Today, businesses face a high and constantly evolving level of risk–from continued supply chain shortages and inflated prices to cyber-attacks and climate-related events. In addition, increased regulatory scrutiny means any slip-ups could lead to large fines and restrictions around business activities.

Third parties have become a crucial piece of the operational risk and resilience puzzle as more organizations rely on external providers for business-critical products and services. Oversight is needed to ensure that third parties are compliant and in control if an organization is to safeguard its business operations. However, third-party risk management (TPRM) has its challenges.

The Growing Complexity of TPRM

Numerous issues are making it difficult to handle TPRM exclusively with internal resources.

A quickly changing risk landscape. The risks faced by global organizations change so fast it is difficult for TPRM professionals to keep their organizations safe and compliant. For example, exposure to cyber risk continues to build as companies deploy more products without appropriate cyber-risk practices in place. For companies big and small, there needs to be a proper understanding of the potential threats. According to the World Economic Forum’s 2024 cybersecurity report,^[1] 29% of organizations had been materially affected by a cyber incident in the past 12 months, with the largest organizations saying the highest barrier to cyber resilience is transforming legacy technology and processes.

Lack of supply chain visibility. Many organizations lack a fully mapped supply chain and fail to carry out due diligence beyond their Tier 1 suppliers. Yet, multi-tier supply chains are a reality and a supplier’s own suppliers can introduce unwanted exposure.

Emergence of sustainability as a risk domain. As sustainability directives and regulations increase, a supplier ecosystem creates even more complex and nuanced risk exposures. Sustainability needs to be understood through three lenses: environmental, social, and governance risks. Environmental risks include how a supplier impacts the environment, their level of carbon emissions, and how they track against their net-zero goals. Social risks include the evaluation of the human rights and labor practices of a supplier. Governance risks focus on how well companies are prepared to prevent IT system failures and major information security or cybersecurity incidents, among other topics.

Intensifying regulatory scrutiny. An increasingly complex and burdensome amount of global regulation is putting pressure on businesses to comply. Regulations are also becoming more prescriptive and more complex, with the requirements and the scope continually expanding. In addition, any breaches may be very costly.

Lack of automation. TPRM has evolved from a specialty on the fringes of procurement functions to an essential capability for organizations. Yet, investment in TPRM has not evolved as needed, remaining slow and incremental. TPRM tends to be reactive, fragmented, and administrative rather than effective and strategic. This leads to a high risk of non-compliance, as well as an excessive administrative burden for supply professionals, suppliers, and stakeholders.

A talent war. Given the complexity of the risk landscape, an in-house TPRM capability needs to cover the key areas of vulnerability – data breaches, possible operational failures, financial instability, reputational impact, and cybercrime. It is the work of a crack specialist team, yet finding talent is difficult. TPRM professionals are few and far between today and are at a premium.

TPRM is a discipline that needs to be handled properly and expertly. Taking a patchwork approach will no longer cut it in such a volatile and challenging environment. It is time for organizations to get smart about TPRM. Outsourcing some of the required activity may not only be a more cost-efficient approach but also enable an organization to be more agile in scaling up and down to meet rapidly changing demands.

According to research by S&P Global, 44% of organizations give themselves a high score on strategy and processes, but only 32% do the same around platforms and technology. This implies firms may well be missing opportunities for value optimization and effectively managing risks.

The Advantages of Outsourcing

Regulators are increasingly warmed up to the concept of outsourcing aspects of the TPRM lifecycle, such as through shared assessments or pooled audits. For example, the European Union’s Digital Operational Resilience Act (DORA) and the European Banking Authority’s Guidelines on Outsourcing Arrangements accept the use of external parties for TPRM, especially where third-party arrangements become complex. These regulations require that organizations prove that both internal and external risk partners have the appropriate skills and knowledge to effectively perform third-party audits and assessments, something that a specialist managed service provider (MSP) can easily achieve.

TPRM solutions are rapidly moving to platform and managed services to elevate a supplier risk management program to effectively assess critical and outsourced services in a streamlined way using industry best practices. An MSP can handle new vendor requests from onboarding and due diligence through lifecycle oversight and termination. In addition, given the difficulty of finding skilled resources with industry experience to manage and conduct end-to-end TPRM, and the associated expense, an MSP can provide access to the best talent in the industry. The skills of an MSP include:

• Experience in supply chain and supply chain resilience.
• A deep understanding of a broad range of risk domains, including information security, financial sustainability, and human rights.
• Expertise in the latest technology and digital solutions.
• Operational and process expertise.
• An understanding of the changing regulation landscape globally and across industries.

The growing complexity of TPRM, the range of skills needed for an effective program, and the financial penalties of non-compliance have firms turning to MSPs that have the technology and credentials for success.

About KY3P^® for Third Parties

KY3P helps financial institutions simplify third-party oversight processes. A centralized data hub enables users to collect and maintain up-to-date information on vendors in a single location to assist with implementing best practices and ensuring audit readiness. Standardized questionnaires allow vendor information to be requested and stored once, with updates applied as needed. The platform helps firms collect and maintain risk information, including cybersecurity and financial ratings, sanctions data, news alerts, cyber event data, and questionnaire responses from third parties that can be used to generate risk scores. The recently released 5.0 assessment methodology enhances firms’ regulatory compliance, optimizes risk management by aligning with industry-standard risk types, increases risk transparency, and improves clarity for clearer risk communication to business teams. Additionally, customized workflow capabilities enable users to implement KY3P into their existing processes seamlessly. Driven by insights from diverse banks, customers, and S&P Global cross-industry experience, the KY3P blended framework consists of control objectives critical to business.