Why Is Third Party Risk Management Important? [Complete Guide]

Bonus Material: Free BCP Checklist

In addition to acting as an advocate for your organization, you must also take a leading role in managing risks caused by the third party’s activity. This comprehensive guide answers the question “Why Is Third Party Risk Management Important?” in an effort to better prepare you in regards to managing that risk.

what is a risk management plan main image

What is Third Party Risk Management?

Your third parties are any vendors, customers, regulators or other partners with whom your organization is directly associated with. You and your third parties have contractual relationships and without them, it’s likely that some area of your business would collapse. That’s why it’s essential to have a comprehensive understanding of everyone that you’re working with. Third party management is the process of collecting your third parties’ information, tracking what they have access to, understanding what internal policies apply to them and more.

Up until a few years ago, many professionals viewed third party management as a siloed activity to be handled by one or just a couple departments at their organization. Now, the tide is changing and most organizations have come to realize that everyone owns a piece of the process. As a result, best practices or standards for excellence in managing vendors are often set and embedded across the entire company. At LogicManager, as a best practice, we believe that Third Party Management should be synonymous with Third Party Risk Management.

When disaster strikes, it’s your job as a leader to decide who is to blame. In business, this often involves a formal, standardized process. It’s important to ask yourself before working with a third party, “how much am I prepared to be held morally and/or legally accountable for?”

In order to mitigate risks from materializing in the first place, you need to have a comprehensive understanding of who you trust to perform tasks you could otherwise perform yourself. Taking a risk-based approach to third party management means extending risk management processes across all departments and levels of your organization.

Why is Third Party Risk Management Important?

In this world of instantaneous sharing, your organization can outsource a process, but it can never outsource the risks associated with it. The impact of reputational damage is greater than ever before, making a proactive, risk-based approach to third party management a hot topic for corporations, regulators, consumers and investors alike.

With this risk-based third party approach, you’re better suited to anticipate risk before it manifests into an irreversible scandal. You’re also able to vastly enhance business performance. Implementing a risk-based third party management program requires participation from people at every level; but this can make orchestrating the process more difficult.

As outsourcing, automation and customer expectations accelerate the course of business, third party management programs need to connect and streamline their processes to keep up. Effective third party risk management enables you to maximize the value of your third party relationships by controlling costs, strengthening operations and reducing the risks inherent to outsourcing.


When third parties are not properly managed, their risks instantly become your own and can lead to a third party risk management failure. By associating in some way or another with this third party company, your organization may be held accountable for their mistakes and your customers, investors and communities may suffer the consequences. Let’s take a look at an example of a company widely known for their failures in third party risk management: Chipotle.

In the fall of 2015, E. coli outbreaks linked to Chipotle restaurants were detected by public health officials in Washington, Oregon, Massachusetts, and other states, sickening hundreds of customers and employees across the U.S. A few months later, Chipotle publicly expressed confidence that this would “never happen again.”

Chipotle decided that it would serve them well to appoint a new CEO in an effort to regain their reputation as a trustworthy food establishment. When in July 2017 multiple customers who ate at a Chipotle restaurant in Sterling, Virginia complained of symptoms consistent with the highly contagious norovirus, they changed CEOs once again. But this had no impact on their disease outbreak; later that year, there were reports of sick employees and customers at a Chipotle restaurant in Los Angeles. In March 2018, the UBS Evidence Lab survey reported that 32% of respondents who have stopped eating Chipotle said “nothing” would make them want to visit more often.

The truth is that the outbreaks occurred shortly after the restaurant launched an innovation to include locally sourced food in their recipes; they innovated their industry with decentralized locally sourced food, but did not follow up with risk management best practices to match their innovative business model. With a decentralized business model, they opened themselves up to over 1,000 different points of food sourcing and contamination (whereas typical centralized systems have a fraction of that). Chipotle neglected to assess this risk, decentralize controls and deploy monitoring at the activity level.

These repeat food-safety catastrophes were a result of Chipotle failing to address the root cause of the issue. By not mitigating the correct risk, it kept manifesting over and over again.

Third Party Risk Management Solutions

You deserve to work with top-notch vendors and suppliers, but third party risk management has a lot of moving parts. It can be challenging to manage the ins and outs of what services they provide, which internal policies and external regulations apply, and so much more.

LogicManager’s comprehensive third party and vendor management software is a fully integrated solution. While it’s designed to give you a centralized repository of all your organization’s third party relationships, it’s made up of 11 carefully curated packages that tackle all your needs together or apart. Our cloud-based platform is fully configurable, so you can capture all the information you need without the hassle of maintaining spreadsheets or shared drives.