Strengthening the Bonds of the Extended Enterprise: A Unified Approach to Third-Party Risk Management
In today’s interconnected world, the relationships that businesses forge with third parties are akin to friendships—built on trust, integrity, and resilience. Just as strong friendships require shared values, ethical behavior, and the ability to withstand challenges, so too do the relationships that businesses maintain with their vendors, suppliers, and partners. These relationships form the backbone of what is known as the “extended enterprise,” a complex web of interactions that extends far beyond the traditional boundaries of a single organization.
As an analyst deeply entrenched in the field of third-party risk management, I can attest that this is one of the busiest and most critical areas in governance, risk management, and compliance (GRC) today. I am currently involved in over a dozen RFPs (Requests for Proposals) related to third-party risk management, all driven by the dual pillars of integrity and resilience. These are not just buzzwords; they are essential qualities that define the success and sustainability of business relationships in the modern enterprise.
Integrity and Resilience: The Cornerstones of Third-Party Relationships
Imagine a friendship that lacks integrity—one where trust is broken, and values are compromised. Such a relationship is bound to fail, as it lacks the moral foundation needed to weather challenges. In the same vein, business relationships must be built on a foundation of integrity, encompassing environmental, social, and governance (ESG) principles, as well as compliance with laws, regulations, and ethical standards. This is the very essence of corporate integrity.
But integrity alone is not enough. A relationship must also be resilient, capable of withstanding the inevitable challenges and disruptions that arise. In the business world, resilience translates to the ability to manage risk and maintain continuity in the face of adversity. Whether it’s a cyber-attack on a critical supplier, a geopolitical crisis affecting a key market, or a sudden regulatory change, businesses must be prepared to respond swiftly and effectively to protect their operations and reputation.
One of the most telling examples of the importance of resilience in third-party relationships came from a firm that DID NOT use Crowdstrike but found itself impacted because several of its critical third-party partners did. This situation underscores the interconnectedness of risk within the extended enterprise and the need for a comprehensive approach to third-party risk management that goes beyond the surface level and is focused on resilience.
One global bank even identified third-party risk as their largest area of concern, reflecting the growing recognition of the potential impact that third-party failures can have on an organization’s overall risk profile.
The Regulatory Landscape: Driving the Need for Third-Party Risk Management
The regulatory environment is a significant driver behind the increased focus on third-party risk management. Frameworks such as the EU Digital Operational Resilience Act (DORA) and the EU Corporate Sustainability Reporting Directive (CSRD) are pushing organizations to enhance their oversight and management of third-party risks. These regulations have a global impact, and not just regional. They also impacted downstream suppliers and vendors. And the EU DORA and CSRD are the primary drivers right now, but certainly not the only regulatory drivers.
Please free to ping me if you want a list of the dozens of laws/regulations I am tracking that impact third-party risk management.
The Call to Action: A Federated Third-Party Risk Management Program
To effectively manage third-party risks, organizations must move towards a federated third-party risk management program—a unified strategy that spans across departments and functions responsible for third-party risk. This approach requires structured processes that cover the entire lifecycle of third-party relationships, from onboarding and continuous monitoring to addressing issues and, crucially, offboarding—a phase that is often neglected.
At the heart of this strategy lies the need for robust third-party risk technology and real-time third-party risk intelligence feeds/content. These solutions, together, enable organizations to monitor their third parties continuously, ensuring that any emerging risks are identified and addressed promptly. Moreover, advancements in artificial intelligence (AI) are playing an increasingly important role, offering the ability to automate due diligence processes and provide deeper insights into the risk profiles of third parties.
A Holistic Approach to Third-Party GRC Management
Effective third-party risk management requires more than just a focus on risk; it demands a holistic approach that integrates governance, risk management, and compliance (GRC). This approach should be grounded in a clear understanding of the objectives and values that define each relationship, as well as the risks and uncertainties that may threaten those objectives. Myself, I prefer to call it third-party GRC or third-party governance, but third-party risk management is what is commonly used.
Organizations that adopt a federated approach to third-party risk management are better positioned to navigate the complexities of the extended enterprise. By fostering collaboration across departments, leveraging advanced technologies, and maintaining a clear focus on integrity and resilience, businesses can build stronger, more resilient relationships with their third parties—relationships that, like good friendships, stand the test of time.
In conclusion, as the extended enterprise becomes increasingly integral to the success of modern organizations, the need for a unified, proactive approach to third-party risk management has never been greater. Just as friendships require trust, communication, and shared values, so too must business relationships be nurtured and managed with care. By doing so, organizations can ensure that their extended enterprise is not only a source of strength but also a foundation for future growth and success.
This opened my eyes in the understand of how and why GRC applies in federated supplier risk management.
This is very clear approach towards Third Party GRC