5 steps to improving your 3rd party risk management with a better approach to contracts
Finding and qualifying backup suppliers is only one part of a complex equation. You also need to know precisely who’s supplying your third parties – and their risk exposure.
One way to get more visibility into who supplies your suppliers is by mining data from your contracts. The problem is that a Fortune 1000 company maintains anywhere from 20,000 to 40,000 active contracts at any given time. And on top of that, 99% of organizations don’t have the data and technology needed to improve their contracting process. The talent needed to manage contracts, monitor third-party risk and manage supplier relationships is also in short supply.
Today’s business environment requires everyone to do more with less. And that means managing risk is everyone’s job.
Let’s look at how procurement teams can work more efficiently with other business units to create a stronger third-party risk management program by simplifying contract management.
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The Perils of Poor Third-Party Risk Management
In procurement, you need to know the risks associated with your suppliers and it boils down to what’s in those suppliers’ contracts. Failing to manage third parties properly can lead to financial penalties, bad publicity, and potentially even legal action. The consequences can be significant.
Poor contract management can cost your organization money, damage its reputation, and expose it to legal and regulatory risk.
The Benefits of Contract Lifecycle Management
Contract lifecycle management helps procurement teams work faster, smarter, and with more precision among all levels of the organization. It also facilitates better communication and relationships with external suppliers, regulators, and stakeholders.
What does integrated contract and third party risk management look like?
1. Determine what you want to achieve
Before determining what risks your third-party contracts pose, you must map the company’s risk appetite and tolerance.
Risk Appetite – This is the broad, maximum level of loss exposure that the business believes to be acceptable.
Risk Tolerance – This is the degree of variation around the risk appetite level that the business believes it can tolerate; the level that the business can withstand without damaging impact on the operation.
2. Review your relationships
This step requires stringent due diligence and can be extremely time-consuming as you compile data from various sources and assess them against your risk appetite and tolerance frameworks. It’s impossible to do well without help from the right technology.
3. Use Data to Make Faster Contract Decisions
Here is where data captured during the third party due diligence phases above are used to award or deny supplier contracts. The data help stakeholders make informed decisions that protect the business from damage and disruption.
The business can trust that the relationship falls within acceptable risk parameters by thoroughly vetting all third parties before and during commercial relationships. This is also a vital element in terms of increasing efficiency across the operation – something that also helps prevent loss of revenue.
4. Keep tabs on suppliers to promote contract integrity – and spot risk signs early
Once the contract is signed, and the supplier is onboarded, the work isn’t over. Continuous monitoring is an essential component of third party risk management to ensure suppliers meet established KPIs for performance.
This not only ensures a proactive stance to risk within the business operation but also helps to future-proof the enterprise.
You’ll also need to keep close tabs on your suppliers’ contract compliance – a task which generally requires specialized compliance monitoring tools to ensure that terms are accepted, regulations are abided by, and everyone is protected.
5. Strengthen your oversight
Don’t let your third-party risk management program fail because of a lousy contract management process. Contract lifecycle management and third-party risk are complementary processes that work in sync to maximize financial and operational performance and minimize risk.
How can Unit4 help you?
Unit4 Contract Lifecycle Management by Scanmarket provides advanced functionalities in an effortless design. Originating from the needs of the end user, Unit4 Source-to-Contract by Scanmarket solution is attuned to meet the needs of the procurement professional. To learn more about Contract Lifecycle Management and how it can inform your risk management strategy, check out our whitepaper on the subject here.
