Almost every company has accommodated third-party software in their business processes to streamline the workflow. However, many contemplate this software before engaging, but the risk can be drawn easily, which can affect your brand and its reputation.
Risk can arise from the underlying activity where some risks are faced by organizations when conducting an activity. Another potential risk faced is the involvement of a third party. However, failure of managing all kinds of risks can expose an organization to regulatory action, financial loss, litigation & reputation damage, which may impair the institution’s ability to establish new or service to the existing customer relationships.
Risk Management Process
Engaging with third-party software may assist the management in achieving strategic goals hence, the use of these software increases the need for oversight of the process from the beginning till the end. The key to effectiveness of third party softwares in your organization is through appropriate assessment, measurement, monitoring, and controlling the risk associated with the relationship.
Some key elements must be taken into consideration for making the selective third-party risk management framework an effective one. The elements applied for third party framework require precise process depending upon the nature of the relationship, scope, and magnitude of the activity, as well as the risk, identified.
Risk Assessment
The fundamental to process the decision of whether to or not to enter into a third-party relationship is a thorough assessment. You must ensure that the third party aligns cleanly with the strategic planning and overall business strategy. A thorough understanding of what the third-party promises to accomplish and what will the third party benefit from your use.
Risk or reward analysis is a must to perform for significant matters. You must also compare the proposed benefits with other methods of performing an activity or product offering, including the use of other vendors or performing in-house functions.
Due Diligence in Selecting a Third Party
After the assessment of the qualified third-party and establishing relationship with the third party requires a due diligence.
Due diligence is the process that helps management address the qualitative and quantitative aspects of potential third-party. This assures transparency and anticipation of the achievements a third party can dispense to pull off the company’s strategic and financial goals and mitigate identified risks.
So, you can say that due diligence is related to the importance and magnitude of third-party software. Comprehensive due diligence involves a lot of information about the potential third party to allocate risk management framework.
· Contingency plans and business resumption strategies.
· Knowledge of civil rights, laws, and regulations of customer protection.
· Scope of internal controls, system, and data security, privacy protections, & more.
· Significant complaints or litigation, or regulatory actions against the company.
· Audited financial statements, annual reports, SEC filings, and other available financial indicators.
· Adequate management information systems and insurance coverage.
Contract Structuring and Reviewing
Written consent of the organization, as well as a third-party framework, is essential before entering into arrangements. The level of detail in the contract will vary as per the scope and risk associated with the third party.
Scope - This defines as the clear set rights and responsibilities of each party to the contract before jumping in.
Cost - The contract must have clear instructions about the cost/compensation to be paid, such as fixed compensation, variable charges, and nonrecurring items or special requests. Other than that, the cost of purchasing and maintaining the framework as well as the legal or audit expenses identified.
Performance Standards - Clearly defined performance standards indicate the true and real-time performance of the third-party risk management framework. Industry-standard should be used as a reference for certain functions. Also, management must periodically monitor and review the performance of security risk management services to ensure consistency with overall objectives.
Confidentiality and Security - Do not allow the third party risk management framework to disclose the institution’s confidential information except the necessary to perform an activity. Any breaches in the security of the data should be immediately addressed under the organization, inclusive of the unauthorized intrusion.
Limits on liability - When signing in with the third-party’s risk management for your organization should ensure whether the damage limitation s reasonable or not. Moreover, you must analyze the proposed damage compared with the loss the institution could experience and that the third party framework fails to perform adequately.
Oversight
Adequate oversight of the third-party activities and adequate quality control over the features offered by the risk management framework by the third-party minimizes the significant financial loss, reputation damage, and supervisory action. The organization must approve, oversee, and review the third-party risk management arrangements whenever there is a change. The compliance management system should ensure compliance with laws, internal policies, and procedures, & regulations of the company.
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In the Nutshell -
Before engaging in risk management services or framework, you must assess, review, and evaluate the limitations, risks, services offered, insurance policy, compliance, and other critical protection against the breaches. However, measuring and controlling risk will be associated with third-party, your engagement and monitoring are equally essential to evaluate whether the management framework is meeting its objectives or not.
