An organization needs to ensure that the performance of the third-party is in compliance with various internal and regulatory requirements. This article provides insights on how organizations can deploy a resilient third-party due-diligence program.
Outsourcing has become a necessity to save on costs and labor, to free up infrastructure, to compete at local and international level and concentrate on core business activities. However, outsourcing comes with its own share of multiple risks such as IT, corruption, operations, business continuation, and regulatory compliance.
Most organizations assess these risks when finalizing a third-party. However, third-party management and due-diligence usually take a back seat after the third-party has been brought onboard. This makes organizations unaware of likely third-party risks, which if left unmitigated can snowball into critical issues that could significantly affect the profitability and reputation of the organization. It doesn’t matter if the fault is on the third-party’s side. Ultimately, the company that hired the third-party is held responsible by regulators and customers for not identifying and addressing the issue.
Staying competitive requires organizations to not only expand their third-party network but also validate the sustainability of their third-party network. Conducting business with a high-risk or non-compliant third-party can significantly tarnish an organization’s reputation and lead to heavy fines, penalties, and costly product recalls.
Multiple regulations such as - Health Insurance Portability and Accountability Act (HIPAA), Anti-Money Laundering (AML) requirements, Conflict Minerals Reporting requirements, the Foreign Corrupt Practices Act (FCPA), the UK Bribery Act, the Federal Trade Commission (FTC) Act, Office of the Comptroller of the Currency (OCC), and the Dodd-Frank Act have increased the focus on third-party governance. Thus, organizations need to be doubly sure of the third-party they take onboard as well and of those that they continue to have a relationship with.
As organizations benefit from outsourcing, they also face the challenges of managing the vast network of third-party spread across geographies. With limited resources, it becomes extremely difficult to ensure focus on third-party performance management, third-party risk, and compliance monitoring. Additionally, a vast amount of third-party information including contact, financial and business information, contracts, agreements, certifications, risk assessments, compliance assessments, and audit results become unmanageable. As such, organizations adopt ad-hoc processes to monitor third-party and ensure regulatory compliance, which often do not highlight the critical issues and thus limits the organization's ability to respond to eventualities.
Trust is an integral part of building third-party relationship, however that’s not enough. Companies and their branches spread across the world often straddle with the same third-party unaware of risks it can cause. Companies must be aware of the risks that the relationship with third-party can cause. They need to improve visibility of the supply chain and also improve vigilance.
Effective due-diligence requires an in-depth understanding of third-party. Organizations need to know their risk appetite and continuously assess risks brought in by their third-party. Based on this information, they need to define the progress of the relationship.
In order to deploy a resilient third-party due-diligence program, organizations need a transparent system which can enable them to know their third-party base, segment them, quickly assess their sub-third-party, deploy controls, and respond quickly to issues. A robust technology not will only automate this process, but also empower organizations with consolidated reports for improved decision making.
Ensuring business growth while adhering to regulatory mandate, and addressing customer needs requires organizations to establish the right balance between the decision to outsource and ability to manage third-party.
Each organization is dependent on a third-party network, and the viability, capability, and agility of this network dictates success within a constantly changing business landscape. However, depending on third-party also poses multiple risks to the associated organizations. Accountability for non-compliance by any third-party lies with the associated organization.
The proactive due-diligence of a dispersed, multi-layer, complex third-party network is an uphill task, but a vital one. Embedding a culture of compliance across the supply chain is an end goal worth achieving. One of the steps toward this will be to establish a robust third-party due-diligence program, consisting of third-party screening and onboarding procedures, risk assessments, ongoing monitoring, and corrective or preventive actions.