The most often yet least-discussed aspect of keeping a business afloat, third party risk management is key. Not only does risk management allow a business to keep a sharp eye on any and all risks that threaten it; with proper tools, but running a strong risk management program can also greatly reduce the chances of new business risks being created in the future.

Many are curious about what business risk management actually is, and how to implement it effectively. Read on to see just what the risk management process entails, and how it can benefit your business.

What is Risk Management?

Before a business can dive into third party risk management, it’s important that employees understand just what it is, and why it’s so important.

Risk management is the process of reviewing, recording, resolving, and monitoring risks that can harm a company’s income, reputation, personnel and cybersecurity. In simple terms, it’s how a company can see potential threats before they turn into anything.

While it may seem like a needless practice at first, risk management can help prevent a myriad of problems down the line. This can include preventing hackings, keeping a company’s reputation intact, and preventing lost revenue.

Who Handles Risk Management, and How?

Typically, supervisors or managers oversee risk management. However, it is ultimately up to each individual business to decide who should manage the risk management process and carry out risk assessments.

As for how risk management is carried out, that too varies from business to business. Although risk management can be done manually, many companies invest in a third-party risk management program to automate the process. These programs can simplify risk management, reduce the number of mistakes made during the risk management process, as well as minimize the chances of new risks being created.

More often than not, businesses invest in a third-party risk management program to handle the risk management process. This is not only to streamline the process, but to also ensure that the risk assessment conducted to locate risks is as accurate as possible. A program limits human error, while also making the process faster.

What is Involved in Risk Management?

Risk management is a multi-step procedure that takes time to do properly. It is not a one-time project that doesn’t need to be revisited. It is a long-term process that spans across multiple departments within a company, 

Conducting a risk assessment

The first step in risk management is conducting a risk assessment. This is, as the name implies, a thorough assessment of all possible risks that a company may face. This can include risks that affect a company’s income, their reputation, and their security, among other things.

A risk assessment is primarily comprised of performing due diligence on all third parties associated with the company. This can include vendors, clients and contractors, among others. While the assessment is being carried out, the risk assessment team should be 

Types of risks

There are different types of risks that an assessment team should be aware of while conducting the assessment. These include:

Cybersecurity risks

Cybersecurity risks are risks that affect a company’s virtual security. Risks that threaten a company’s cybersecurity can include lack of antivirus software, vulnerabilities in the company’s website, unintentional data leaks and phishing attacks, among others. Companies that rely heavily on technology, such as online stores, remote businesses and sole proprietorships should be especially cognizant of cybersecurity risks.

Companies that store sensitive information, including sensitive client data, should also be on the lookout for cybersecurity risks.

Financial risks

Financial risks affect a company’s income and budgets. These risks are perhaps the most dangerous for companies in the short-term, as taking a financial hit is often felt immediately by a company.

Financial risks can come in a few forms. One of the most common financial risks for a company is clients who don’t pay or pay late. Having multiple clients who don’t pay can negatively affect a company’s income greatly. Price hikes with vendors, suppliers who don’t deliver goods on time, and other third parties who prove themselves to be unreliable can also be financial risks for a company.

Reputation risks

Reputation risks are a large risk for smaller businesses, as they can harm the way you and your company are perceived by others. Businesses that rely heavily on word of mouth to find new work, such as contracting companies and freelance workers, should take extra precautions when it comes to their reputation.

Social media is one large way that a company can keep control over its reputation. By receiving reviews and being able to control its online presence, a business can save itself many headaches.

Creating a risk register

Risk registers are crucial in keeping track of the results of a risk assessment. Risk registers are used to not only record risks as they are uncovered during a risk assessment – they also serve as standing records of all risks discovered, which can prove highly useful to a business in the long-term.

Registers are especially important since not every risk can be resolved, or even needs to be resolved. A risk assessment team should be recording risks of all levels of urgency, meaning that the register will end up containing low-priority risks. These low-priority risks are either risks that have a low chance of becoming a real threat or are risks that aren’t quite as time-sensitive. 

For example, an unreliable vendor that is slated to provide goods for an upcoming event is a time-sensitive, high-priority risk that should be resolved by finding a backup vendor or replacing that vendor altogether. Whereas a client that was late with one payment, but has continued to pay on time since, would be considered a low-priority risk.

Risk registers allow companies to monitor the lower-priority risks, and be prepared to act, should something change. Third party risk management programs are key in managing lots of low-priority risks, as well as keeping track of higher-priority risks as they’re being resolved. These programs can also keep an eye out for future risks, thus reducing the number of manual risk assessments that need to be made in the future.

Overall, third party risk management is a crucial part of keeping a business healthy and thriving. By conducting assessments and staying on top of risks of all priority levels, a business can see a catastrophe in advance, and take precautions to prevent (possibly irreparable) damage to the business.