Supply chain security and Third Party Risk Management are unavoidable topics for organisations both inside and outside the EU. With stricter regulations such as NIS2, GDPR and CSRD placing increased demands on organisations to manage data and security, it's no longer enough to just manage your own operations; you also need to know and manage the risks of working with third parties.
What Is Third Party Risk Management?
Third Party Risk Management is an integral part of an organisation's overall risk management strategy and focuses on identifying, assessing and managing the risks associated with engaging in business relationships with third parties. This includes suppliers, distributors, subcontractors, service providers, partners and other external actors that have access to the organisation's data, systems or resources.
Without effective third-party risk management, organisations can face financial losses, legal complications and reputational damage. Therefore, it's important to integrate supply chain security into an organisation's overall risk management strategy and ensure it aligns with business objectives and regulatory obligations.
With organisations increasingly outsourcing functions, engaging in complex partnerships and relying on a global supply chain, the risk of unforeseen incidents is higher than ever - which is why it's important to have an overview of supply chain security.
Management Responsibility in Supply Chain Security
In light of the NIS2 directive, the role of head management in Third Party Risk Management has become even more critical. The directive requires that the organisation's management is not only aware of, but also actively engaged in the risk management process. This implies direct management responsibility for identifying and managing cyber risks, including those from third parties in the supply chain.
NIS2 obliges management to ensure that the organisation's cybersecurity measures are in place and up to date, which includes due diligence on third-party security protocols. It is no longer enough to focus on internal security measures; management must also ensure that business partners fulfil the cybersecurity and data protection requirements set out by the directive.
This creates a synergy between NIS2 and Third Party Risk Management, where management must not only ensure compliance with the directive's requirements internally, but also throughout the supply chain. Non-compliance or a weakness in a third party can have direct consequences for the organisation's compliance status and therefore its financial and reputational risks, which is why it's important to investigate and understand the scope of supply chain security.
Overview of Relevant Processes
Effective Third Party Risk Management requires a holistic approach that takes into account a variety of factors, including the regulatory requirements of GDPR, NIS2 and CSRD.
The first step is to identify, document and analyse all interactions with third parties to create an overview. The purpose is to gain a complete understanding of how third parties are integrated into the organisation's value chain and what risks they can potentially introduce.
The mapping must take into account the regulatory requirements the organisation must comply with. For example:
- GDPR: The organisation must have control over how personal data is handled, both internally and by third parties.
- NIS2: The organisation must assess cybersecurity risks both internally and with all business partners.
- CSRD: Sustainability reporting should not only cover the organisation's own practices, but also those of third parties.
By analysing the interactions in detail, the organisation can identify areas that require additional controls, due diligence or monitoring and proactively manage risks before they become critical.
Examples of Supply Chain Risks
To safely navigate a complex business landscape, it's crucial to understand the potential risks that can arise when dealing with third parties. They can vary significantly depending on sector, geography and the specific nature of the collaboration in question, but some of the most common risks include:
- Cybersecurity risks: A weak security setup at a third party can compromise the organisation's data and systems.
- Compliance risks: Non-compliance with legislation such as GDPR or NIS2 by a third party can have legal consequences for the organisation.
- Reputational risks: Unethical or irresponsible behaviour by a third party can reflect on the organisation and damage its reputation.
- Operational risks: Delays or failures in deliveries from a third party can disrupt the organisation's operations and lead to loss of revenue.
Supply Chain Security: How to Get Started with Third Party Risk Management
With a solid foundation for Third Party Risk Management and an understanding of the regulatory requirements for the organisation, the next step is to dive into how to actually get started implementing a new third party in your organisation.
Overall, the implementation can be divided into 5 steps.
1) Due Diligence of the New Third Party
Before the organisation enters into a formal collaboration with a new third party, it is crucial to perform a comprehensive due diligence process to identify the risks that the potential new third party may bring.
Due diligence includes, among other things:
Reviewing the financial health of the third party, including analysing financial statements, credit ratings and any previous legal disputes.
Understanding of the third party's technology infrastructure and security protocols, including an assessment of their IT security measures, data management and ability to protect sensitive information.
Insight into the third party's compliance with relevant laws and regulations, including GDPR, NIS2 and possibly CSRD.
By conducting thorough due diligence, organisations can gain a holistic understanding of the potential risks and benefits of engaging with a new third party; a crucial prerequisite for making informed decisions and minimising risks.
2) Insight into the Third Party’s Organisation
After completing the initial due diligence, the next step is to gain a deeper insight into the third party's operational and technological structure. This step is key to understanding how a potential third party will integrate with the organisation on a daily basis.
Insight into the organisation includes, among other things:
- Understanding of the third party's core business processes, including how the workflow is structured and how critical operational functions such as quality control, delivery and customer service are handled.
- Understanding of the technological systems and platforms used by the third party, including whether the technology is compatible with the organisation's own systems.
- Insight into the third party's internal control mechanisms, including how quality, security and compliance are ensured.
By gaining a thorough understanding of the third party's operational and technological landscape, it is easier to assess how the company will fit into the organisation's value chain.
3) Adjustment of Processes
If it turns out that the potential third party does not meet the organisation's standards and expectations, remediation may be required. This may include, among other things:
- Technological upgrades
- Changes to processes
- Retraining of staff
By proactively addressing these areas, you can ensure that any shortcomings or weaknesses of the potential third party are addressed before they become a risk to the organisation.
4) Authorising Collaboration
Once all mitigation measures have been implemented and verified, it's time to make a crucial decision: should the third party be approved as an official collaborator? This is a critical moment in the Third Party Risk Management process and requires a comprehensive assessment.
The following factors should be considered:
- Are identified gaps and risks effectively addressed?
- Does the third party meet the organisation's internal standards and expectations?
- Does the approval require sign-off from other departments in the organisation?
If the third party is approved, a formal contract should be drawn up detailing the terms of the collaboration, including obligations, responsibilities and possible sanctions in the event of non-compliance.
5) Continuous Monitoring
Even after authorisation, it's crucial to continue ongoing monitoring of the third party's security protocols and overall performance. This ensures that they continue to meet the agreed standards and allows for proactive handling of any emerging risks.
One of the most common challenges in Third Party Risk Management is effective supplier management and control of third parties. It is therefore important to have clear guidelines and processes for how supplier performance is measured and what happens if they fail to meet expectations.