It’s very common for businesses to get services and products they need from outside vendors, suppliers, contractors, consultants and other service providers. These third-party entities are integrated into your business operations, IT environment and infrastructure, playing an essential role in your company’s overall ecosystem.
However, working with an outside vendor introduces a degree of third-party risk, since you have limited control over how these partners operate. Without proper third-party risk management (TPRM) practices in place, a poorly vetted vendor can compromise your company’s operations, compliance and reputation. Implementing a strong TPRM framework helps businesses identify, assess and mitigate potential vendor risks while maintaining operational resilience and regulatory compliance.
What Is Third-Party Risk Management (TPRM)?
Third-party risk management (TPRM), also known as vendor risk management (VRM) or supply chain risk management, is the ongoing process companies use to assess, onboard, manage and monitor outside vendors to mitigate risks throughout the vendor lifecycle, from initial review through contract completion.
The process involves identifying the best vendors and also identifying and reducing risks associated with using a particular vendor. Companies must also consider regulatory restrictions at the industry, local and federal levels when selecting a vendor.
Why Is TPRM Important?
Third-party risk management (TPRM) is essential for organizations that depend on external vendors, suppliers and contractors to deliver critical products, services and operations. Without proper oversight, these third parties can introduce compliance, cybersecurity, financial and operational risks that threaten business continuity and reputation.
Industries such as finance and banking, healthcare and technology operate under rigorous regulatory standards designed to protect sensitive data and ensure service integrity. For example, financial institutions must comply with the Gramm-Leach-Bliley Act (GLBA), healthcare providers must meet HIPAA requirements, and technology providers working with government agencies may need to adhere to CMMC frameworks. TPRM ensures that your vendors meet these standards, helping you avoid penalties, service interruptions or customer trust issues.
Key Reasons TPRM is Critical
No matter the size or industry, every organization relies on third parties to keep operations running. However, each vendor relationship introduces unique risks that can affect security, compliance, finances, and reputation if not properly managed.
- Cybersecurity Risks: Third parties can expose your organization to data breaches, ransomware or theft of proprietary information. Automated TPRM tools enable continuous monitoring and real-time alerts to mitigate these threats.
- Compliance and Regulatory Risk: Industries like finance, healthcare and technology face strict compliance mandates. Vendor failures or unauthorized access to protected data can result in noncompliance fines or loss of certification.
- Supply Chain Disruptions: Dependence on a single supplier, legacy technology, or cross-border regulatory barriers can delay critical services or halt production entirely.
- Financial and Legal Concerns: Vendor instability, poor financial health or contract breaches can result in costly disputes and operational gaps. For instance, when a supplier fails to meet service levels or maintain insurance coverage, it can trigger contractual penalties and unplanned expenses.
- Reputation Management: A vendor’s security breach or poor service delivery (such as failing to meet SLAs, product quality issues or delayed response times) can damage customer confidence and erode brand credibility.
Strong TPRM practices and software ensure ongoing monitoring, risk mitigation and proactive management of third-party relationships, protecting both your business and your customers.
Common Types of Third-Party Risks
Engaging with third parties introduces a range of potential risks across cybersecurity, compliance, financial, operational and reputational domains. Understanding these risks allows organizations to take preventive action before they escalate.
Key Types of Third-Party Risks Include:
- Cybersecurity Risks: Vulnerable vendors can open backdoors for cyberattacks, ransomware or data breaches. Continuous assessments and automated monitoring reduce these threats.
- Compliance Risks: Vendors can jeopardize compliance with industry, federal and local regulations. For example, healthcare organizations must ensure that third parties handling patient information comply with HIPAA privacy and security rules.
- Reputation Risks: A vendor’s data breach, unethical conduct or failure to deliver services can tarnish your organization’s reputation. For example, Target’s 2013 breach, originating from a compromised HVAC vendor, exposed 40 million credit card accounts and led to an $18.5 million settlement.
- Financial Risks: Vendor failures can trigger lawsuits, fines or direct revenue loss. In 2014, Home Depot paid $17.5 million in settlements after attackers exploited a third-party vendor’s network credentials .
- Operational Risks: Vendors that fail to meet delivery timelines, service standards or technology update requirements can cause unexpected downtime, jeopardizing your service-level agreements (SLAs) with your customers and overall customer satisfaction.
By identifying and categorizing these risks early, organizations can strengthen their resilience and safeguard against cascading third-party impacts.
Key Components of a TPRM Program
A robust TPRM program follows a structured lifecycle that integrates governance, oversight and automation to manage vendor risk effectively.
- Governance Framework and Policies: Establish clear policies, responsibilities and escalation paths for managing third-party risks. This includes defining ownership at the enterprise and engagement levels, an area where Onspring’s TPRM solution excels through engagement-level assessments that adapt to vendor criticality.
- Third-Party Inventory and Risk Classification: Create a centralized inventory of all vendors and classify them by criticality, access level and potential risk exposure.
- Due Diligence and Vendor Selection: Conduct comprehensive assessments of a vendor’s security controls, compliance posture, financial health and reputation before onboarding.
- Contract Management: Define clear expectations, service levels, data protection clauses, incident response requirements and compliance obligations within the vendor contract.
- Risk Assessment: Evaluate the likelihood and potential impact of each identified risk, aligning assessment frequency with vendor criticality.
- Risk Mitigation and Remediation: Develop and implement plans to remediate risks through continuous monitoring, audits and corrective actions.
- Vendor Offboarding: Follow a secure termination process that includes returning or destroying shared data, revoking system access and confirming contract closure to minimize residual risks.
- Technology and Automation: Use purpose-built platforms to streamline risk assessments, improve reporting and maintain real-time visibility into vendor performance and compliance status.
A well-defined TPRM program supported by automation ensures your organization maintains resilience, compliance and trust across every stage of the vendor lifecycle.
The Third-Party Risk Management (TPRM) Lifecycle
An effective third-party risk management (TPRM) lifecycle ensures vendors are properly evaluated, monitored, and managed throughout their relationship with your organization. Each stage of the TPRM framework helps reduce risk exposure, strengthen compliance and maintain operational resilience.
Here’s what a comprehensive TPRM process should include:
- Planning and analysis: Think about what your vendor needs are and which ones you already have met. Is it time to replace an existing vendor with a new one? As you consider vendors, look at online reviews, consider recommendations from other businesses, and check the Better Business Bureau (BBB) for unresolved complaints.
- Evaluation: Once you narrow down your initial list of potential vendors, you can dig deeper into risk analysis. Ask about vendor security practices, finances, compliance standards and reviews.
- Remediation: If you have a vendor you are serious about or are already working with, you may notice potential red flags for resolvable issues. You may give the vendor time to resolve high-risk factors or end the relationship.
- Approval: After deciding to work with the vendor or renew an existing agreement, it’s time to sign a contract with defined terms and conditions.
- Monitoring: Your TPRM should be continuous until you end the relationship. After all, a company’s solid security practices can go downhill due to downsizing, license issues or changes in management or monitoring tools. Luckily, you can make it easier for your company by automating the process.
- Offboarding: Sometimes, you may have to say goodbye to a vendor due to a change in your company’s needs or poor performance on their end. In that case, you must take steps to terminate the contract appropriately.
Best Practices for TPRM
You can build a solid TPRM strategy following three main practices:
- Prioritize: What are your most vital vendors? Start defining their level of importance by placing them into different categories, such as “Tier 1” for high-priority and risk or “Tier 3” for low-access, low-risk vendors. You should always monitor every vendor under contract, but knowing which ones have the most access to company data or a higher role in the supply chain allows you to designate more resources and time to conduct deeper assessments.
- Automate: Don’t worry about manually assessing every one of your vendors. With the right compliance automation services, you’ll have help with intake, onboarding, calculating risk performance, reviews, reassessments and other alerts.
- Consider non-cybersecurity risks: Remember, your third-party risk goes beyond cybersecurity threats. Consider how the vendors you work with affect your revenue, operations, privacy, ethics performance, environmental friendliness, reputation and geopolitics.
How to Get Started with TPRM Automation
With today’s technological advances, you can use third-party risk management (TPRM) automation software to handle vendor risk assessments for you. The right TPRM tools help you onboard new vendors faster with automated risk assessments and seamless integration into your existing business workflows. You can also receive automated alerts if a security threat arises and benefit from real-time vendor security monitoring through continuous data feeds that identify emerging risks.
Ongoing vendor management becomes much easier with TPRM automation, giving your team more time to focus on core business tasks instead of manual risk tracking. These tools are also scalable, adapting as your company grows or changes in size. Since vendor management directly impacts cybersecurity, finances and your reputation, investing in automation is a smart move.
Want to learn even more about third-party risk management? Schedule a demo with an Onspring expert today.
