Third Party Risk Management

Importance Of Human Factors In Third Party Risk Management

Business 5 Mins Read
published on: 06 February 2024 last updated on: 08 February 2024

Third party risk management has become an increasingly important function for organizations of all sizes. With supply chains and business partnerships growing more complex, businesses are exposed to significant risks from third-party relationships like vendors, contractors, and outsourced service providers. According to one study, a whopping 43 percent of cyber attacks are aimed at small businesses, but only 14 percent are prepared to defend themselves.

While robust processes and technology solutions are essential for managing third-party risk, they are not sufficient on their own. The human factor – the people managing and overseeing these relationships – is critical to effective third-party risk management.

The Role of People in Third-Party Risk Management

There are several reasons why the human element is so important when it comes to managing third-party risk:

Subject Matter Expertise

The people responsible for third party risk management must have deep knowledge of the types of risks that can arise from different third-party relationships and how to identify and mitigate those risks. They draw on their expertise in areas like compliance, cybersecurity, privacy, and vendor management to provide strategic guidance and oversight. Relying solely on tools and templates is not enough.

Critical Thinking

A rules-based approach can only go so far. The people involved must be able to think critically, ask tough questions, and make sound judgments when evaluating third-party relationships and associated risks. They need to be able to spot potential issues that automated systems or standard procedures may miss. 

Building Relationships

Developing strong working relationships with third-party representatives is key for gaining cooperation and getting access to important information needed to evaluate risks properly. People skills enable trust-based partnerships that open up clear communication channels.

Promoting Accountability

Holding third parties accountable for meeting contract requirements, following regulations, maintaining security controls, and proactively reporting issues is difficult without engaged people managing those relationships. They reinforce accountabilities and maintain discipline around governance, compliance, and performance management.

Managing Gray Areas

Not every situation fits neatly into standardized frameworks. Gray areas and uncertainties are common when evaluating third-party risk. Expert human judgment is required to interpret and apply policies and procedures to reflect the true risk in ambiguous scenarios. 

Driving Continuous Improvement

Even with the most advanced tools and systems, third party risk management is not a “set it and forget it” undertaking. People are crucial for learning from past performance to continuously improve risk management approaches, processes, and training.

Key Roles and Responsibilities

To leverage the human factor advantage in managing third-party risk, certain roles and responsibilities are critical:

Third Party/Vendor Risk Managers 

Dedicated professionals with primary responsibility for developing and overseeing the third-party risk management program. They design and implement policies, procedures, assessments, and mitigation plans.

IT/Security 

Information security teams provide vital insight into technical risks associated with third-party access, data sharing, and connected systems. They conduct security reviews and support cyber risk assessments. Cyber technology is reshaping the digital landscape at such a fast pace that it is becoming difficult for IT security teams to match the pace. 

These experts ensure third-party risk management aligns with legal and regulatory obligations related to privacy, data security, safeguards, etc. They also advise on risk analysis and contract terms.

Procurement 

Procurement teams give important input on vendor evaluation criteria and contract provisions that impact performance and risk exposure. They aid in the oversight of high-risk vendors. 

Business Relationship Owners 

While not directly involved in risk management, these individuals manage the business side of third-party relationships. They provide critical business context in risk evaluations.

Executive Leadership 

Leadership establishes priorities, oversees resourcing and supports the adoption of third-party risk management principles across the organization. They also participate in governance and high-level risk discussions.

Real World Examples 

Here are some examples of how people make a real difference in managing third-party risk:

  • A supplier relationship manager builds close ties with a high-risk vendor and is able to work collaboratively with them to quickly resolve a potential supply chain disruption.
  • Attorneys drafting a vendor contract insert key clauses related to liability, IP protection, and termination rights that end up shielding the organization when issues later occur. 
  • An IT director requires multi-factor authentication after identifying vulnerabilities with a vendor’s remote access solution during a security assessment, preventing a costly breach.
  • A cross-functional team evaluates communications vendors and determines one lacks adequate security controls and a staffing model – leading to the selection of a different vendor to minimize risk.

Benefits of Implementing Human Factors in Risk Management

Understanding the impact human behavior can have on the primary process is key to good business. The human factor risk management process will take into account culture, ethics, and stakeholder expectations. These factors affect the culture of the organization and how it manages corporate sustainability. 

  • Reduction of training costs and turnover
  • Gaining a competitive edge by hiring better people 
  • Enhancement of productivity that helps employees become more productive in the knowledge that everyone in the company has undergone screening
  • Helps set an organization apart and win more clients
  • Reduction of employee-related problem 
  • Protection of company reputation as well as brand and customer relations
  • Complying with mandates under the state or federal law for particular industries 
  • Increased employee and client retention 
  • Reduction of negligent hiring claims 
  • Avoiding violence in the workplace (threats of violence or actual violence)
  • Reduced theft and espionage
  • Avoiding lawsuits as well as the costs associated with defense
  • Avoiding loss of goodwill

Mitigation of Employee Risk

Many organizations spend long years and huge amounts of money to make their products and services become a brand. But it will take just one bad hire to lose that reputation as well as capital. Employee Background Checks help reduce the risk of hiring employees who do not have the capacity to live upto their skill set. These employees could, in turn, cause irrevocable damage. This could also make the organization fail in its endeavors because the particular hire could hold malice towards the organization. 

Risk management measures can help reduce business as well as financial crime significantly. Organizations can also avoid fraud and malpractice within the workplace. 

Here are some of the most common factors that lead to employee fraud:

  • Pressures to perform
  • Departmental cuts
  • Staff reduction
  • Business survival
  • Overworked audit staff
  • Reduced regulatory oversight
  • Increased external vulnerability due to weak IT controls 

Conclusion

Managing third-party risk ultimately comes down to people – their skill, experience, critical thinking, and engagement. No automated system or tool, no matter how advanced, can replace human insight, relationships, expertise, and sense of accountability.

Organizations must invest in and empower the people responsible for overseeing third parties while also integrating risk management principles across all teams that interact with vendors and partners. With a focus on people, organizations can manage third-party risks while realizing the full value of business relationships.

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Ankita Tripathy loves to write about food and the Hallyu Wave in particular. During her free time, she enjoys looking at the sky or reading books while sipping a cup of hot coffee. Her favourite niches are food, music, lifestyle, travel, and Korean Pop music and drama.

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