LSEG’s new webinar series, Meet the Experts: Supply Chain Edition, features experts covering various risk management topics. Our first webinar was in collaboration with our trusted partner Aravo, a leading supplier of third-party management software and solutions.
- Effective third-party risk management has become a business-critical function, but many risk management teams still face a range of challenges.
- Uncover best-practice approaches to effective third-party management from industry experts.
The risk landscape
The risk landscape is not only highly dynamic, but the universe of risks that organisations face is also expanding – potential risk now extends beyond sanctions, and bribery and corruption, to include ESG, information security, concentration, assurance, performance risk, and more.
In the context of third-party risk, this expansion is significant, because businesses are increasingly reliant on third parties, especially for core functions – and these third parties can inadvertently introduce risk into global supply chains.
Effective third-party risk management has become a business-critical function, but many risk management teams still face a range of challenges, from limited staff resources and legacy systems to financial constraints and “do more with less” requirements.
The good news is that, as the risk landscape continues to change, third-party risk management will increasingly be perceived as a strategic driver of value, and worthy of a place in C-suite conversations. Those that implement a best-practice approach will see results, but what does a best-practice approach look like?
In an online poll, webinar attendees were asked to select the biggest challenge they face in managing third-party risk in their organisations. The areas selected by the highest numbers of respondents were:
- Understanding a third party’s risk accurately and comprehensively, and
- Increasing programme and process efficiency
A best-practice approach
When implementing a best-practice approach to risk management, it is important to ensure effective management across the third-party risk lifecycle. To achieve this, organisations need to invest in technology, since old school tools such as questionnaires can be inefficient and time-consuming, but can also lead to incomplete information.
With the scope of risk expanding, organisations simply cannot manage risk manually. Rather, they need to streamline the risk management function and close the gaps. This means moving away from Excel-based systems, but also tapping into available risk intelligence to inform decisions and automate processes.
Adopting a risk-based approach is crucial, as this helps organisations to pinpoint the areas of highest risk and understand where to concentrate scarce resources.
Ongoing monitoring is also essential, since risk changes over time. In fact, research reveals that 83% of legal and compliance leaders discovered third-party risks after onboarding and due diligence[1].
A risk-based approach including screening and EDD
Both screening and EDD can be used to enable a risk-based approach.
Screening is an effective first step that can highlight areas of higher risk. Screening is often focussed on financial crimes and sanctions and is considered a minimum threshold for best-practice KYC. It can be a terminal step for low-risk entities or an initial step for high-risk entities.
Where higher risk is suspected or detected, EDD reports deliver more evidence and detailed information about a specific third party. This is useful for vetting high risk or high value third parties, since EDD reports incorporate risks beyond financial crime, and provide additional, contextual information on a subject. EDD can help organisations define when and how they are prepared to conduct business with a higher risk third party.
In a dynamic risk environment, knowing your third parties – and managing potential third-party risk – is more crucial than ever.
As risk management moves away from the old tick-box approach, technology is key – in order to boost efficiency, manage increasing volumes of information, and ensure effective regulatory compliance.
Trusted, comprehensive risk intelligence data is also a critical requirement that can help firms build holistic pictures of risk and enable a risk-based approach that protects scarce resources.
Risk management does not need to be viewed as a straight cost or burden, instead it can be used to create a compelling competitive advantage – by helping to improve the customer experience through streamlined processes; by boosting business resilience; by reaping the benefits of engaging with global ESG and sustainability concerns; and much more.
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