Mastering Third-Party Risk Management in 2024

Introduction:

In the dynamic world of third-party risk management, 2023 was a year of significant learning and evolution. As we embark on 2024, it's imperative for businesses to reflect on these lessons and adapt their strategies accordingly. This blog reviews last year's key developments and presents a guide to best practices in third-party risk management for the upcoming year.

A Few Lessons From 2023:

  • Elevated Importance of Cybersecurity: Cybersecurity threats have become more sophisticated and widespread, as evidenced by major incidents like the MOVEit breach, and attacks on mortgage industry players like Experian, Mr. Cooper and FNF. This underlines the necessity for organizations to constantly evolve their cybersecurity strategies to stay ahead of cybercriminals who are continually adapting and finding new ways to exploit vulnerabilities.
  • Business Continuity Amidst Increasing Disasters: With a record number of natural disasters in 2023, the importance of business continuity and disaster recovery (BC/DR) has been magnified. These events, along with other disruptions like cyberattacks and operational failures, have shown the need for robust BC/DR planning, not only for internal processes but also for third-party vendors, whose incapacitation can have cascading effects on businesses.
  • Geopolitical Risks Affecting Global Supply Chains: The year 2023 saw heightened geopolitical tensions with far-reaching implications for global supply chains. The Russia-Ukraine conflict and disturbances in areas like Israel and Palestine have demonstrated how international conflicts can have ripple effects on businesses, even those not directly involved in affected regions, but connected through extensive supply chains.
  • AI Integration and Associated Risks: The increasing integration of AI across various sectors has brought to the forefront concerns regarding third-party AI tools and services. Issues like data breaches, privacy violations, and biases in algorithms have become critical points of consideration in risk assessments, necessitating a more nuanced approach to evaluating and managing these risks.
  • Changing Regulatory Landscape: The regulatory environment saw significant shifts in 2023, with new guidelines like the Interagency Guidance on Third-Party Relationships expanding the definition of third parties and increasing the complexity of compliance, especially in the financial sector. These changes necessitate a continuous and adaptive approach to regulatory compliance.

Must-Have Third-Party Risk Management Practices for 2024:

  • Unwavering Focus on Risk Management: Despite economic uncertainties, prioritizing third-party risk management remains critical. The increasing complexity and interconnectedness of today’s business environment underscore the importance of having robust risk management strategies to avoid costly regulatory fines and protect against data breaches and other risks.
  • Rigorous Adherence to the Vendor Lifecycle: Following a structured approach through the stages of onboarding, ongoing management, and offboarding in the third-party risk management lifecycle is essential. This approach ensures a comprehensive oversight of risks, allowing for early identification and mitigation, thus safeguarding the organization against potential vulnerabilities.
  • Strengthening Cybersecurity Practices: Continuous collaboration and information exchange with internal cybersecurity teams are vital. Implementing a rigorous practice of risk monitoring and periodic reviews is necessary to manage emerging cyber threats effectively and ensure that cybersecurity policies are up-to-date and capable of addressing new challenges.
  • Enhanced Focus on BC/DR Plans: Regular assessments of third-party vendors' business continuity and disaster recovery plans are crucial, especially for those that are high-risk or critical to business operations. This includes ensuring that these plans are not only well-drafted but also regularly tested and updated to reflect current risks and operational realities.
  • Proactive Monitoring of Third-Party Risks and Performance: It’s essential to continuously reassess inherent risks and conduct thorough third-party reviews to ensure that vendors maintain appropriate risk management practices and controls. Between periodic reviews, it's crucial to remain vigilant for any new or emerging risks or signs of declining performance. Utilizing professional risk intelligence and monitoring services can be invaluable in providing real-time information about changes in your third parties’ risk profiles, including aspects like cyber risks, geopolitical concerns, financial stability, environmental, social, and governance (ESG) practices, negative news, and more.
  • Effective Management of Third-Party Issues: Promptly addressing any performance decline or temporary failures in third-party operations is essential. Keeping a diligent track of identified issues, complete with descriptions, issue owners, remediation plans, and timelines, helps in holding stakeholders accountable and preventing minor problems from escalating into major crises.
  • Staying Abreast of Regulatory Updates: In a landscape where regulatory requirements frequently change in response to new and emerging risks, staying informed and proactive is vital. Subscribing to alerts from regulatory bodies, participating in industry forums, and actively engaging in discussions about proposed changes are effective ways to stay ahead. Preparing for compliance ahead of the effective date of new regulations can significantly ease the transition process.
  • Regular Review and Update of Key Documentation: It is imperative to regularly review and update all essential documents related to third-party risk management. These include inherent risk assessments, vendor questionnaires, and governance documents. They should reflect the latest regulatory guidelines and emerging risks. Moreover, the tools and methodologies used to assess risks and gather information should be comprehensive and dynamic, capable of addressing not only known risks but also those that are new and evolving, such as those associated with AI and other technological advancements.

Conclusion:

The lessons learned in 2023 serve as a crucial foundation for strengthening third-party risk management practices in 2024. By focusing on these best practices, organizations can better prepare themselves to identify, assess, manage, and monitor third-party risks effectively. Remember, in the ever-evolving business landscape, the ability to adapt and respond to new challenges is key to maintaining resilience and achieving long-term success.

In the end, mastering the fundamentals of third-party risk management—such as following the lifecycle, prioritizing cybersecurity, reviewing BC/DR plans, monitoring risk and performance, and staying updated with regulatory changes—is essential for organizations to navigate the complexities of the current business environment. These practices will not only help in mitigating risks but also in harnessing opportunities for growth and innovation in the face of uncertainties.

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