Guide: What is Third-party Risk Management (TPRM)?

It’s very common for businesses to get services and products they need from outside vendors or suppliers. These third-party entities can include your business affiliates, distributors, service providers, manufacturers, marketers and resellers.

When you work with an outside vendor, you take on a certain amount of risk, as you have little control over how they operate. Failure to properly vet a third-party partner can damage your company’s operations and reputation. This is why businesses should understand what third-party risk management is and the best practices to follow.

Table of Contents
What Is Third-Party Risk Management?
Why Is Third-Party Risk Management Important?
Common Types of Third-Party Risks
The Third-Party Risk Management Lifecycle
Best Practices for Third-Party Risk Management
Automating Third-Party Risk Assessments

What Is Third-Party Risk Management?

Third-party risk management (TPRM) is the ongoing process that companies use to onboard, manage and monitor an outside vendor. The process starts with reviewing potential vendors and lasts until the end of the contracted relationship.

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 Third-Party Risk Management Important?

Industries such as finance, healthcare and IT often have strict compliance requirements to maintain licenses and avoid fines. Compliance with those requirements is at risk if unauthorized parties access your company’s information. Most businesses rely on third-party vendors to provide the goods or services they need to serve their customers. If a vendor can’t deliver, then your business might lose sales or damage customer relationships. TPRM lets you assess and reduce those risks to safeguard your business’s revenue and reputation.

Cybersecurity

According to Statistica, between 2024 and 2029, the estimated cost of cybercrime will increase by a total of $6.4 trillion U.S. dollars. Effective third-party risk management software can help businesses assess and prevent cybersecurity threats posed by vendors.

Cybersecurity is such a serious issue that in 2021, the federal government initiated Executive Order 14028 to ensure the government and private sector companies do their part to follow security guidelines, update platforms, and quickly report security threats. Even if you’re not a direct federal tech contractor, you don’t want to risk breaking one of the regulations under this order.

One security leak from a mismanaged third party can put your whole company at risk. Some vendors have an excellent security structure that can match or even surpass your own. Others, though, may not be as up-to-date with today’s security regulations. That is why you should constantly access your supply chain’s security efforts.

Supply Chain Issues

When you invest in third parties for your business, you must look into risks such as:

• Sourcing challenges: Are there extreme vulnerabilities due to the vendor only having access to a single supply source? For example, manufacturers can be at risk if their supplier’s raw material and production capacity falls or stops without warning. Reliance on a single source, inclement weather or employee strikes can affect operational concerns.
• Technology: How well does the vendor handle technology updates? Are they at risk of becoming obsolete or vulnerable to breaches due to a lack of control system updates? Do they utilize technology to assess their direct cybersecurity risks? Once part of your interconnected network, vendors can create a major cybersecurity risk by not remaining compliant with regulations. Evaluate their monitoring practices.
• Location: When working across borders, legal, sustainability and sourcing challenges can become an issue. You should use the most up-to-date third-party risk management tools to extensively map the supply chain of any potential and current vendor.
• Finance and Legal Concerns: Vendor license expiration, references from other companies and the vendor’s financial stability are points you should constantly check. Is a third party at risk of closing down shop in the near future due to low profits, downsizing or poor bookkeeping? A vendor’s sudden closure can leave a hole in your supply chain, affecting your reputation and bottom line.

Failure to take your third-party risk management seriously can hurt you financially. For example, a third-party security breach may leak your customer information, resulting in steep fines and penalties for you — even though it wasn’t your fault.

One of the most serious examples is the 2013 HVAC data breach that resulted in 40 million stolen credit card numbers and cost Target $18.5 million to settle. Good third-party management software can constantly monitor your vendors’ actions to see if they’ve added any new vulnerabilities, such as taking on a fourth party or having a lapsing license.

Common Types of Third-Party Risks

Dealing with your third-party vendors involves many risks related to data security and beyond. These risks can affect your finances, regulation compliance and reputation with customers and business colleagues.

Cybersecurity Issues

Computer scientist Newton Lee explains, “As the world is increasingly interconnected, everyone shares the responsibility of securing cyberspace.” Even if your cybersecurity is strong, your company and its valuable data can all too easily become exposed online from a cyberattack on a vulnerable third party you work with.

According to Statistica, in 2024, ransomware attacks occurred in about 65% of international financial organizations. Ransomware and leaked identity data can create millions or billions of dollars worth of damage. You can reduce such incidents with regular monitoring, testing and properly vetting all third parties as part of your supply chain security measures.

Compliance

Your vendor can affect your company’s compliance with industry, local and federal regulations and client agreements. For example, medical facilities must consider the Health Insurance Portability and Accountability Act (HIPAA), which protects patient privacy and ensures health information is secure.

Reputation

Even the most respected company can suffer damage to their reputation due to an irresponsible or hacked third party. As Stephane Nappo, Groupe SEB’s Global Chief Information Security Officer, stated, “It takes 20 years to build a reputation and a few minutes of cyber-incident to ruin it.”

No one wants their personal, contractual or financial information breached, and they don’t want to work with a company known for obvious security risks. These days, customers have more options than ever. If your company receives poor reviews and no recommendations due to angry customers or other business dealers damaged by poor data security, your company’s reputation may not recover.

Finance

A third party can bring financial risks ranging from the potential of a lawsuit to a decline in revenue. Home Depot paid a $200 million settlement over a 2014 breach of customer data obtained with credentials stolen from a third-party vendor. Aside from lawsuits, poor supply chain management can delay your products for software, hardware or other services and affect your client relationships.

Operations

An irresponsible third party that doesn’t meet their supply or service duties can disrupt your overall business operations. A third-party software engineer contractor could deliver poor code or a vendor might fail to update its security systems and go offline. These scenarios can create unexpected downtime as you work to resolve the issue.

The Third-Party Risk Management Lifecycle

Your third-party risk management cycle should involve these steps on your checklist:

1. 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.
2. 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.
3. 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.
4. 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.
5. 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.
6. 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 Third-Party Risk Management

You can build a solid TPRM strategy following three main practices:

1. 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.
2. 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.
3. 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.

Automating Third-Party Risk Assessments

With technological advances, you can use dedicated software to manage your third-party risk assessments for you. The right tools allow you to onboard new vendors much faster with automated risk assessments and integration into your business workflow. You can get automated alerts if there is a security threat. Enjoy real-time vendor security monitoring through data feeds and identification of emerging risks. Rely on accurate data constantly being pulled from vendor systems.

Easier ongoing vendor management gives you time to focus on regular business tasks instead of worrying about third-party risks. Moreover, as your company or team grows or downsizes, these automated tools are scalable to fit your existing needs. Vendor management is a cybersecurity matter that can affect your finances and reputation, so don’t ignore it.

Want to learn even more about third-party risk management? Schedule a demo with an Onspring expert today.