Blog was inspired by the presentation by Julie Gaiaschi, CEO & Co-Founder of TPRA, at TPRA’s September 2024 Practitioner Member Meeting. (To watch the full presentation, TPRA Members can visit our Previous Meetings page and navigate to the September 2024 meeting recording noted on the On Demand tab.)
In Third Party Risk Management (TPRM), establishing a thorough and well-structured budget allows teams to not only support their program’s current needs but also helps plan for future maturity efforts. A budget can also show the value TPRM brings to your organization. This is important because it allows executives to understand what you are doing, where you plan on going, and the return on investment (ROI) when you get there. So, how do you go about developing a strategic TPRM budget?
In this blog, we will cover:
Demonstrating Your TPRM Program’s Value
Key Budget Considerations
Resources
Operations
Travel
Program Maturity
Tools
Sample Budget Format
Demonstrating Value
It is important to first demonstrate the value of your TPRM program to executives. There are many ways to demonstrate the value of your program and team to receive executive support on the TPRM budget. This ensures they understand the program's importance and the return on investment the organization receives from funding the TPRM program.
To start, articulate the value of mitigating third party risks, such as protecting sensitive data, ensuring operational resilience, and minimizing financial and reputational impact. Then, tie in how the TPRM budget aligns with the organization’s strategic goals, like reducing risk exposure, ensuring compliance, and maintaining business continuity. It is important to share how the TPRM budget aligns with the organization’s goals, to ensure buy-in and support. Note the TPRM program does not relate to the main organization-wide activity and is everyone's responsibility.
Next, show how the budget is allocated based on the level of risk posed by different third party relationships. High-risk vendors (e.g., those with access to sensitive data or critical systems) may require more scrutiny and more investment. You will also want to discuss the evolving risk environment, including cybersecurity threats, regulatory changes, and geopolitical factors, as well as how this influences the allocation of resources in the TPRM budget. Another aspect to highlight is the potential financial consequences of failing to manage third party risks, such as regulatory fines, penalties, or breach-related costs. You can include considerations for the costs associated with responding to third party-related incidents, such as legal fees, forensic investigations, and customer notification processes. If incident response costs are included in a different budget outside of TPRM, then note that, as incident response is a big piece of managing risks.
You may also want to provide benchmarking data to show how the organization’s TPRM budget compares to industry peers. This can justify the budget request and demonstrate that the organization is staying competitive in its risk management approach.
Lastly, discuss how the budget reflects the organization’s risk appetite and tolerance. Highlight the balance between cost and the need for adequate risk mitigation measures to protect the organization from potential third party-related failures. Be sure to provide examples of how the organization can optimize costs by focusing on the most critical third party risks and leveraging tools to reduce manual workload.
Key Budget Considerations
After you’ve demonstrated your program’s value to the organization, it’s now time to create your formal TPRM budget. Items to consider include, but are not limited to:
Resources are centered around current and future employees, or contractors, as well as the costs associated with training them. You may also want to note if pieces/parts of the program will be allocated to other departments (which should also have a budget for risk assessment activities), as well as the cost savings associated with the allocation for your department.
Operations include costs associated with daily tasks and running the TPRM program (such as variable and fixed costs). This also includes costs associated with regulatory compliance and incident response.
Travel can include costs associated with onsite visits, disaster recovery testing, disengaging with a third party, and other travel required. Travel costs can also include responding to incidents with in-person meetings.
Program Maturity includes costs associated with TPRM program enhancements required, and what is needed to get there. Program maturity is important because while your budget says what you want to do, program maturity can show your executives where you are headed. You can note what process enhancements are you looking to make and how those enhancements will improve your program.
Tools include budgeting for TPRM program automation. You can also estimate the cost savings a tool(s) will bring to your organization. Specific tool types you will want to consider include, but are not limited to, Governance Risk Compliance (GRC) tools, TPRM Platforms, Risk Rating/Risk Intelligence tools, and TPRM Services (such as consultants).
Sample Budget Format
Your budget should detail the value your TPRM program brings to the organization, the return on investment, and enhancements you wish to make to continuously improve program activities. Below is an example budget format that can be leveraged.
Executive Summary: Briefly explain the purpose of the TPRM budget, aligning it with the organization’s strategic goals and objectives. This should highlight why TPRM is essential to mitigating risks and ensuring compliance.
Value of TPRM Organization: Here is where you can explain how the TPRM program aligns with and supports key business objectives, such as safeguarding the organization’s reputation, maintaining compliance with regulations, and protecting against supply chain disruptions.
Cost Avoidance: Provide examples of how TPRM has helped avoid costly incidents, such as data breaches, regulatory fines, or business disruptions. This can be a bit harder to identify or call out, but it does paint a clearer picture for the board and executives.
Operational Resilience: Highlight how the program ensures the stability of operations, particularly in managing critical vendors.
Return on Investment: Share how the TPRM program is providing value to the organization by comparing the cost of managing third party risk to potential financial damage avoided, similar to operational resilience.
Budget Breakdown: Include a detailed breakdown of your budget, to include any budget subcategories.
Key Performance Indicators (KPIs) & Metrics: Lay out specific KPIs to measure the success of the TPRM program and the effectiveness of the budgeted items. Include metrics that show how the program is reducing risk exposure, such as lower incident rates, reduced financial impact from third party risks, or improved risk scores from third party risk management platforms.
Risk Assessment & Mitigation: Note potential risks to the TPRM program itself, such as lack of resources or budget constraints, and how they will be mitigated. Clearly explain the risks of underfunding the TPRM program, such as increased vulnerability to cyberattacks, compliance failures, or vendor disruptions.
Multi-Year Budget Forecast: Highlight potential areas for future investment, such as automation, artificial intelligence, or additional personnel to manage an increasing number of third party relationships.
Conclusion: Reinforce the critical role of TPRM in protecting the organization and mitigating vendor risks. Provide a clear and concise summary of the budget request, linking back to the strategic goals and value brought by the program. Then, ask for approval of the budget and support for any key investments highlighted in the report.
Conclusion
A well-crafted TPRM budget not only justifies the costs associated with managing third party risks, but also positions your program as a strategic asset to the organization. By clearly demonstrating how the budget supports business objectives, mitigates risks, and provides a solid ROI, you create a compelling case for continued and increased support. The insights and structure provided ensure that executives understand the critical role TPRM plays in protecting the organization, thereby making it easier to secure the resources needed for long-term success.
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