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As the global business landscape becomes increasingly interconnected, third-party risk management (TPRM) has emerged as a critical component of a comprehensive risk management strategy. In this article, we will delve into the current trends and the future of TPRM, along with the changing role of risk managers, fortified by real-world statistics and expert insights.

The Rising Importance of Third-Party Risk Management

Third-Party Risk Management (TPRM) has surged in significance as organizations continue to leverage external suppliers, vendors, and partners for critical operations. This trend has resulted in a complex business ecosystem, presenting numerous potential vulnerabilities that may be exploited.

Technology research giant, Gartner, has forecasted that by 2023, a staggering 75% of organizations globally will have deployed tools explicitly engineered for TPRM. This constitutes a marked rise from just 20% in 2020 [1]. This trend signals the increasing recognition of TPRM’s critical role in mitigating potential hazards associated with third-party relationships.

This rising trend towards prioritizing TPRM is not unconnected to the increased frequency of third-party incidents. A study conducted by Deloitte lends weight to this assertion, reporting that 83% of organizations surveyed had experienced a third-party incident within the last three years [2]. These incidents can range from data breaches to failure to meet service level agreements, all of which can have severe repercussions including financial loss, reputational damage, and regulatory penalties.

In a business environment growing ever more reliant on third-party entities for service delivery, supply chains, and operational efficiency, the ability to manage risks associated with these third-party relationships has become paramount. This necessitates the implementation of robust, effective TPRM practices. Organizations must take into account not only their immediate third-party relationships but also the extended network of fourth and fifth-party relationships, otherwise known as a ‘ripple effect.’

Furthermore, the advent of stringent regulatory requirements in many sectors underscores the need for TPRM. Regulators across industries are increasingly demanding organizations to demonstrate transparency in their third-party relationships and a firm grip on the associated risks.

Consequently, TPRM is no longer seen as an optional aspect of business operations. It has ascended the ladder of importance, becoming an indispensable component of comprehensive risk management frameworks. Organizations that do not prioritize TPRM will likely find themselves exposed to numerous risks, thus underlining the urgency of implementing sound, effective TPRM strategies.

Emerging TPRM Trends and Future Predictions

As the business landscape evolves and the number of third-party relationships expands, the strategies and tools used for managing associated risks must keep pace. Here are some of the emerging trends shaping the future of TPRM:

Digitalization and Automation: The infusion of technology into the TPRM process is reshaping how organizations approach and manage third-party risks. Automation is fast becoming the backbone of TPRM. According to Deloitte’s 2020 Third-Party Risk Management Survey, companies that have embraced automation in their TPRM activities have experienced a 15% reduction in the time expended on risk assessments [2]. This has translated into significant savings in both time and resources, leading to more efficient operations.

Looking ahead, we can expect to see increased adoption of automated risk assessment tools, powered by cutting-edge technologies such as Artificial Intelligence (AI) and Machine Learning (ML). These tools offer real-time risk monitoring capabilities, enabling organizations to identify and respond to potential issues swiftly. Additionally, with AI-enhanced predictive capabilities, companies can anticipate and mitigate risks before they materialize, further enhancing their risk management strategies.

Regulatory Compliance and Transparency: Regulatory compliance remains a critical aspect of TPRM, and it’s set to become even more prominent in the future. Across various industries, there’s a growing push for organizations to demonstrate transparency in their third-party relationships and the associated risks. This is evident in guidelines like the European Banking Authority (EBA) Guidelines on outsourcing arrangements, which emphasize managing third-party risks and ensuring transparency [3].

In the future, we can expect to see even more regulatory frameworks around TPRM. As a result, organizations will need to establish robust compliance processes, ensuring they meet all regulatory requirements, and can provide clear documentation of their TPRM practices when required.

Integration of ESG Factors: Environmental, Social, and Governance (ESG) factors have surged in prominence, moving from the fringes to become a central consideration in business and investment decisions. As a result, these factors are now being integrated into TPRM strategies. A study by McKinsey found that 83% of C-suite leaders and investment professionals expect ESG programs to contribute more shareholder value in five years than they do today [4].

In the context of TPRM, this translates to a growing need for third-party vendors, suppliers, and partners to demonstrate their commitment to ESG principles. This could involve showing their carbon footprint reduction strategies, social responsibility initiatives, or corporate governance structures. As a result, companies will need to incorporate ESG risk assessments into their TPRM strategies, ensuring that their third-party relationships align with their own ESG commitments and the expectations of their stakeholders.

As we look to the future of TPRM, it’s clear that it’s a dynamic, evolving field, with digitalization, automation, compliance, and ESG considerations all playing increasingly important roles. Organizations that can adapt and innovate in their TPRM strategies will be best positioned to manage third-party risks effectively and capitalize on the opportunities these relationships present.

The Evolving Role of Risk Managers

In the face of rapidly changing business environments and the increasing complexity of third-party relationships, the role of risk managers is undergoing a significant transformation. They are transitioning from reactive crisis management roles to strategic positions that directly influence business decisions. Forrester’s survey underscores this shift, with 88% of risk professionals agreeing that risk management is becoming a more strategic function [5]. This evolution signifies the rising importance of risk management in shaping business strategies, identifying opportunities, and driving growth.

As we move forward, risk managers will need to adapt to this changing landscape and equip themselves with the necessary skills and tools to manage third-party risks effectively.

Data Literacy: Future risk managers will need to enhance their data literacy skills. As companies increasingly rely on data-driven insights for decision-making, risk managers must be able to interpret and apply data in their risk assessments. They should be comfortable working with large data sets, using analytics tools, and understanding statistical concepts. This will enable them to glean meaningful insights from the data and make more accurate risk predictions and assessments.

Understanding Emerging Technologies: As technology continues to advance, it is reshaping the TPRM landscape. Emerging technologies such as AI, ML, blockchain, and IoT are being used to improve risk assessment, monitoring, and mitigation. Risk managers will need to familiarize themselves with these technologies and understand how they can be leveraged to enhance TPRM processes.

Incorporating ESG Factors: As ESG factors become increasingly integrated into TPRM, risk managers must understand how to incorporate these considerations into their risk assessments. This could involve assessing a third party’s environmental impact, social responsibility initiatives, and governance structures. Risk managers will also need to stay abreast of changing ESG standards and regulations, ensuring their organizations remain compliant.

Balancing Risk and Opportunity: The increasing reliance on third-party relationships presents both risks and opportunities. While risk managers must identify and mitigate potential risks, they also need to recognize the opportunities these relationships can offer. This could involve identifying innovative third-party solutions that could drive growth or efficiency, or finding partners that align with the company’s ESG commitments. Therefore, risk managers must strike a balance between protecting the organization from third-party risks and enabling the business to harness the benefits of these relationships.

In conclusion, the role of risk managers is becoming more complex and strategic, requiring a broader skill set and a proactive approach. As they navigate this evolving landscape, risk managers who can adapt to these changes and adopt a strategic, forward-thinking approach to TPRM will be integral to their organizations’ success.

Conclusion

The future of TPRM is set to be driven by technological advancements, increasing regulatory requirements, and a growing emphasis on ESG factors. As the role of risk managers continues to evolve, it is clear that the focus on third-party risk management will continue to rise in importance in the strategic business context.

Sources:

[1] Gartner, Market Guide for Third-Party Risk Management, July 2020

[2] Deloitte, 2020 Global Survey on Third-Party Risk Management

[3] European Banking Authority, Guidelines on outsourcing arrangements, Feb 2019

[4] McKinsey, More than values: The value-based sustainability reporting that investors want, Aug 2020

[5] Forrester, The Future of Risk Management, June 2020

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