[OR] [RBI] [12] Third-party Dependency Management

Third-Party Dependency Management in Operational Resilience

Third-party dependency management is vital for ensuring an organisation’s operations remain stable and secure, even when relying on external partners or vendors.

This process involves identifying, assessing, and monitoring the risks associated with third-party relationships, such as supply chain disruptions, service outages, or compliance issues.

By effectively managing these dependencies, organisations can mitigate potential threats, ensure the continuity of critical services, and maintain trust with their stakeholders.

Proactive third-party management also enables organisations to respond swiftly to any issues, reducing the impact on overall business performance.

Principle 11: Managing Critical Third-Party Dependencies

To ensure the delivery of critical operations, REs (financial institutions) must manage dependencies on third-party relationships, including intragroup entities.

Critical Components of Third-Party Dependency Management

Risk Assessment and Due Diligence

Conduct thorough risk assessments and due diligence before entering into third-party arrangements.
Ensure third parties have equivalent operational resilience to safeguard critical operations during normal and disruptive conditions.

Board and Senior Management Oversight

The Board of Directors and Senior Management must understand and manage the
Operational Risks associated with third-party arrangements.
Implement Board-approved policies for managing third-party risks, encompassing procedures for engagement, due diligence, structuring, and monitoring.

Effective Control Environment

Establish robust controls for both the RE and third-party service providers.
Maintain a register of third-party relationships, highlighting the criticality of different services and metrics for oversight.

Business Continuity Planning

Develop business continuity plans and exit strategies to ensure operational resilience in case of third-party failures.
Assess substitutability and alternatives for third-party services to maintain critical operations during disruptions.

Managing Supply Chain Complexity

Be aware of and manage risks associated with downstream service providers (fourth parties and beyond).
Ensure service providers are contractually liable for their sub-contractors performance and risk management, maintaining transparency and control over the entire supply chain.
By integrating these practices, REs can effectively manage third-party dependencies and enhance their operational resilience, ensuring continuous and reliable delivery of critical operations.

Comments from the Author

Third-party risk management and Operational Resilience should be closely aligned.

From the perspective of operational resilience, Third-party risk management is one of the four key pillars that supports operational resilience.

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