions, workshops, and interactive modules can help employees understand these policies’ nuances and importance.
Provide ongoing training and updates: The world of TPRM compliance is ever-evolving. Thus, regular training sessions and updates should be a norm, ensuring that employees are always up-to-date with the latest regulations, best practices, and internal policies.
Ultimately, training needs to be improved in the natural world environment, as we constantly deal with human nature. This is why the next step shouldn’t be neglected:
Fostering a culture of compliance
Creating a compliance-centric culture is more than just about rules; it’s about instilling values and behaviors and prioritizing compliance at every turn.
Encouraging ethical behavior and reporting is at the heart of a robust TPRM compliance system. When employees feel empowered to act ethically and have clear avenues to report discrepancies, it fosters an environment of trust and transparency.
Open communication channels: Establish clear and confidential channels for employees to voice concerns or report potential breaches.
Whistleblower protections: Ensure those who report non-compliance or unethical behaviors are protected from retaliation.
Ethical training: Offer training sessions that underscore the importance of ethical decision-making in everyday operations.
Incentivizing compliance adherence is essential for businesses to reward and recognize consistent compliance behaviors.
This means providing tangible and intangible benefits to employees and teams and demonstrating a solid commitment to upholding TPRM compliance policies such as:
Reward systems: Recognize and reward employees who consistently adhere to compliance guidelines and go above and beyond to ensure that the organization remains compliant.
Feedback loops: Provide continuous feedback to employees about their compliance behaviors, highlighting areas of excellence and those that need improvement.
Compliance ambassadors: Appoint ambassadors within departments responsible for promoting compliance and serving as role models for their peers. This step should be addressed if the company culture is strongly influenced on a follow-by-example basis.
Now that you are aware of how to create an excellent environment to foster compliance, let’s get an overview of how to conduct assessments to ensure your whole operation is working as intended:
Audits and Assessments
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A third-party vendor security incident’s average annual financial impact was estimated to be over $10 million. Despite these rather costly valuations, many businesses still hold on from hiring specializing audit and assessment authorities to vet third-party vendors:
Such undertakings can shed light on the strengths of the strategy, potential vulnerabilities, and areas necessitating further attention. A significant step towards a sound TPRM compliance framework is an internal audit of all current third-party vendors.
Conducting compliance audits
Periodic assessments of TPRM compliance are essential to maintaining a robust compliance posture. These evaluations should aim to address these areas:
Offer a snapshot of current compliance levels: Get a concise overview of where your business stands regarding compliance adherence.
Highlight potential risk areas within third-party relationships: Identify and spotlight vulnerabilities within your vendor partnerships. Be prepared to take actionable steps to resolve any vulnerabilities before starting the collaboration.
Provide actionable insights for continuous improvement: Deliver clear, practical recommendations for enhancing your compliance strategies.
Ensure adherence to internal policies and external regulations: Ensure alignment with organizational guidelines and mandatory legal standards, especially regarding proper handling of consumer data.
Identifying areas of improvement is pivotal for refining the TPRM strategy. A focused review can bring gaps in the existing framework to the fore, facilitating timely interventions. Learn more about our compliance services to help your business through the audit process.
Engaging third-party auditors for independent evaluations offers a fresh perspective on the compliance landscape. These external experts can:
Provide unbiased feedback on identified trouble areas.
Benchmark a business’s compliance efforts against industry best practices.
Highlight blind spots that might have been overlooked internally.
Compliance validation ensures that businesses’ measures to achieve TPRM compliance are practical and efficient. It’s a testament to the organization’s commitment to upholding the highest standards in third-party risk management.
Certain entities can be hired to conduct these external reviews depending on your business needs.
Final Thoughts on TPRM Compliance
When dealing with TPRM compliance, a proactive, educated, and hands-on approach is paramount. As businesses increasingly intertwine with third-party vendors, ensuring each link in this extended ecosystem remains compliant becomes crucial to operational success.
It’s not just about minimizing risks; it’s about fostering relationships built on trust, transparency, and mutual respect. With its extensive expertise and state-of-the-art tools, Captain Compliance is ready to shepherd businesses through the maze of TPRM compliance.
We help identify potential risks to streamlining audits and employee training modules and staying abreast of regulatory changes. Contact us and take the next confident step towards TPRM compliance excellence.
FAQs
What is TPRM compliance?
TPRM compliance refers to the standards, regulations, and policies businesses must adhere to when managing risks associated with third-party vendors. This ensures that third-party relationships do not introduce unacceptable risks and that parties comply with the relevant regulations.
What does TPRM stand for?
TPRM stands for Third-Party Risk Management. It refers to the strategies, processes, and tools businesses use to identify, assess, and manage the risks posed by their relationships with third-party vendors.
What is a TPRM process?
A TPRM process is a systematic approach businesses use to identify, evaluate, and manage potential risks from their dealings with third-party vendors. This process typically includes risk assessments, due diligence, contract management, continuous monitoring, and reporting.
What is TPRM in risk management?
TPRM in risk management refers to the specific focus on risks from third-party relationships, ensuring that these external affiliations don’t compromise the business’s security, reputation, or operational efficiency.
