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Third-party relationships are critical to business success. Businesses adopt technology from third parties to drive innovation and efficiency.
However, third-party relationships introduce many risks that can have severe consequences if not properly managed. For example, in a KPMG survey, 72% of financial services organizations say third-party incidents within the last three years are causing them significant operational disruption, monetary loss, or reputational damage.
Regulators are aware of these third-party risks and have tightened compliance requirements to ensure businesses stay on track.
For companies in the UK, meeting regulatory demands while managing a diverse array of vendors can feel overwhelming. This post will discuss the top 7 challenges you might face in third-party risk management and provide practical solutions to help you stay compliant and secure.
The common third-party risk management (TPRM) challenges that financial institutions and other organizations in the UK face include:
Now, let’s examine these UK third-party risk management (TPRM) challenges in detail, including practical solutions for overcoming them.
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UK organizations operate in a particularly stringent regulatory landscape with many regulations governing third-party relationships. Examples are the General Data Protection Regulation (GDPR) and the UK Data Protection Act 2018.
When your business already has many compliance demands, ensuring third-party vendors comply with these regulations can be challenging.
First, ensure you understand current regulations related to third-party management.
Develop a comprehensive compliance checklist and use this in your vendor onboarding process.
Also, vendor contracts should include the regulatory requirements they must meet and the consequences of non-compliance. You may want to include clauses for regular reporting and compliance verification.
Another important step in addressing regulatory compliance challenges is to conduct regular audits of third-party vendors for compliance. Consider investing in advanced third-party risk management solutions like Supplier Shield to help you track third-party compliance.
Also Read: Let’s Talk About the Landscape of Third-Party Risks: A Comprehensive Overview.
Third-party vendors are targets for cyber crimes because they usually have access to sensitive data. Sadly, a security breach at a third party can compromise an organization’s data security and integrity.
Dealing with third-party cyber security issues can be challenging because organizations typically have less control over third-party vendors' security practices and processes. This problem worsens when using multiple vendors with varying security standards and practices.
Addressing this risk starts even before you engage your vendors. Before you engage any vendor, perform a comprehensive cybersecurity assessment to ensure they have robust security protocols. Evaluate their security measures, policies, and historical incident data.
Then, ensure vendors adhere to your organization’s cybersecurity standards. Make sure you include these requirements in their contracts and audit them regularly to verify compliance.
The presence of data protection laws like the GDPR means organizations must ensure that third-party vendors collect, store, and use users’ personal data in a way that does not compromise their privacy rights.
This can be challenging because organizations have less control over vendors’ practices. However, it is non-negotiable because a third party’s failure to adhere to relevant data protection regulations can have legal and financial consequences for an organization.
Create formal agreements with third parties outlining their obligations regarding data protection and privacy. Regularly review third-party practices to ensure they adhere to data protection requirements.
Also, apply encryption techniques to protect data in transit and at rest. Ensure third-party vendors implement similar techniques to safeguard sensitive information.
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Organizations often use multiple vendors for different types of services and technologies, and managing all these vendors can be very challenging.
Each vendor comes with unique risks and requirements. For example, managing risks associated with cloud service providers will be different from managing risks with hardware suppliers.
Also, each vendor may require different risk management processes. This creates inconsistencies in how risks are assessed, monitored, and mitigated, making it hard to assess overall risks.
Start by mapping your vendor ecosystem to identify all third-party vendors and understand their roles in the organization. Next, categorize vendors based on their risk level and criticality to the business. This helps you prioritize risk mitigation actions. For example, you may want to focus first on high-risk and high-impact vendors that pose the greatest threat.
Implement continuous monitoring of vendors to track the performance of critical vendors in real-time. A centralized vendor management system makes this easy, as it improves visibility and provides a unified view of all vendor-related data. Supplier Shield offers a simple dashboard that gives you visibility into vendors' performance and lets you see risk data at a glance to know who is compliant or at risk.
A common UK third-party risk management challenge is ensuring a business can maintain operations despite third-party failures or disruptions.
The ability of a business to recover from disruptions caused by failures within third-party relationships is what is called operational resilience. When relying on solutions from external vendors and service providers, disruptions like system outages or data breaches can significantly affect your business operations.
Start by assuming that third-party outages will happen. This will help you plan for possible outages. Next, identify critical services from third parties and map supporting processes. Then, develop comprehensive contingency plans that address potential disruptions of critical services from third parties. Ensure you test these plans to determine that they are effective.
Also, ensure third parties have sound operational resilience strategies. That is, assess their risk management practices and ability to maintain operations during crises. You can use advanced TPRM platforms (like Supplier Shield) to continuously monitor the operational status and risk profiles of your third-party vendors.
Know that ongoing monitoring of third parties is one of the requirements that the recent EU legislation, the Digital Operational Resilience Act (DORA), imposes for third-party risk management.
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Concentration refers to relying heavily on just one or a few vendors for critical services. It’s a significant challenge in UK third-party risk management because it can create vulnerabilities in a business’s operations. If the concentrated vendor encounters problems, the business can suffer severe operational disruptions or financial losses.
Heavy reliance on a small number of vendors can create compliance challenges because regulatory requirements often mandate diversification to mitigate systemic risk. A typical example is the Prudential Regulation Authority (PRA) in the UK financial services industry. PRA sets out requirements for managing concentration risks to ensure systemic stability of banks, insurers, and major investment firms.
Start with understanding your risk exposure. Perform a comprehensive risk assessment to evaluate concentration risks. If possible, model potential impacts and scenarios related to concentration risks. Then, develop contingency plans to address identified risks, including identifying backup options.
Importantly, engage multiple vendors to reduce reliance on any single vendor.
Vendor relationship management is everything involved in managing interactions with vendors, and this can be challenging, especially when there are multiple vendors.
Managing healthy communication with different vendors can be complex because each vendor relationship may require specific attention and management strategies. It can also be challenging to ensure that different vendor’s systems and processes integrate seamlessly with your own.
How to overcome vendor relationship management challenges
Effective communication is key to fostering strong relationships with vendors. Use effective communication channels and tools to facilitate ongoing dialogue with vendors and quickly address emerging risks and concerns. Where possible, schedule meetings with vendors to discuss performance and address issues.
Having clear contractual terms also helps. Ensure vendor contracts clearly define expectations and performance standards so there are no disagreements about what vendors should deliver or how performance will be evaluated.
There’s no doubt that third-party solutions can drive innovation and make an organization more efficient. So, not adopting these solutions simply because they introduce risks to a business shouldn’t even be an option. Instead, the key should be managing these third-party risks proactively so you can enjoy the benefits of these third-party solutions while safeguarding your business.
Interestingly, with the right tools, addressing UK third-party risk management (TPRM) challenges can become less daunting. This is where Supplier Shield comes in!
Supplier Shield simplifies third-party risk management for businesses in the UK. It helps you manage vendor relationships and ensure compliance with critical regulations like GDPR, NIS2, and DORA. With features that let you see who’s compliant or not at a glance, you can stay ahead of potential pitfalls and protect your organization.
Ready to embrace an advanced TPRM solution to streamline compliance and safeguard your business’s operations? Book a Demo today and see how Supplier Shield makes mitigating third-party risks relatively effortless!
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