Third party risk management: a guide to TPRM best practices

Working with external vendors and service providers significantly increases your business’s security risks. Effectively managing these threats can be more challenging than it seems. A 2023 report showed that nearly half of organizations experienced business interruptions due to third-party issues in the last two years.

To protect sensitive data, maintain operational continuity, and prevent financial and reputational damage, businesses must proactively identify and address third-party risks.

This guide explores third-party risk management (TPRM), covering key concepts, challenges, best practices, and practical steps to help you implement a successful program.

Top takeaways

• A third party is any individual, organization, or entity outside your company that you engage with in a business relationship (e.g., supplier, contractor, etc.).
• Third-party risk management (TPRM) protects your organization by systematically managing risks tied to third-party access to sensitive data and systems.
• TPRM is valuable for cutting costs and maintaining regulatory compliance, among other reasons.
• Accurately assessing risk levels is one of the few challenges of a TPRM framework. However, following best practices like continuous monitoring and reporting can help overcome hurdles.

Understanding third-party risk management

Before diving into the implementation of a TPRM program, it’s crucial to understand the core concepts and principles that form its foundation.

What is a third party?

A third party is any individual, organization, or entity outside your company that you engage with in a business relationship. This could range from suppliers and contractors to partners and service providers. While the term is broad, it generally refers to those who offer goods, services, or support to your business.

For example, in cybersecurity, a cloud service provider (CSP) hosting your data storage is a third party. Similarly, a software vendor providing tools for your operations or a managed service provider (MSP) handling your IT services would also be considered third parties.

Each of these third parties can introduce security vulnerabilities, making it essential to have risk management strategies to address potential threats to your organization’s data and systems.

What's the difference between a third-party and a fourth-party?

A third party is a direct business partner working with your organization, while a fourth party is a company that your third party contracts. This adds an extra layer of complexity to your risk management efforts.

For instance, if your company hires a CSP to store data, that CSP is your third party. If the CSP uses another company to manage its servers, that server management provider becomes a fourth party.

What is risk management?

Risk management is the structured process of identifying, assessing, and managing potential threats to an organization. This involves evaluating the likelihood and impact of each threat and implementing strategies to reduce or eliminate the risks.

What is third-party risk management in cybersecurity?

TPRM in cybersecurity helps protect your organization by systematically managing risks tied to third-party access to sensitive data and systems. It evaluates security practices, incident response capabilities, and overall risk profiles of third parties to identify and address potential threats. By proactively managing these risks, you can safeguard your organization from external security breaches and operational disruptions.

4 reasonswhy third-party risk management is important​

1. Third parties introduce risks

Third-party partners bring valuable expertise and innovation, but be aware of these inherent risks:

• Data breaches: Third-party vendors are attractive targets for cyberattacks given they often have access to a large amount of sensitive data.
• Supply chain interruptions: Operational issues within a third party can delay your supply chain and affect business continuity.
• Regulatory non-compliance: Third parties may not meet the same regulatory standards, which can expose your organization to potential fines and penalties.
• Reputational damage: Security breaches or other incidents involving third-party misconduct can harm your business’s reputation.
• Operational disruptions: Poor performance from third parties can disrupt operations and negatively impact customer experience.

2. TPRM massively reduces vulnerabilities

A well-structured TPRM strategy minimizes risk exposure, strengthening your business’s resilience. For example, a TPRM program lowers:

• Cybersecurity risks: Identifies and addresses potential threats in third-party systems with thorough vendor assessments, ongoing monitoring, and incident response planning.
• Operational risks: Reduces the likelihood of operational disruptions and service failures, confirming third parties deliver quality services and meet their contractual obligations.
• Financial risks: Prevents costly financial losses due to breaches or poor performance through careful selection and monitoring of third-party vendors.

3. TPRM helps cut costs

Implementing a TPRM program helps businesses avoid costly security incidents and regulatory fines. It also strengthens vendor relationships and reduces the time spent negotiating contracts. For example, conducting a thorough vendor risk assessment helps identify potential risks early on, so you can mitigate those proactively. This can prevent expensive data breaches, saving you from significant financial losses and reputational damage.

Additionally, your organization can ensure it’s receiving high-quality services at the most competitive price by assessing and continuously monitoring vendor performance.

4. It’s a core component of maintaining regulatory compliance

TPRM is essential for remaining compliant with:

• Industry regulations
  • HIPAA (Health Insurance Portability and Accountability Act): Requires healthcare organizations to safeguard patient health information.
• PCI DSS (Payment Card Industry Data Security Standard): Establishes security standards for organizations handling credit card transactions.
• SOX (Sarbanes-Oxley Act): Mandates that public companies maintain accurate financial records and internal controls.

• Privacy regulations
  • General Data Protection Regulations (GDPR): Governs personal data processing and requires specific data protection measures for those living in the European Union.
  • California Consumer Privacy Act (CCPA): Grants consumers rights over their personal data, including the right to know how it’s collected and used.

Related read: Are You Prepared for Today’s Modern Cyber Threats?

Common TPRM challenges

While TPRM is necessary for protecting business information, it also presents its own set of challenges. Common hurdles include:

Difficulty gaining a complete view of parties involved

• Complex supply chains: Modern supply chains often involve multiple layers of third- and fourth-party relationships. This can make it difficult to identify and evaluate all relevant parties.
• Inconsistent information: Third parties may provide incomplete or misleading information about its security practices and risk profiles, creating challenges with accuracy.

Issues with correctly assessing risk levels

• Subjective risk ratings: Measuring risk often relies on subjective judgments, which can make it hard to consistently evaluate the level of risk posed by different third parties.
• Limited visibility: Not all organizations have the same transparency. Businesses may struggle to gain clear insights into a third party's security practices and incident response capabilities, impacting your ability to assess risks.

Having to consistently monitor for and manage risk

• Dynamic threat landscape: Cyber risks are constantly evolving, so organizations must regularly reassess and address third-party risks to stay ahead of emerging threats.
• Resource constraints: Many companies lack the resources needed (e.g., people, technology, etc.) to effectively monitor and manage multiple third-party relationships.
• Poor communication and collaboration: Ineffective communication with third parties can hinder information sharing, delay issue resolution, and weaken the enforcement of security standards.

Third-party risk management best practices​

When managing third-party risk, a proactive approach is required. Let’s explore four best practices for implementing TPRM:

1. Complete due diligence during and after vendor selection
   1. Oversee thorough vetting: Perform extensive due diligence, including background checks and security audits, to assess potential vendors' capabilities and risks.
   2. Input clear contractual terms: Clearly define contract terms that specify security requirements and compliance expectations.
   3. Assess business continuity plans: Ensure that third parties have strong business continuity plans to maintain operations during disruptions, and lower the impact on your organization.

2. Conduct comprehensive risk assessments
   1. Evaluate security controls: Regularly review third parties’ security measures, including access controls, encryption, and incident response plans, to confirm it meets your organization’s standards.
   2. Establish monitoring and reassessment: Continuously track vendor performance and risk profiles. This includes updating risk ratings and addressing emerging threats to stay ahead of potential issues.

3. Maintain efficient communication and collaboration
   1. Provide open communication channels: Make use of collaboration tools to enable information sharing and issue resolution.
   2. Join forces on security initiatives: Encourage joint security efforts, such as shared security assessments and threat intelligence, to strengthen your overall security posture.

4. Leverage robust monitoring and reporting
   1. Implement real-time monitoring: Use real-time monitoring tools to detect and respond quickly to security incidents involving third parties.
   2. Carry out regular reporting: Set up regular reporting to track key metrics, identify emerging risks, and inform decision-making. This allows for timely adjustments to your approach.

How do you create a third-party risk management program?

Creating a TPRM framework requires focusing on the third-party risk management lifecycle. This lifecycle outlines all stages of managing third-party relationships effectively.

Here are eight steps to establish a TPRM program, following the lifecycle stages:

1. Define objectives and scope: Clearly outline the goals of the TPRM program and the scope of the third-party relationships to be managed. Identify the types of vendors involved and the specific risks to monitor.
2. Develop a risk assessment framework: Establish standardized criteria and tools for evaluating the risks associated with third parties. The framework should cover various factors, including data security practices and operational risks.
3. Adequately onboard third parties: Set up a comprehensive onboarding process that includes risk assessments, background checks, and compliance verifications for new vendors. Confirm that potential risks are identified and addressed before finalizing the partnership.
4. Conduct regular risk assessments: Build a schedule for assessing the risks posed by all third-party relationships. Regularly review vendor performance and security practices to identify emerging risks or areas needing improvement.
5. Monitor and manage risks: Continually track the risk landscape for each third party, using automated tools and analytics to monitor compliance and security. This enables timely responses to any identified issues.
6. Establish communication protocols: Define clear communication channels between internal stakeholders and third parties. Keep stakeholders updated on risk assessments, changes to vendor status, and any developments in the third-party relationship.
7. Implement remediation plans: Create plans to address identified risks or incidents related to third parties. Work with vendors to make necessary changes or improvements to their security practices and operations.
8. Properly offboard vendors: Ensure a structured offboarding process when ending a relationship with a third party. This should include secure data retrieval, revoking access, and a final assessment of any residual risks from the partnership.

Related read: The future of cybersecurity: key trends for 2025 and beyond

Achieve better business outcomes with TPRM

The benefits of a TPRM strategy are clear and comprehensive, ranging from reducing security risks and ensuring compliance to enhancing operational efficiency.

Launching a TPRM program and prioritizing secure solutions can help your business build stronger, more resilient partnerships, driving better business outcomes.