Third-Party Risk Management Lifecycle: How To Map Out Each Step

Are you currently contracting vendors without a risk assessment process? The third-party risk management lifecycle is a common term describing the stages of risk companies must manage with their third parties throughout their relationship. Understanding the third-party risk management lifecycle can help your business map out each stage efficiently to ensure you take a holistic approach and use risk management best practices.

For most organizations, relying on hundreds of third-party suppliers, partners, subcontractors, and agents to deliver their services is a matter of doing business. Relationships with third-party providers help organizations reduce costs. Still, third parties come with different types of vendor risks, including reputational, operational, information security, and compliance risks, among others, and all of these risks must be assessed and managed.

With all these types of risk in mind, it is critical to take a holistic approach to risk management throughout each step of pre-contracting, contracting, and post-contract monitoring. Only then will you achieve risk-aversion throughout the third-party lifecycle.

What Is The Third-Party Risk Management Lifecycle

No matter the size or industry, every company engages with third-party vendors and needs to grant them access to their network and data, expanding the risk surface. Consequently, more is required to secure data and implement defensive measures in your organization because your vendor may fail to protect your data and the data of your customers.

Today, third-party risk management is more urgent than ever due to digital transformation and globalization. When more third-party vendors enter your network, third-party data breaches can be more damaging, so it’s imperative to have visibility and control over every data touch point to avoid them. Besides, third-party risk management regulations are rising in almost every industry. Companies must ensure their third-party ecosystem is as safe as their internal network to comply with them.

Understanding your company’s third-party risk management lifecycle is crucial to identifying and remediating vendor and supplier risks. But it’s a common mistake to think that third-party risk management (TPRM) is a one-time risk assessment and remediation initiative.

The reality is that your company encounters distinct risks at each step of the vendor relationship. You must establish a comprehensive vendor risk management program to address the entire vendor lifecycle. The third-party risk management lifecycle is highly detailed and varies by industry; each company has a different perspective. Most lifecycles have a five to eight-step process, and there are several general steps that all organizations should have in place.

Steps In The Third-Party Risk Management Lifecycle

It’s a mistake to view the third-party lifecycle within the limits of signing a contract, implementing a third-party product or service, and terminating it. The contract is only one component of the third-party lifecycle. It’s essential to consider all the steps of managing a third party throughout the entire relationship with your company.

There are three main stages of a third party’s lifecycle, each containing many subsequent steps. These are natural points in the relationship, and it’s important to understand risk throughout them and ensure vendor risk mitigation:

  • Pre-contract—before you enter a formal relationship with a third party
  • Contracting—when you negotiate key terms and provisions and determine how you will share risk between the parties
  • Post-contract—after you enter into the relationship with a third-party vendor all of the way through termination.

Let’s take a look at each of these three steps:

Step One: Pre-Contract Risk Management

Pre-contract risk management starts before you enter a contractual agreement with a third-party vendor. After identifying new third-party providers, you must perform the third-party risk assessment to determine its inherent risk and criticality. You have to look at the types of information each third-party vendor handles and then review the potential financial, reputational, and legal impact of a data breach.

Identifying these inherent third-party risks is critical because you will use this information to conduct risk-based due diligence on them. This is also an essential step in risk management because it allows you to dive deeper into the third-party vendor’s policies, systems, and controls. The vendor must respond to the questionnaire and provide relevant evidence for each control. This information helps you understand any residual risks that you need to address.

Step Two: Contracting

If the risks are mitigated, it’s time to negotiate the contract terms and begin working with a vetted third-party vendor. You need to develop sound contracting principles and provisions. It’s essential to understand which risks are being assumed by the parties and achieve the right balance in risk distribution.

A firm contract is critical for managing third-party risk, so never rush through contract creation. As you start working with a third party, you should continue reviewing the contract to verify if the vendor meets expectations and service level agreements.

Step Three: Post-Contract Monitoring

Post-contract monitoring is the last stage in the third-party risk management lifecycle that starts after signing the contract. This stage gets neglected, but it’s where the real risk begins. The post-contract monitoring process should include these four critical activities:

  • Continuous monitoring allows you to maintain a current view of third-party risks that may come from changes in credit ratings, new lawsuits, significant layoffs, or other events that may impact their overall risk posture.
  • Point-in-time monitoring allows you to assess risks periodically using questionnaires and examining such documents as SOC reports, information security policies, and financial statements.
  • Risk reassessments are regularly performed as third-party relationships grow and evolve to evaluate what has changed and determine whether additional diligence or contract changes are needed.
  • Structured third-party off-boarding is based on your exit strategy and helps ensure third-party contracts and relationships are risk-averse. It includes such activities as returning or destroying data, removing access to systems, confirming the completeness and accuracy of all deliverables, etc.

Third-Party Risk Management Lifecycle With Start

The third-party risk management lifecycle is the end-to-end approach companies use to manage third-party vendors organized and transparently. It starts before a contract is signed and continues until you determine it’s time to end the relationship. Creating suitable systems and controls throughout the lifecycle is crucial to identify and mitigate your risks with third parties effectively.

By working with Start, you can access a comprehensive third-party risk management platform that streamlines the entire risk management process through your vendor lifecycle. You can book a call today to speak with an expert and learn more about how Start can save you time and money.

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