Third-Party Risk Management: Mitigating External Risks

No CTO in their right mind trusts their vendors and contractors completely. Irrespective of their relationship, vendors will need to fulfill a due diligence baseline to qualify as a good fit and a safe choice. But what separates your company from being a secure one from a vulnerable one is the depth of your due diligence. 

The depth, of course, varies from company to company, but it exists all the same since companies often have to rely on vendors to stay compliant and have sufficient security practices in place. And any misalignment can have a cascading impact on the company’s compliance posture.

This is where third-party risk management or TRPM comes in. It’s not just a hot topic. It’s a necessity. Although complex, it is important to know and assess vendor security posture while ensuring it aligns with yours. 

So what exactly do you need to do to ensure your TPRM is in place with the market standards of 2025? Read on. 

TL;DR

Third-Party Risk Management	Identifying, assessing, and monitoring risks associated with external parties like vendors, contractors, and other third parties.
How to implement TPRM	The process consists of analyzing the third party, conducting due diligence, addressing risks, assessing relationships and monitoring vendor security & compliance.
Best practices	1. Take a risk-based approach 2. Score risks based on impact 3. Track and document breaches 4. Leverage automation

What is third-party risk management?

Third-Party Risk Management (TPRM) is the method of identifying, assessing, and monitoring risks related to vendors, suppliers, and contractors employed by a company. It is a key aspect of cyber security programs because it forms the first line of defense against any risk a third-party business relationship introduces to the operation. 

But how do third parties assert such risks upon your company?

The third parties associated with your company have access to parts of or a complete database of sensitive information like 

• Public health information (PHI)
• Customer data
• Intellectual property
• Credit card information
• Personal identifiable information (PII), etc. 

Unauthorized access or sharing of such information could lead to security vulnerabilities, incidents, and breaches. These could cause financial loss, damage to the company’s reputation, and an inability to cater to the needs of your customers. 

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

Because of how vast and complex TPRM can be, we’ve divided the implementation of the process into two stages. This section discusses how you can implement an effective third-party risk management program before vendor onboarding and during ongoing third-party engagements. 

Here are the 5 steps of implementing third-party risk management:

Stage 1: Before you onboard a third party

The pre-onboarding process of third-party risk management (TPRM) is important to ensure that the potential third parties you’re considering meet your organization’s standards. Before a formal engagement, you need to thoroughly evaluate their compliance and security.  

This stage involves the following key steps:

Step 1: Conduct thorough due diligence

As a first step, you should conduct thorough due diligence of your potential vendors. Consider assessing their history with reviews from websites like Capterra, G2, Software Suggest, etc. Also evaluate the risks your organization is going to face once the third party is onboarded. The risks associated with it should be estimated based on the level of risk exposure you’re going to get exposed to. 

Step 2: Engage the third-party

Once a vendor meets the external security requirements, the next critical step is to delve deeper into their internal security measures. This step ensures that the vendor’s overall security posture aligns with your organization’s standards and expectations. 

Here are specific details that you should consider during this engagement:

1. Completing a security questionnaire
2. Checking security certifications
3. Assessing data protection and privacy policies
4. Ensuring employee security training
5. Evaluating incident response plans

As a bonus, download the “Third-Party Risk Management Policy” to protect your business. This important document outlines how to manage third-party risks and secure vital information.

Step 3: Remediate misalignments and safety issues

If the third party has an unacceptable level of risk, you may not want to wait until they rectify the identified security issues before engaging with them. 

In such cases, you should communicate the identified risks to the third party and work together to address them. Depending on the severity of the risks, the organization may need to consider alternatives or fallback strategies.

This could involve renegotiating contracts to include specific security requirements, implementing additional monitoring measures, or even working with alternatives till the risks are sufficiently mitigated. 

Stage 2: Optimizing existing vendor relationships

Once you successfully onboard a third party into your organization, you have to ensure that you monitor the third-party risks surface continuously. This is vital to maintain a compliant relationship with them.

The following steps ensure that the vendors continue to meet your security standards and address any potential issues promptly. 

Step 4: Conduct periodical security checks

Periodical security checks involve thoroughly analyzing compliance documentation, testing cyber security measures, conducting frequent risk assessments, assessing access controls, and reviewing policies. 

This step is integral and should be conducted periodically during the whole third-party lifecycle. It also requires gathering input from internal and external stakeholders to understand if the vendor is keeping to the service level agreement and contractual obligations. 

Step 5: Track breach incidents

Tracking breaches and security incidents is integral to your risk management system. When breaches occur, it’s important that security teams understand their roles in mitigating damage, minimizing operational disruption, and recovering lost data. This can also work the other way—the organization will also need to notify third parties if the security incident affects them in any way. 

As a bonus, take control of incidents with ease using our Sample Incident Management Policy Template.

Recommended read: How to automate the risk management process

Third-party risk management best practices 

The following practices aren’t just about ticking boxes. They are about building a resilient risk management system, staying a step ahead of the evolving threat landscape, and having a competitive advantage. 

Here are four best practices for third-party risk management:

1. Enforce a risk-based approach 

TPRM is most efficient when your strategy has a risk-based approach. Risk assessment does not end at identifying all kinds of risks; you need a holistic program to understand, address, and mitigate a wide range of risks pertaining to third parties. 

You could employ strategies at the contract level as well as take a more tactical, granular approach that involves regular compliance audits, mandatory training, and requesting for frequent penetration testing reports. You should also keep an eye on failing controls if vendors don’t abide by your compliance mandates.

2. Use risk levels or scores

Categorizing your third parties using a risk matrix can help you prioritize risks based on severity, likelihood of occurrence, and potential impact. Bucket vendor risks into the ‘Low’, ‘Medium’, and ‘High’ categories. This tells you which risks need immediate attention and which ones can be prioritized once the most pressing issues are resolved. . 

Learn more about managing security incidents. 

3. Data classification and access control

Data classification is an integral part of TRPM. As an extension of data inventory, this practice helps you separate and classify data into groups based on sensitivity and criticality. Doing this not only tells you what data needs to be made accessible to vendors (according to the principle of least privilege) but also tells you what data needs extra protection. It’s a good practice to document and formalize how data is accessed, processed, stored, and transmitted.

4. Leveraging automation

For a process with third-party risk management, leveraging technology can be a game-changer. TRPM has a number of moving parts and predictable tasks that can be automated. Automation can streamline the security questionnaire step, for example, to expedite the onboarding process. It can also trigger background checks and track risk remediation measures without the need for manual intervention. 

Why is third-party risk management important?

Third-party risk management is important because it has a huge impact on your security posture and can leave the company susceptible to data breaches and instances of non-compliance. This has forced companies to sit up and take notice of the importance of TRPM.

With that in mind, here are six reasons why your company should definitely be investing in third-party risk management:

1. Achieving compliance:

If you want your business to be aligned with industry-standard frameworks and processes, TPRM is the answer. It incorporates aligning vendor controls with organizational security goals and compliance requirements.

2. Minimizing operational disruptions:

Third-party risk management helps you prepare for potential breaches and business disruptions. Being prepared ensures that risks have minimum impact on your business and makes it easier to maintain business continuity. 

3. Fine-tuning disaster recovery:

In a webinar by Shared Assessments, 87% of attendees agreed that they engaged their third parties in disaster recovery management. Efficiently managing third-party risks allows you to strengthen your disaster recovery management systems and prepare for the most challenging scenarios.

4. Maintaining data protection:

With the amount of data being collected, the need for protection is on the rise. Data breaches has significantly contributed to this scenario. TPRM facilitates the implementation of controls and policies to uphold data protection standards consistently across the vendor environment.

5. Drafting security policies:

Security policies are at the foundation of a strong security posture. TPRM helps you create clear security policies that protect organizational assets. These guidelines ensure the vendor understands their obligation to make security a part of their everyday routine by training employees and adhering to SOPs.

6. Streamlining vendor onboarding:

With TPRM, bringing vendors on board is easier and safer. You can ensure vendors and third parties are aligned with your security standards before they are onboarded. This also allows you to focus on building stronger relationships and working together smoothly.

Compliance requirements under TPRM

Compliance is a vital element in any TRPM strategy. Vendors are the first line of defence against malicious actors and potential vulnerabilities. A number of regulations and security standards have mentioned the importance of third-party risk assessments and management. 

In this section, we’ve consolidated the clauses and policies that companies need to abide by to stay compliant.

ISO 27001

• Annex 15 – Supplier controls: Guides risk assessments for third-party vendors handling your organization’s information assets.
• Information security policy: ISO 27001 requires controls for vendor management, covering vendor selection, contractual obligations, risk assessments, monitoring, and termination procedures.

GDPR

• Risk assessment: Risk assessments are mandatory for third-party processors handling EU residents’ personal data.
• Processor contracts: GDPR requires written contracts outlining responsibilities, data processing details, sub-processor involvement, data deletion, breach notifications, and accountability principles.

SOC 2

• Security and availability trust service principles: While not explicitly requiring third-party risk management, SOC 2 reports demonstrate controls for managing vendor risks.
• Security and availability principles: Focus on preventing unauthorized access and ensuring system accessibility when needed.

HIPAA

• HIPAA security rule: Requires safeguards for electronic protected health information (ePHI) even when managed by third-party vendors.
• Risk assessments: Risk assessments are mandatory for potential risks associated with business associates accessing ePHI.
• Business associate agreements (BAAs): Require written agreements with business associates covering safeguards implementation, ePHI use limitations, breach reporting, and termination clauses.

Managing third-party risks with Sprinto

To summarize, we can say that TPRM is the practice of identifying, assessing, and mitigating risks associated with engaging third-party vendors or partners. It’s crucial because these relationships can significantly impact your organization’s security posture, particularly in compliance with regulations and standards.

Sprinto is a GRC platform that helps you closely monitor vendor controls, enable thorough due diligence, align vendor compliance, and evolve with the threat landscape. The platform alerts your security teams when controls are about to fail, helping you resolve issues as they surface.

Sprinto leverages the power of automation to help you streamline compliance and third party risk management process with ease. This way, you don’t just get compliant but stay compliant. 

Ready to take the next step? Get in touch here.

Frequently asked questions

1. What are the phases of third-party risk management?

The five phases of third-party risk management include analyzing third party risks, engaging the third parties in due diligence, remediating their risks, approving the relationship and continuously monitoring them. 

2. Which department owns third-party risks?

There is no specific department that owns third-party risk management since it is comparatively a new field. Usually, its responsibilities are shared by various senior management and security teams from departments like Information Technology (IT), Legal, Privacy and Data Governance, Operations, and the Data Protection Officer (DPO). 

3. What are the benefits of TPRM?

TPRM mitigates risks associated with vendors, contractors, affiliates, suppliers, etc. It also helps you build trust and credibility with your customers and third parties. An effective TPRM strategy fosters a healthy relationship with your vendors. It maintains their sustainability in your company’s ecosystem to achieve business goals. 

4. Give an example of a third-party risk.

Let’s imagine your company uses a cloud storage service for customer data, including names, addresses, and credit card details. Now let’s suppose that the the third-party provider experiences a data breach due to a security flaw. This exposes all their data to the hackers. Such a  breach can result in financial penalties, reputational risk, and lawsuits against the third-party service and your company as well. 

5. What is third-party liability insurance?

Third-Party Liability Insurance covers the costs if someone sues you for causing harm or damage to them or their property. It can include legal fees, medical expenses, or repair costs. This insurance is essential for businesses and individuals to protect against unexpected financial burdens from lawsuits.