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What Are The Third Party Risk Management Key Risk Indicators

In today's complex business environment, organizations in every industry rely heavily on third parties. From vendors, and suppliers to service providers, and business partners - for many essential aspects of their operations. These third party relationships can provide efficiency, specialized expertise, cost savings, and other benefits. However, they also introduce significant risks that need to be carefully managed across the vendor ecosystem.

Some of the major types of third party risks that TPRM metrics show include data security compromises, privacy breaches, regulatory non-compliance, business disruptions, financial losses due to vendor failures, and reputational damage. For example, a recent high-profile incident involved a ransomware attack on a major IT vendor. This disrupted the operations of several hospitals, resulting in delays in critical medical procedures and patient care. In 2022 around 68 percent of the total reported cyberattacks worldwide were ransomware.

An important and ongoing process in third party risk management is identifying and tracking key risk indicators (KRIs). KRIs provide visibility into potential issues and early warning signs. These allow organizations to proactively assess risks, have informed conversations with vendors, enforce service agreements, and implement mitigating controls across vendor relationships

The blog post will take a closer look at some of the most useful key risk indicators to monitor for effective third party risk management:

Financial Health KRIs

A vendor facing financial instability or distress poses significant continuity risks. After all, they may cut operational corners, neglect security measures and maintenance, or even go out of business entirely. All of these directly impact their ability to deliver promised goods and services. Monitoring key financial health indicators can provide those early warning signs into a vendor's stability.

Useful financial third party risk management key risk indicators to track include profitability ratios. Focus on operating margins and net income trends, liquidity ratios like current ratio and cash flow, balance sheet leverage ratios, credit ratings by external rating agencies, and probability of bankruptcy scores. Sudden negative changes in financial performance, losses, cash flow issues, increased debt loads, credit downgrades, and low agency scores, all warrant further investigation and may necessitate contingency plans.

Service Level Agreements Performance

Service level agreements (SLAs) between an organization and vendors define expected service levels. Furthermore, they cover performance benchmarks, and reliability targets that providers commit to deliver. Tracking and monitoring vendor SLA performance provides insight into fulfillment of contractual obligations. Thus, is a quantified means to hold third parties accountable.

Common SLA metrics like system uptime, network availability, application response times, service desk response times, data accuracy KPIs, and maximum incident resolution times should be closely monitored. Violations of SLA targets, patterns of gradually declining performance vs commitments over past periods, and continuous misses of key benchmarks. These all signify increasing risk exposure for the organization if requirements are not met.

Security Incident Tracking

Since third party vendors usually have access to sensitive organizational data and systems, breaches, disruptions, outages, data leaks, hacks, ransomware attacks, or other security incidents at a provider directly impact their customers. Tracking frequency, impact, recovery times and root cause analysis for security incidents provides visibility into a vendor’s overall security performance and risk management effectiveness. Achieving cyber resilience against threats posed by the third party relationship is generally the top priority of every approach.

Upward trends in security incidents, expanding impact radii, lengthy outages, insufficient remediation and closure reporting all highlight heightened risks requiring proactive intervention with vendors. Lack of transparency or delays in communication around past security incidents also raise concerns.

Compliance & Certifications Monitoring

Vendors should comply with relevant regulatory requirements and industry standards. Valid certifications demonstrate their internal controls and compliance rigor are independently audited and validated on an ongoing basis by external bodies. Look for active monitoring expiration or changes in key compliance certifications like SOC 2. Additionally, consider lapses in mandatory privacy regulation requirements like EU-US Privacy Shield program. Emerging non-compliance fines/sanctions helps ensure standards are continually maintained.

Subcontractors Risk Management

Since many third parties depend on secondary downstream suppliers and subcontractors for delivering portions of contracted services, weak links among those players expose the organization to additional risks that must be understood and managed.

Useful third party risk management metrics and indicators include;

Examining vendor policies around subcontractor assessments
Assignments of liability through MSAs
Requirements for non-disclosure agreements for subcontractors
Business continuity commitments
Ongoing monitoring of risks

Overdependence by primary vendors on just one or few subcontractors, or lack of visibility and oversight into secondary supplier relationships are warning signs of higher risks to monitor.

Conclusion

In summary, managing third party risks requires ongoing tracking. Consider various performance, compliance and delivery indicators across multiple risk dimensions. These include, financial health, information security, privacy, regulatory adherence, and subcontractor diligence. It is a complex but critical discipline requiring focus across the vendor ecosystem to preemptively identify problems early while managing enterprise risks. Leverage purpose-built IT solutions for data aggregation and monitoring of KRIs. This can provide tremendous efficiency to this continuous process. A vigilant eye on early warning signs allows organizations to proactively review relationships. Thus, enforce contractual commitments, and implement risk mitigating controls across third party engagements.

Author Bio

Nagaraj Kuppuswamy is the Co-founder and CEO of Beaconer, an esteemed enterprise specializing in managed third-party risk using the cloud-native AI-based solution. With an extensive portfolio of accolades and industry certifications, Nagaraj stands out as a seasoned expert. He boasts over 16 years of dedicated involvement in the field of Cybersecurity. Throughout their career, he has predominantly focused on elevating the realm of third-party risk assessment. You can connect with him through Linkedin.