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What is Third Party Risk Management (TPRM)?

A Comprehensive Guide

Third Party Risk Management (TPRM) (also called Vendor Risk Management or VRM) is the practice of evaluating and then mitigating the risks introduced by vendors (suppliers, third parties, or business partners) both before establishing a business relationship and during the business partnership. A robust TPRM program provides visibility and control over the third party ecosystem, ensuring that all external vendors and partners are assessed and managed effectively. This comprehensive guide to Third Party Risk Management (TPRM) will help you understand the importance of assessing and mitigating risks when working with external vendors, ensuring your business remains protected throughout these critical partnerships.

What Is Third Party Risk Management?

Third Party Risk Management (TPRM) is the process of identifying, assessing, and mitigating risks associated with outsourcing to third-party vendors or service providers. It is an essential component of all cybersecurity programs, as third-party vendors can access sensitive data, intellectual property, and personally identifiable information (PII). TPRM is designed to give organizations an understanding of the third parties they use, how they use them, and what safeguards their third parties have in place. By implementing a robust TPRM program, organizations can protect themselves from potential threats and ensure that their third-party relationships are secure and compliant.

Why Is Third Party Risk Management Important?

Third party risk management is essential because unaddressed third party risks potentially expose an organization to cybersecurity threats, supply chain disruption, and data breaches resulting in reputational damage. A data breach, particularly when dealing with third-party vendors, can lead to severe implications including significant regulatory and operational disruptions, as well as potential financial and reputational damage. Increasingly, it is a regulatory requirement to protect against the threats introduced by third parties with risk management.

Who Is Considered A Third party?

A third party or vendor is a business or company with whom you have an agreement to provide a good/product or service on behalf of your organization, typically referred to as a vendor. Third parties are who you outsource or subcontract with. Your organization relies on their products and services in manufacturing, to maintain operations, and/or to deliver your end product or service.

What Is An Example Of A Third Party?

Third parties in your organization include any vendor you outsource to or with and any vendor essential to the manufacturing or delivery of your product/service. Examples of third parties might be your:

• Internet provider
• Attorney
• Software provider
• Payroll provider

What Is A Vendor Risk Management Program?

A vendor risk management program, also called a third party risk management program, are the people and processes organized to identify and mitigate the risks introduced to your organization by vendors. Effective third party management involves compliance checks, vendor risk assessments, and analytics to enhance security and privacy management processes. The Shared Assessments Vendor Risk Management Maturity Model (VRMMM) can help organizations create or mature risk management programs by benchmarking against a set of comprehensive best practices and industry standards.

What Is A Third-Party Risk Assessment?

A third party risk assessment is a due diligence review of a vendor to provide an understanding of their practices. It is a process that can assess potential third party risk and identify vulnerabilities, including the vendor’s inherent risk. Evaluating each vendor’s inherent risk is crucial as part of the third-party risk assessment process.

The Third-Party Risk Management Lifecycle

The Third-Party Risk Management Lifecycle is a series of steps that outlines a typical relationship with a third party. It includes identification and evaluation, risk mitigation and contracting, ongoing monitoring and review, and offboarding. This lifecycle approach ensures that organizations can systematically manage third-party risks from the initial engagement through to the end of the relationship, maintaining a high level of security and compliance throughout.

Identification and Evaluation

The first step in the TPRM lifecycle is to identify and evaluate potential third-party vendors. This involves gathering preliminary information about the vendor, such as their business description, contact information, and services offered. Organizations should also assess the vendor’s inherent risk based on industry benchmarks or basic business context. This includes evaluating the vendor’s security controls, compliance with regulatory requirements, and reputation. By thoroughly understanding the vendor’s risk profile, organizations can make informed decisions about whether to engage with them.

Risk Mitigation and Contracting

Once a vendor has been identified and evaluated, the next step is to mitigate any risks associated with the vendor. This may involve implementing controls, monitoring and reviewing the vendor’s security practices, and updating policies and procedures. Organizations should also establish contractual standards and terms, including service level agreements, payment terms, and termination clauses. These contracts should clearly outline the expectations and responsibilities of both parties, ensuring that the vendor adheres to the organization’s security and compliance standards.

Ongoing Monitoring and Review

After a vendor has been onboarded, it is essential to continuously monitor and review their security practices and risk posture. This includes ongoing risk assessments, monitoring for changes in the vendor’s risk profile, and reviewing contractual terms and conditions. Organizations should also maintain detailed records of their vendor relationships, including risk assessments, mitigation strategies, and contractual agreements. By following the Third-Party Risk Management Lifecycle, organizations can effectively identify, mitigate, and manage risks associated with third-party vendors, protecting their sensitive data and reputation.

What Are Common Types of Third Party Risks?

A robust vendor risk management program or third-party risk management program is essential to protecting an organization from a wide variety of risks. These risks can impact multiple areas of your business, including operations, reputation, finances, and regulatory compliance. Below are the most common types of third-party risks to consider:

Operational Risk

Operational risks arise when a third party’s services or products fail to meet expectations, causing disruptions to your business operations. For example, if a critical vendor experiences a system outage, it can impact your ability to deliver products or services to your customers. Managing operational risk involves thoroughly assessing the vendor’s reliability, performance history, and disaster recovery plans to ensure your business can continue running smoothly even if issues arise.

Reputational Risk

Your organization’s reputation can be damaged if a third party engages in unethical behavior, provides substandard services, or suffers a public relations crisis. Even if your company wasn’t directly involved in the incident, the association with the vendor can reflect poorly on your brand. Reputational risk can be mitigated by regularly monitoring vendors for ethical practices, data security measures, and their public reputation.

Financial Risk

Financial risks occur when a third party is unable to meet its financial obligations, potentially leaving your organization with unpaid bills, disrupted services, or financial liabilities. This can include anything from the vendor’s bankruptcy to pricing inconsistencies or missed deadlines. Performing financial due diligence on third parties and ensuring you have contingency plans in place can reduce this risk.

Compliance Risk

Regulatory requirements vary depending on the industry, and third-party vendors are often subject to the same compliance standards as your organization. If a third-party vendor fails to meet legal or regulatory obligations, it can result in fines, legal action, or other consequences for your business. Managing compliance risk involves ensuring that vendors adhere to data protection laws, industry regulations, and contractual obligations.

Common Challenges of Third Party Risk Management

Implementing and maintaining a third-party risk management program can be challenging, and organizations often face several common obstacles. Some of the most significant challenges include:

• Lack of visibility into vendor risk: Many organizations struggle to get a clear understanding of the risks associated with their third-party vendors, making it difficult to develop effective risk management strategies.
• Limited resources: Managing third-party risk can be resource-intensive, requiring significant time, money, and personnel. Many organizations struggle to allocate sufficient resources to their risk management efforts.
• Complexity of vendor relationships: Third-party vendor relationships can be complex and multifaceted, making it challenging to develop effective risk management strategies.
• Evolving regulatory requirements: Regulatory requirements for third-party risk management are constantly evolving, making it essential for organizations to stay up-to-date with the latest requirements and guidelines.
• Difficulty in measuring risk: Measuring and quantifying third-party risk can be challenging, making it difficult for organizations to develop effective risk management strategies.

By understanding these common challenges, organizations can develop effective strategies for overcoming them and implementing a successful third-party risk management program. Addressing these obstacles head-on will enable you to build a robust party risk management program that protects your organization from third party risks and ensures compliance with regulatory standards.

For a more in depth exploration of these foundational strategies, check out Third-Party Risk Management Fundamentals. 

Trends and Future Of Third Party Risk Management

The landscape of third-party risk assessment is constantly evolving, with new trends and technologies emerging to address the growing complexity of third-party relationships. Staying ahead of these trends is essential for maintaining an effective third-party risk management program.

Third Party Risk Management Tools for Risk Management Professionals

Shared Assessments’ thought leaders develop best practices based resources, including tools that are:

• Member-driven
• Industry-standard
• Consistent, robust and cost-effective

Our tools help organizations better manage third party risk, using controls for cybersecurity, IT, privacy data security and business resiliency. Program Tools are kept current with industry needs, regulations and the threat environment. Learn more about Shared Assessments’ tools for the third party risk management lifecycle