Unintended Consequences of Not Investing in Third-Party Risk Management

Today’s business leaders continue to face economic challenges such as rising inflation, supply chain security, and political instability. To reduce costs, some organizations may choose to cut back on business investments like third-party risk management (TPRM). However, not investing in TPRM can produce unintended consequences that harm your organization. We’ll uncover some potential business threats that can arise when you don’t invest in TPRM.

How Your Organization Can Be Affected By Common Types of Risk

Third-party risks affect organizations of all types, regardless of industry or size. Let’s begin with an overview of some common third-party risks that need to be managed and how they can be mitigated through TPRM:

• Strategic risk – This is when your third party’s actions or decisions prevent your organization from achieving its goals and objectives.
   
  • Example: Your vendor didn't update its technology, which delayed your organization's release of a new product or service. 
  • How TPRM helps: A periodic risk re-assessment would’ve identified this risk, which would enable your organization to make a better decision during the contract renewal period.
• Compliance risk – Organizations in regulated industries, such as financial services and healthcare, should be aware that third parties can expose them to compliance risk. Guidelines like HIPAA and the Interagency Guidance outline how organizations should manage third-party risk.
   
  • Example: A technology vendor has been improperly handling your healthcare organization’s patient data. Your organization now faces regulatory fines because the vendor violated the HIPAA Privacy Rule. 
  • How TPRM helps: Activities like performance monitoring will help you be better prepared to identify and mitigate compliance risk.
• Operational risk – Daily business operations are complex, and many organizations rely on at least a few vendors to provide necessary products or services that sustain these operations.
   
  • Example: A third party that provides electronic health records software to a hospital would be critical. If they went out of business or experienced a system failure, the hospital's operations would be significantly affected. 
  • How TPRM helps: Reviewing a vendor’s business continuity plan is one component of TPRM that would ensure you can mitigate this operational risk.
• Financial or credit risk – A third-party vendor that has poor financial health can impact your organization in numerous ways. The vendor’s performance may start to decline because it can’t afford to retain employees or invest in new technology.
  
  
  • Example: A vendor is having financial troubles that you were unaware of. As a result, they’ve chosen to discontinue a service or product that’s necessary for your operations. 
  • How TPRM helps: A regular practice of ongoing monitoring within a TPRM program, including financial health assessments, would identify these financial risks early on, before they become larger issues.
• Reputation risk – Vendors that interact directly with your customers, or have access to sensitive data, can expose you to reputational risk.
  
  
  • Example: Let's say that one of your customers is trying to resolve an issue with one of your products and has spent hours on the phone with an employee at your third-party call center. Your customer thinks he's frustrated with your organization, but the poor service is actually coming from your third party. The call center would expose you to reputation risk because your customer has associated that negative interaction with your organization.
  • How TPRM helps: An active TPRM program would ensure that vendors are maintaining quality standards, so your organization’s reputation isn’t harmed.
• Cybersecurity risk – Third-party data breaches are increasingly common and can result in hefty regulatory fines and legal fees, not to mention lasting damage to an organization’s reputation.
  
  
  • Example: A software vendor uses a cloud-based software platform to transfer sensitive data files. A data breach with the software platform has now impacted thousands of your customers. 
  • How TPRM helps: Unfortunately, third-party cybersecurity incidents aren’t 100% preventable, so the key is to have a process in place that will identify and mitigate this risk. An effective TPRM program should include a strategy that ensures your third parties can prevent, identify, and resolve any cybersecurity incidents that occur.

Other Unintended Negative Consequences of Not Managing Vendor Risk

The risks listed above point to some of the primary reasons why you shouldn’t neglect vendor risk management, but it isn’t enough to treat vendor risk management as a routine activity where you’re simply checking off tasks from a to-do list. Failing to manage risk properly and using insufficient resources can have other negative consequences throughout your organization.

Some of those consequences might include:

1. Negative impact from the loss of a vendor. One of the many lessons learned from the pandemic is that planning for a vendor loss is essential for an organization’s survival. Losing a vendor can occur seemingly without any warning, either because of unexpected mergers and acquisitions, the sudden decline of the vendor’s financial health, or a global health crisis. Although these events can’t be prevented, a TPRM program can create a soft landing, with plans and contractual standards already in place that will enable your organization to continue operations.
   
   The third-party risk team is ultimately responsible for developing and overseeing the plan that protects an organization through the sudden loss of a vendor. This generally includes identifying and vetting a backup vendor during the initial vendor selection process. 
2. Customer complaints. Negligent third parties that fail to perform are not only going to create customer dissatisfaction, but they can also open the door for enforcement actions that cost your organization significant fees and fines. Regulators like the Consumer Financial Protection Bureau (CFPB) won’t hesitate to penalize your organization because of your third party’s actions that violated customer protection laws.
   
   A third party’s poor performance might not be 100% avoidable, but an effective TPRM program can help minimize the likelihood of a significant issue that would cause harm to your customers.
   
   
   Pro Tip: Establish a formal process for customer complaints. This should include identifying who’s responsible for investigating the complaint, documenting the root cause, and confirming that the customer receives a response in a timely manner. 
3. Audit and examination failure. TPRM is an important focus area for auditors and examiners, who will take a critical look at the effectiveness of your program. If your program receives a poor review or fails altogether, chances are that you’ll be spending considerable time and money to resolve those issues. Investing in TPRM upfront will keep your program running smoothly and give a strong impression to your auditors and examiners.

The Challenges of Implementing TPRM and How to Address Them

Now that you understand some of the risks you can avoid, maybe you’re ready to invest and implement a robust TPRM program. But there still might be some challenges that lie ahead.

Here are some common challenges you might face and how to address them:

• Struggle to get organizational buy-in – It’s not always easy to introduce new business practices like TPRM, which requires the participation and cooperation of various departments. Some of these departments or individuals may resist, citing a lack of time and resources to devote to TPRM.
  
  
  • How to address the issue: Since TPRM is highly collaborative, try to understand everyone’s perspectives and concerns. Explain some of the consequences of not investing in TPRM and highlight the cost benefits, such as increasing efficiencies and retaining valuable vendors.
• Burden of vendor due diligence – If you have a large vendor inventory, the thought of performing in-depth due diligence on each one can be overwhelming. Not only do you have to collect numerous documents on a recurring basis, but you also need to review them all!
  
  
  • How to address the issue: The good news is that regulators advocate using a risk-based approach for due diligence. This essentially means that your due diligence process should be extensive for your critical and high-risk vendors. A TPRM program will help you determine a vendor’s criticality and manage all your due diligence documents.
• Ineffective organizational tools – Implementing a TPRM program can be challenging enough, but even more so when you don’t have an organized approach. If your vendor data is distributed across different spreadsheets and files, you’ll be wasting valuable time trying to track down the information you need and manually completing tedious tasks.
  
  
  • How to address the issue: Make sure you’ve established an organized TPRM framework that will work for your organization. Consider the value of using a TPRM module or dedicated TPRM software. These often have features such as automated workflows, contract management, and reporting.

Third-party risk management may seem like a large investment upfront, both in time and money. However, when you take the step, it’s easier to see the overall benefit of protecting your customers and organization from third-party risk. When you don’t invest in TPRM, you’re ultimately going to miss out on a larger return on investment down the road.