Third-party risk management (TPRM) encompasses the processes and strategies an organization employs to identify, assess, monitor, and mitigate risks associated with third-party relationships.
TPRM has become increasingly crucial since most organizations rely on external vendors, suppliers, and service providers for their business operations. However, third-party organizations represent potential risks that can impact an organization’s security, compliance, and general ability to function. In fact, 15% of the data breaches recorded in 2024 resulted from third-party relationships, up 68% from 2023.
Table of Contents
- What Risks Do Third Parties Pose?
- What Are the 5 Phases of Third-Party Risk Management?
- What Are the Benefits of Third-Party Risk Management?
- Who Is Responsible for Third-Party Risk Management?
Third-Party Risk Management: A Deep Dive
What Risks Do Third Parties Pose?
Any third party that has direct or indirect access to an organization’s systems, services, and data can pose various risks—notably security, supply chain, operational, reputational, financial, and legal risks.
Imagine this scenario to discern how a single issue can cause a third party to pose various types of risks at once to an organization.
One of your suppliers suffered a data breach recently. The vulnerable system attackers exploited is connected to your network (i.e., security risk). The issue also affected the supplier’s ability to provide the products you rely on for your services (i.e., supply chain risk), causing a delay in your operations (i.e., operational risk).
As a result, some of your customers lost faith in your capability (i.e., reputational risk) and decided to cancel their orders. That resulted in lost sales on your part (i.e., financial risk).
To top it all off, you may face legal penalties for failing to sufficiently protect your network (i.e., legal risk) from the breach that extended from the supplier compromise.
What Are the 5 Phases of Third-Party Risk Management?
Effective TPRM involves five phases—identification, assessment, mitigation, monitoring, and response.
Phase #1: Identify All Third-Party Vendors
Organizations must compile a comprehensive list of all third-party vendors, suppliers, and service providers categorized based on their criticality to business operations, the sensitivity of information they handle, and the level of access they have to systems and data.
As part of this phase, organizations may include third parties in asset discovery that can be performed using an external attack surface management (EASM) platform to determine the potential impact of data exposure or other issues.
Phase #2: Assess Each Third Party
Organizations must perform background checks, financial stability analyses, compliance audits, and cybersecurity evaluations to assess third-party risk profiles. That includes checking out third-party networks for vulnerabilities and understanding their context. Organizations can then classify third parties into risk tiers (e.g., low, medium, high) based on the assessment results.
Phase #3: Mitigate Third-Party Risks
Organizations must develop and enforce controls, policies, and procedures that third parties need to follow to minimize risks. They may also train third parties on risk management practices and compliance requirements.
Phase #4: Periodically Monitor All Third Parties
Organizations must conduct periodic audits and assessments to ensure third parties comply with regulatory requirements and internal policies, including service-level agreements (SLAs) and key performance indicators (KPIs). They can use automated tools and technologies to continuously monitor third-party activities, their security posture, and risk indicators.
Phase #5: Promptly Respond to Issues
Organizations must take corrective actions to address issues, such as revising contracts, improving security measures, or even terminating relationships where deemed necessary.
What Are the Benefits of Third-Party Risk Management?
Implementing a robust TPRM program offers various benefits. For one, the process improves risk mitigation in that it allows organizations to identify potential risks associated with third parties before they materialize. That enables proactive mitigation strategies.
TPRM can also enhance regulatory compliance in that it specifically helps organizations check if third parties comply with relevant laws, regulations, and industry standards, reducing the risk of regulatory penalties on their part. By ensuring third parties adhere to stringent data security standards, TPRM also reduces the risk that organizations will suffer data breaches and unauthorized access to sensitive information. The better protected third parties are, the more secure associated organizations are as well.
Apart from operational efficiency as a result of monitoring third-party performance against established metrics to ensure consistent service quality and reliability, effective TPRM also helps organizations manage and control costs associated with third-party engagements by identifying financial risks.
In addition, TPRM provides valuable insights into third-party performance and risk profiles, aiding in better decision-making regarding partnerships and vendor selection.
Who Is Responsible for Third-Party Risk Management?
Internal auditors typically perform TPRM, systematically evaluating documentation, processes, and controls, along with weaknesses that must be addressed and report their findings to the board of directors and senior management.
Internal auditors typically include a lead auditor and several subject matter experts (SMEs). The lead auditor helps identify risks and deficiencies that may otherwise go unnoticed by providing independent and objective assessments for maintaining regulatory compliance, protecting against third-party risks, and fostering continuous TPRM improvement.
The SMEs, comprising IT, cybersecurity, legal, and compliance experts, meanwhile, perform specific functions.
- IT experts: Identify IT-related risks, such as system vulnerabilities, integration issues, and potential service disruptions; recommend technical controls and solutions to mitigate identified risks; and ensure third-party IT systems comply with internal and external regulatory requirements.
- Cybersecurity experts: Identify potential cybersecurity threats and vulnerabilities in third-party systems using automated tools like EASM platforms; recommend and implement cybersecurity measures to protect against data breaches, malware, and other cyber threats; and train third parties on cybersecurity best practices and protocols.
- Legal experts: Identify legal and regulatory risks associated with third-party engagements; ensure contracts are structured to protect an organization’s interests and mitigate risks; and provide guidance on legal compliance issues and ensure third parties adhere to applicable legal requirements.
- Compliance experts: Identify compliance-related risks, including potential violations of laws and regulations; develop and implement remediation plans to address compliance gaps and deficiencies; and promote continuous improvement in third-party compliance practices through regular audits and feedback.
Key Takeaways
- TPRM encompasses the processes and strategies an organization employs to identify, assess, monitor, and mitigate risks associated with third-party relationships.
- Third parties can cause a variety of security, supply chain, operational, reputational, financial, and legal risks.
- The TPRM has five phases—identification, assessment, mitigation, monitoring, and response—and provides various benefits.
- Internal auditors, a team comprising a lead auditor and SMEs—IT, cybersecurity, legal, and compliance experts—are responsible for TPRM.
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