What is Third-Party Risk Management?

What is Third-Party Risk Management (TPRM)?

Third-party risk management (TPRM) is the structured process of identifying, assessing, monitoring, and mitigating risks introduced by external vendors, suppliers, partners, contractors, and service providers that have access to an organisation's systems, data, or operations.

Third-party risk management is the discipline through which organisations govern the risks that arise from their reliance on external parties. It covers the full lifecycle of a third-party relationship, from initial due diligence and onboarding through ongoing performance monitoring and eventual offboarding. TPRM addresses the full spectrum of risk exposure introduced by third parties, spanning cybersecurity vulnerabilities, operational dependencies, regulatory compliance obligations, financial stability concerns, and reputational exposure.

The modern TPRM imperative is grounded in a structural reality: most organisations cannot deliver their products or services without a dense and interconnected network of external relationships. Enterprises in financial services, healthcare, energy, and manufacturing routinely rely on hundreds of technology vendors, data processors, logistics providers, and professional service firms. Each of those relationships represents a potential entry point for harm, whether through a security incident, a regulatory violation, or an operational failure at the vendor's end that cascades into the client organisation.

The threat data from 2025 confirms the urgency. According to SecurityScorecard's 2025 Global Third-Party Breach Report, which analysed 1,000 breaches across industries and geographies, 35.5% of all breaches in 2024 were third-party related, a 6.5% increase from the prior year, with 41.4% of ransomware attacks now initiated through third-party access vectors. Regulatory frameworks including DORA, NIS2, GDPR, and CSDDD have responded by imposing explicit and enforceable third-party risk management obligations on organisations operating in or with the EU. TPRM has moved from a voluntary best practice to a compliance requirement with direct financial consequences for non-compliance.

What is Third-Party Risk?

Third-party risk is essentially any risk that originates from a collaboration with another entity. The management of these risks comes under the purview of Third-Party Risk Management (TPRM), also known as Vendor Risk Management, Supplier Risk Management, or even Vendor Management and Supplier Management. While these terms do have specific connotations, TPRM means the overarching function that studies and mitigates all third-party risks.

Such risk is diverse in nature and can affect the enterprise in a variety of ways. These risks can arise out of several reasons such as the location, size, other clientele, possible fraudulent activity, and more. To sustain and grow in an increasingly competitive market, it becomes imperative that businesses effectively manage third-party risk.

How Do Third-Party Collaborations Make an Enterprise Vulnerable?

Third parties expose businesses to a diverse set of risks that are capable of damaging and hindering a business’s operations and reputation in several ways. As and when a third party is contracted by an enterprise, the risk of different types of damages begins to arise. Here are some ways by which enterprises can be susceptible to risks from the third parties they engage with:

Reputation

Risks arising from vendors or third parties may result in temporary or permanent damage to the public image of the enterprise. This may be caused due to inconsistent behavior of third parties, violation of company and public policies, or sub-par solution delivery.

Strategy 

Businesses may suffer damage due to uninformed or poor strategic decisions taken by third parties. This prevents an enterprise from achieving its goals and creates discrepancies in the system.

Operations 

An enterprise is exposed to the risk of losses arising out of the poor internal performance of the operational duties carried out by third parties.

Cybersecurity and Data Security 

One of the most common and damaging risks associated with third parties is the breach of company data. As companies get involved with more entities, they extend the enterprise’s focus on information access. Therefore, when the data security of a third party is compromised, the enterprise is also exposed to the same threats, to the extent of shared data.

Compliance 

When third parties are contracted, they begin to represent an enterprise. Therefore, where a third party is in violation of the rules and regulations of a jurisdiction, or the policies of a region, the enterprise is at risk of attracting legal action through vicarious liability.

TPRM Risk Categories

Effective TPRM programmes are built around a clear taxonomy of risk. Different third parties introduce different risk profiles, and the assessment methods that apply to a cybersecurity risk are not the same as those relevant to an ESG or concentration risk. The following table sets out the primary risk categories, their characteristics, illustrative examples, and appropriate assessment methods:

Third-Party Risk in Practice

Theory is quickly rendered concrete by the incidents that characterise the current threat environment. Two events from 2025 illustrate how third-party risk materialises across different sectors and attack vectors.

Chain IQ Group AG, June 2025: On 12 June 2025, Chain IQ Group AG, a Swiss procurement and supply chain services firm serving major financial institutions, suffered a sophisticated cyberattack. Threat actors gained access to Chain IQ's systems and exfiltrated data from at least 19 of the firm's clients, uploading the stolen files to the dark web. Over 130,000 employee records were compromised, including names, email addresses, phone numbers, and workplace location codes from firms such as UBS and Pictet. Leaked data included the direct phone number of UBS CEO Sergio Ermotti. No client financial data was reported as directly affected, but the exposure of internal organisational intelligence represented a significant operational and reputational risk for the affected firms. The incident is a clear illustration of concentration risk: multiple high-value financial institutions sharing a single procurement vendor, with no direct visibility into that vendor's security posture, produced cascading exposure from a single compromise.

Salesloft and the Salesforce SaaS Supply Chain Attack, August 2025: In August 2025, threat actors attributed to the group ShinyHunters breached Salesloft, a sales engagement platform widely integrated into enterprise Salesforce instances. The attackers exploited the broad OAuth permissions granted to the Salesloft application to gain API access to hundreds of organisations' Salesforce customer relationship management data without requiring direct credentials or bypassing multi-factor authentication. More than 700 organisations across multiple sectors were affected. The attack highlighted a structural gap in many TPRM programmes: vendor assessments commonly focus on the primary vendor's own infrastructure but rarely extend to the permissions and integrations that the vendor has established within the client's own environment. A vendor can hold the keys to sensitive systems without ever being classified as a critical third party under conventional tiering approaches.

How to Build a TPRM Programme in 7 Steps

Step 1: Build a Comprehensive Third-Party Inventory: A TPRM programme cannot function without a complete picture of the third-party ecosystem. Identify every vendor, supplier, contractor, and cloud service provider with access to the organisation's systems, data, or operations, including shadow IT relationships outside formal procurement records. Document each party's function, access scope, business owner, and contractual terms. Without an accurate inventory, risk tiering and due diligence are built on an incomplete foundation.

Step 2: Tier Third Parties by Criticality and Risk Level: Each third party should be assigned a risk tier based on two dimensions: the criticality of the function they support and the nature of their access to systems and data. Critical-tier vendors have direct access to core systems or sensitive data. High-tier vendors have significant but more limited access. Medium and low-tier vendors present progressively lesser exposure. Assessment depth, monitoring frequency, and contractual requirements scale accordingly.

Step 3: Conduct Risk-Based Due Diligence: Due diligence should be proportionate to the tier assigned in Step 2. For critical and high-tier vendors, assessments should cover security posture, financial health, regulatory compliance status, business continuity capabilities, and sub-processor disclosures. For medium and low-tier vendors, a streamlined process is appropriate. The objective is intelligence calibrated to actual risk, not uniform assessments applied indiscriminately across the portfolio.

Step 4: Establish Contractual Risk Controls: Contracts are the primary instrument through which third-party risk is governed. Core provisions should include enforceable security requirements, audit rights, incident notification timelines of 24 to 72 hours, sub-contractor disclosure obligations, GDPR-compliant data processing agreements, SLAs with defined remedies, and exit and data return provisions. Financial services organisations subject to DORA face additional mandatory contractual content under Articles 28 to 44 for ICT arrangements.

Step 5: Implement Ongoing Monitoring: Onboarding due diligence is a point-in-time assessment. Vendor risk profiles change as relationships evolve, and monitoring must keep pace. Continuous security rating tools, periodic reassessments calibrated to tier, adverse news monitoring, and financial health tracking should all feed into a programme that triggers escalation workflows automatically when defined thresholds are breached.

Step 6: Manage Incidents and Escalations: When a third-party incident occurs, the organisation must have a defined response pathway in place. This covers ownership of the response function, communication protocols with the vendor, criteria for board escalation, regulatory notification processes, and procedures for assessing fourth-party exposure. Response speed has a direct bearing on containment outcomes; incident management cannot be improvised at the moment it is needed.

Step 7: Execute Controlled Offboarding: Ending a third-party relationship carries risk if handled poorly. Access must be revoked promptly, data returned or deleted per contractual terms, and transition support activated to maintain operational continuity. For critical vendors, a formal exit plan should be in place before the relationship ends, and replacement arrangements should be identified and tested in advance rather than sourced reactively at the point of termination.

How to Assess Risk and Exposure?

It is always important for enterprises to remain aware of third-party risk. An enterprise must create a risk profile for each third-party partner to understand the different risks that they bring to the table and how to protect the company from any damage that may occur.

A third-party risk profile can be created by evaluating the following parameters:

Location 

One of the more critical factors in assessing third-party risk levels is the geography of the entity. If a third-party vendor is located in a politically unstable region, a region prone to natural disasters, war-torn areas, or a region plagued by high rates of criminality, the risk associated with the third party becomes higher.

Regulation 

A third party that operates in a business environment that is surrounded by complicated legislation and rigorous compliance increases the chances of failure to comply. When a third party fails on the compliance front, the contracting enterprise is exposed to legal action and fines that can disrupt and damage its operations. Therefore, a highly regulated jurisdiction is cause for concern for an enterprise.

Information Access 

When an enterprise extends access of its business data to a third party it exposes itself to the risk of breach. This breach may be caused due to poor security standards of the third party or when the propagator is the third party itself. A higher level of access translates into increased enterprise risk.

Importance 

As more companies contract third parties, dependence on these entities grows. Such dependence makes a third party important for a variety of reasons to the enterprise. Therefore, when a third party is critical to the operations or continuity of an enterprise, the risk associated is significantly higher.

TPRM Risk Categories vs. Related Risk Disciplines 

TPRM is a distinct function, though it intersects with several adjacent disciplines. Understanding those distinctions prevents scope confusion and programme fragmentation:

Why Do Organizations Need Third-Party Risk Management?

The importance of third-party risk management cannot be stressed enough. The sheer damage caused due to the exposure can be detrimental to the very existence of an enterprise. Deloitte calls third-party risk a first priority challenge, since vendors that companies have worked with for years may have gone out of business, new ones may have entered the system, and brought with them several associated risks.

Therefore, it is critical that businesses give due attention to third-party risk and understand how TPRM (third-party risk management) can prevent lasting damage to an enterprise.

Here are a few reasons why organizations need TPRM:

Integrity 

Risks associated with a third party stand to damage the integrity of the company in an irreparable manner. This creates gaps in the strategic goals of the enterprise, representing weak motives, and tarnishing its reputation. Through TPRM, businesses ensure that the enterprise remains a credible establishment with goodwill among investors and customers.

Continuity 

When an enterprise falls victim to the detriments of a third party, the disruptions that follow could hamper previously uninterrupted operations that are critical to the functioning of the business. Third-party risk management ensures that business continuity remains a top priority, and even in cases where a third-party relationship is damaged, the operations of the enterprise do not come to a halt.

Profitability 

One of the greatest incentives of third-party risk management is the protection of company finances. When an enterprise suffers damages due to the action or inaction of a third party, its revenue and profits are liable to suffer. Therefore, through a viable TPRM strategy, companies can avoid exposing their earnings to the damages caused by the risk associated with a third-party relationship.

Security 

To avoid damage to data, businesses need to employ a TPRM strategy that protects company data if the third party suffers a breach, or in some cases, attempts a breach.

The Benefits of Third-Party Risk Management

Third-party risk management is the logical way forward for businesses when dealing with third-party entities. The need for a TPRM strategy far outweighs the importance of measures to control damage after exposure. Although TPRM acts as a risk indemnity for an organization, it carries other advantages that make it ideal for an enterprise to incorporate within the system.

Here are some of the ways an organization may benefit from third-party risk management:

Avoid Fines and Legal Action 

A TPRM framework allows businesses to avoid getting involved with regulatory authorities. When a TPRM framework gives due importance to GRC, it is likely to protect the enterprise from legal action, even when an associated third party is liable.

Promote Organizational Risk Culture 

When companies create a third-party risk management framework, they require contracted third parties to abide by the code of conduct of the company. This extends the cultural values and ethics of the organization to external parties. Further, through training and sensitization programs, companies promote the culture of their enterprise, while simultaneously mitigating risk.

Mitigate Risk Exposure 

As companies become involved with multiple partners in different geographies, it increases the risk and potential for damage. A sound TPRM strategy allows an enterprise to contain the level of exposure that they face in the event of a third-party-induced incident.

How to Create a Third-Party Risk Management Strategy

Irrespective of the scale and level of engagement with third parties, all enterprises must maintain a sound TPRM strategy to protect themselves even from the smallest of damages. To achieve this, businesses are required to create a framework that highlights several factors that would determine the result of a third-party incident and the extent of damage caused as a result of exposure.

1. Identify

   The first step in understanding the threat landscape is to identify the partnerships that the enterprise maintains. Identification helps businesses stay aware of the several entry and exit points of data that need to be covered. This also allows businesses to review existing relationships with third parties and cut ties with partnerships that are not required anymore or do not align with the company’s strategic goals.

2. Classify

   Next, the third parties need to be classified based on the risk that they carry. Such classification can be made based on geography, previous performance, the trade of the third party, and the level of access granted. Classification enables the creation of risk profiles for several third parties, paving the way for detailed assessment.

3. Assess

   Once third parties are classified into different categories of risk, the enterprise needs to assess the level of exposure. Through due diligence and third-party assessments (TPAs), businesses can estimate the likelihood of a risk causing tangible detriment to the enterprise.

   Assessments also help the organization understand its own risk appetite in the context of third-party relationships, thus ensuring a more structured way of making decisions around collaboration.

4. Manage

   Upon successful assessment of risk, the enterprise can take the necessary measures to mitigate such risks and protect the enterprise from possible damage that may be suffered. This means creating policies that demarcate whether a risk proposition is worth the gamble.

5. Monitor

   Although TPRM is largely complete upon assessment of risk and development of policies to cover the enterprise from such risk, the process remains a continuous exercise. Therefore, the enterprise is required to consistently monitor relationships with third parties and be aware of their actions to ensure that policies are followed and malpractices are identified before they become too big to contain.

What are the Steps That an Organization Can Take in Selecting the Right Third-Party Vendor?

Vendors who understand and follow the compliance norms set forth for their industry are often a good pick for collaboration. Such compliance is easily visible in cases of publicly traded companies as they are required to declare their revenues and operations annually. For larger organizations, a dedicated risk team is often best poised to study the third-party vendor in question to evaluate what a potential partnership might mean for the organization across all areas of risk.

How Can an Organization Build a TPRM Network? What Stakeholder Interests Must the Organization Consider?

As discussed earlier, the five key tenets of a TPRM framework include identifying the third-party risk landscape as it currently stands, classifying these risks based on severity and urgency, assessing them in the context of the company’s overall risk appetite, managing these risks with set controls, and monitoring compliance over a period of time.

In a real-world situation, this entails everything from where the organization’s major risk came from in the past, identifying patterns in third-party vendors who may be causing these risks, garnering inputs from internal functions to understand their current vendor needs, and developing a framework that allows them autonomy in choosing a vendor as long as the vendor is vetted against certain set parameters within the TPRM framework.

Who is the Owner and Operator of a TPRM Framework within the Organization?

Since multiple stakeholders engage with and employ third-party vendors, the onus of minimizing third-party risk does not rest at the door of one individual or team. Instead, a good TPRM framework helps various departmental and functional heads decide on the best practices to follow when choosing to work with a vendor or terminating a contract.

Using a single tool to manage third-party risk also ensures complete visibility of the process. Moreover, when a vendor’s contract is terminated, all stakeholders in the system are kept informed so they may take the next appropriate steps—revoking data access, requesting file transfer, preventing further contact with the third-party vendor, and so on.

What are the Best Practices to Be Followed in TPRM?

The focus of a best-practices checklist for TPRM should always be to cover as many bases as possible. In the context of the pandemic, there are three things to bear in mind when thinking about TPRM best practices. These are:

Prioritizing vendors 

Not all vendors are equally critical for business operations, and this means that companies always have the choice of distributing vendor risk accordingly. In other words, a vendor who isn’t as critical to business operations can easily be replaced with another whose risk mitigation approach is better suited to the company’s needs.
However, the more critical vendors can be brought under a common risk umbrella which is most beneficial for the company.

Thinking beyond cybersecurity risks 

While cybersecurity and information security risks get high priority in conversations, there are several other aspects of risk to evaluate, such as business continuity, competitive risks and disruption, geopolitical risks and financial risks, all of which have been exacerbated by the pandemic.
A comprehensive TPRM plan is reliant on understanding the entire risk landscape, and not limited to cybersecurity threats alone.

Leveraging automation 

Today, automation is a powerful tool available to companies facing multiple complex risks.
Processes such as assigning risk categories to vendors, vendor onboarding, risk ownership and documentation, and risk reporting can all be automated. This always allows every stakeholder to access the risk profile of third-party risks.
Hence, organizations must consider automation as a core risk mitigation strategy, and not just as an operational convenience.

What is the TPRM Lifecycle?

The TPRM lifecycle outlines the steps and timelines associated with studying and mitigating third-party risks. It usually begins with vendor identification, evaluation, and selection, followed by risk assessments of new and existing vendors. Usually, a long and continuous process of risk monitoring follows these steps.

Risk mitigation is closely tied with risk monitoring and reporting, and a risk champion is assigned for each vendor. In some cases, the cycle ends with vendor offboarding either due to the end of the contract period, or due to contract termination.

What are Some Common Reasons Why a TPRM Process Fails?

The third-party risk management (TPRM) process is the continuous process of identifying, assessing, and mitigating risks introduced by third-party vendors, including suppliers, sub-contractors, or IT business partners. It is also called Vendor Risk Management (VRM).

Often, a TPRM process can fail due to the following reasons:

- The process has been designed without considering the needs and priorities of all parties that the process impacts.

- The process has not been documented clearly enough for various stakeholders to understand and report an anomaly when it arises. Over time, individual stakeholders have no incentive to report incidents because the process is too complex or cumbersome, and the risk management function is therefore affected.

- The process is too rigid and does not account for the sheer diversity in the kinds of third-party entities that exist today. For example, some of the most sophisticated tools in the market are built by small teams and emerging businesses, which may not have the compliance bandwidth to address every need of the enterprise. In such cases, the TPRM process must be flexible enough to minimize risk while also allowing for such partnerships.

- The TPRM process has not kept up with changing times. For example, some data around risk management may continue to reside on spreadsheets while the rest is migrated to analytics platforms, presenting a less-than-complete overview of the organization’s actual third-party risk exposure.

Why is it Important That TPRM Be Viewed as a Full-Lifecycle Program?

Often, third-party risk management is perceived as a function that ends with the onboarding of an approved vendor. However, most third-party relationships are equally dynamic and evolve over time. This means that a third-party service provider who is not offboarded appropriately can also pose a risk and cause compliance challenges.

Hence, it is important that TPRM is viewed as a full-lifecycle program that covers the entire engagement lifecycle of every vendor within the organization at all times, and across all functions.

Why is it Important to Leverage Technology with Effective Third-Party Risk Management?

Today, AI tools can help study the risk landscape associated with a vendor using existing markers such as past history of breaches, known and unknown data leaks within the industry, the risk profile of the service provided by the vendor, the number of years of operation, the tools and technology they use to prevent a data breach, and so on.

Manually, these factors would take a long time to study and even longer to standardize against the company’s risk appetite. Using AI, these insights can be derived much faster, allowing companies to more effectively manage third-party risk.