How to Build Effective Third-Party Risk Metrics

Reporting on Third-Party Risk Management (TPRM) metrics is a vital task that enables operational teams, executives, and board members to effectively communicate and mitigate vendor and supplier risks. This blog addresses the challenges associated with TPRM reporting, shares examples of key third-party risk metrics, and provides guidelines on developing the right metrics for your organization.

What Are Third-Party Risk Metrics?

Third-party risk metrics are quantifiable measures used to assess and understand the risks associated with engaging third-party vendors and suppliers. These metrics provide organizations with a systematic way to evaluate potential threats to their operations, reputation, data security, and compliance status stemming from their relationships with external entities. By leveraging the right metrics to manage third-party risks, your organization can effectively safeguard its assets and maintain trust with customers and stakeholders.

Why Are Third-Party Risk Metrics Important?

Allowing vendors and suppliers to access data, systems, and facilities is essential to conducting business today, but third-party access can also expose organizations to incidents like data breaches and supply chain attacks. In response, boards and business leaders are seeking increased visibility into their organizations’ third-party ecosystems.

TPRM metrics can reassure an organization’s leadership, board of directors, and auditors that the third parties they work with pose an acceptable level of risk. At the same time, if third parties are associated with unacceptable risks, having the right metrics can simplify and speed up the remediation and mitigation processes.

What Are Some Challenges of TPRM Reporting?

TPRM reporting can present complexities for both new and seasoned teams alike. Simply identifying a starting point can be challenging, leading many teams to struggle with effectively communicating third-party risks. And outdated, overly technical, and complex methods and dashboards further contribute to the confusion between boards, executive leadership, and functional teams. This complexity underscores the importance of taking a programmatic approach to identifying, formulating, and implementing the appropriate TPRM metrics for your organization.

Categories of TPRM Metrics

Before selecting specific metrics for your organization’s TPRM program, it is crucial to understand the categories of metrics that should be considered. TPRM metrics fall into four primary areas of measurement, each consisting of several KPIs and KRIs that provide invaluable insights into third-party relationships:

• Risk Metrics: Assess the risks associated with specific suppliers, providing insights into potential threats, corresponding mitigation strategies, and the supplier’s adherence to controls.
• Threat Metrics: Consist of publicly available data related to cyber, operational, financial, and reputational aspects, addressing how vendor risk data correlates with externally observable threats.
• Compliance Metrics: Reveal how well suppliers’ practices comply with internal control environments and regulatory requirements, critical for maintaining legal and industry standards.
• Coverage Metrics: Ensure a complete understanding of the global supplier footprint, identifying third, fourth, and Nth parties in the supply chain.

Measuring KPIs and KRIs across each of these categories will enable you to take a more comprehensive and balanced approach to third-party risk management. For recommendations of which specific metrics to consider for your TPRM program, download the eBook The 25 Most Important KPIs and KRIs for Third-Party Risk Management.

How to Build Effective TPRM Metrics

The process of developing effective TPRM metrics involves several crucial steps, which are illustrated below.

Before anything, appoint key leadership, typically orchestrated by the Chief Risk Officer (CRO) through an Enterprise Risk Council (ERC), a working group comprising members from different business units. In smaller organizations without a CRO, the ERC may consist of the Chief Information Security Officer (CISO), Head of IT, Head of Procurement, and Chief Financial Officer (CFO). After establishing leadership, the process involves six critical stages for defining and implementing TPRM metrics.

1. Set Enterprise Objectives

The Enterprise Risk Council determines enterprise objectives for TPRM by addressing strategic questions. This phase ensures alignment with regulations, business goals, and successful TPRM implementation at scale.

Key Considerations: Objectives may include protecting sensitive data, ensuring regulatory compliance, decreasing cybersecurity risks, mitigating operational and financial risks, safeguarding the organization’s reputation, enhancing operational efficiency, and supporting informed decision-making.

2. Set Departmental Objectives

During this phase, the CEO meets with department heads or relevant leaders to define departmental objectives for TPRM. These objectives, drawn from ERC recommendations, consider third-party interactions, sensitive data access, and relevant regulations.

Departmental Responsibilities: Departmental teams, led by heads, are formed to define objectives, and align with overall TPRM goals.

Key Questions: Teams consider third-party interactions, data and system access, and relevant regulations governing their departments.

3. Identify Third Parties

Departmental teams start by identifying third parties, such as vendors, suppliers, contractors, logistics partners, and cloud service providers. Collaboration with internal teams, such as procurement and accounts payable, centralizes third-party data for better governance.

Foundation for Governance: Working with internal teams to centralize third-party data establishes a foundation for well-governed TPRM.

4. Identify Risks to Measure

After identifying third parties, teams determine potential risks associated with each party, including data breaches, reputational concerns, regulatory fines, financial solvency, and supply chain disruptions.

5. Identify Performance Indicators

Upon identifying third parties and potential risks, the teams create and establish performance indicators for regular monitoring. Several key factors contribute to effective TPRM metrics, including:

• Data Availability/Quality: This ensures that data is available for reporting and that teams can access a centralized repository of holistic vendor risk profiles.
• Standardization/Consistency: Harmonizing processes and views across business units regarding potential vendor risks can streamline operations.
• Data Integration: Merging and integrating different platforms offers a cohesive perspective on vendor risk throughout the organization.
• Simplicity of Analysis: Automating programmatic processes helps manage and analyze the large volume of data.
• Interpretation and Contextualization: Understanding the audience and context provides clear, succinct, and meaningful information.
• Report Formatting and Communication: Distilling, communicating, and presenting data in a user-friendly format is crucial.
• Timeliness and Frequency: Continuous monitoring of vendors in real-time is paramount for an effective TPRM program.

At this stage, teams can seek support and recommendations from TPRM vendors, leveraging their expertise and resources to identify risks, track performance indicators, build reporting strategies, and address other concerns.

6. Harmonize Metrics Across the TPRM Lifecycle

In this final phase, the ERC works in tandem with department leaders to form groups that ensure all identified risks and performance indicators are in alignment. Groups work to standardize and synchronize metrics across each stage of the Third-Party Vendor Risk Management Lifecycle.

Next Steps

Ready to transform your TPRM approach with data-driven metrics and ensure a secure and resilient third-party ecosystem for your organization? Download our white paper, Measuring What Matters: How to Build Effective Third-Party Risk Metrics, to get detailed guidance on each of the above steps, metrics to consider at each stage of the TPRM lifecycle, and tips for avoiding common pitfalls when establishing your TPRM metrics.

Whether you are starting a new TPRM program or want to optimize your existing TPRM metrics initiatives, the Prevalent Third-Party Risk Management Platform can enable your entire organization to collaborate on identifying, understanding, and reducing vendor risk. Schedule a demo to learn how Prevalent can help you automate and accelerate your TPRM metrics program.