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In the age of globalization, it’s virtually impossible to scale your organization up without third-party vendors. The problem is—it’s equally impossible to remain risk-free while working with them. According to research by Cyentia Institute and SecurityScorecard, 98% of organizations have a relationship with at least one third party that has suffered a data breach in the last two years.
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Cybersecurity is only one of the concerns that come with exposure to third parties. If your organization is expanding its outsourcing scope, it must account for many other relevant third-party risks.
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In this guide, you’ll learn about:

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• The meaning of third-party risk
• Different types of third-party risks and an effective three-step process to manage them

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What is third-party risk?

Third-party risk is the probability of an organization facing an unfavorable event because of external parties, such as vendors, contractors, and distribution partners. Such risks arise because the third parties you partner with often gain access to sensitive organizational systems and information or have the ability to impact your operations.
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Common types of third-party risks to account for

While third-party risks are diverse, it’s considered good practice to account for risks under the following six common categories:

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1. Strategic: The possibility of the organization not achieving its strategic goals due to a mishap caused by a third party.
2. Operational: Potential disruptions to the organization’s operations as a result of a third party’s inability to provide the necessary product or service.
3. Financial: Any damage to an organization’s cash flow or revenue due to service bottlenecks related to a third party, such as missed raw material deliveries or software downtimes.
4. Legal and compliance: The risk of an organization running into regulatory roadblocks because of the increased legal and compliance duties triggered by its relationship with the third party.
5. IT and security: Data leaks, security breaches, and similar risks stemming from a third party’s inability to implement adequate data safety and cybersecurity measures.
6. Reputational: Public-image issues caused by association with a third party that is experiencing negative publicity due to poor service quality or unethical practices.

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4 factors that impact your third-party risk profile

Your organization’s third-party risk profile will typically be influenced by the following four factors:

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1. Function sensitivity: The more direct and critical a third party’s contribution toward your operations, the greater their corresponding risks. Threats are particularly prominent if a third party performs customer-facing or manufacturing functions in your organization.
2. Number of third parties: A higher number of third parties means more risks to consider. It also implies that your approach to third parties should be more mature and systemized.
3. Size of third parties: Organizations working with numerous third parties on a smaller scale tend to face higher risk levels than those that consolidate their supply chain with fewer large partners. This is mainly because smaller third parties might not have elaborate systems in place to protect their partners (i.e., your organization) from risks.
4. Geographic complexity: Geographically dispersed third parties involve compliance with numerous local and international laws, regulations, and trade agreements, all contributing to compliance risks.

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Regardless of your risk profile’s specifics, you can easily stay on top of most external threats and avoid unpleasant surprises with a third-party risk management (TPRM) program. 

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Importance of managing third-party risks with a TPRM program

Having a formalized third-party risk management program is essential to fast and effective vendor onboarding. It’s also crucial for maintaining a balanced security posture throughout your partnerships with third parties. A well-implemented program offers many benefits, most notably:

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• Undisrupted compliance: Many activities and systems you’ll set up as a part of your TPRM program draw from established regulations and standards, making it easier to follow necessary guidelines. 
• Enhanced asset and data security: Robust cybersecurity is an essential component of TPRM. By implementing the right policies, controls, and review mechanisms, you can minimize the chances of your data being compromised due to third-party exposure.
• Business continuity and effective risk response planning: TPRM helps prevent operational disruptions by giving you a complete overview of the risks you need to mitigate. For example, you may want to finalize backup vendors to ensure your supply chain remains stable if an existing supplier fails to meet your demands.
• Reduced liability for third-party breaches: The average cost of a data breach was $4.45 million in 2023. TPRM lets you decrease your attack surface and minimize damages if such a breach happens to a third party.
• Improved customer trust: Customers are typically more confident about buying from an organization that can protect them from threats through a comprehensive risk management program.

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{{cta_simple17="/cta-modules"}}| Webinar: Vendor risk management

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How to minimize and mitigate third-party risks

TPRM involves various practices, but you can split them into three general steps:

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1. Perform third-party due diligence
2. Maintain a third-party inventory
3. Enable continuous monitoring

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Step 1: Perform third-party due diligence

Due diligence is the process of closely examining and evaluating third parties before they enter into a contract with an organization. It can be performed repeatedly—typically, at least annually—to keep up with changes in the risk landscape and reassess third parties as needed.

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Organizations typically use questionnaires to conduct thorough due diligence in a formalized, predictable way. The result of this process should be a detailed report containing the following data:

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• Basic company information
• Financial data
• Cybersecurity risk profile
• Compliance and reputational risks

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Step 2: Maintain a third-party inventory

Third parties working with your organization should be added to a centralized inventory from which you can manage their related risks without excessive manual work. Consider categorizing third parties by risk levels, which can be calculated based on several factors, such as:

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• Amount, classification, and sensitivity of shared data
• Service delivery and uptime
• Business functions impacted

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The best way to get a unified overview of your third-party risks is to implement a modern risk management software solution. Look for a platform that complements your current system and enables features for streamlined maintenance of third-party inventory.

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Step 3: Enable continuous monitoring

Your organization doesn’t have control over third parties’ operations and risk profiles, so you need to continuously monitor them to spot and resolve any issues proactively. Your third-party risk landscape will inevitably evolve with time—get the best results by employing monitoring workflows at a cadence that works for your industry.

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Specifically, regularly monitor the following aspects of your relationships with third parties:

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• Performance according to predefined security metrics
• Strategic or operational decisions that might impact your organization
• Current security posture
• Any changes in a third party’s regulatory compliance posture

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Much like third-party inventory and categorization, ongoing monitoring can be simplified and automated with the right risk management platform. 

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Manage third-party risks effortlessly with Vanta

Vanta is a comprehensive trust management platform that helps organizations of all sizes automate compliance, manage risk, and prove trust. It provides a Vendor Risk Management solution that streamlines TPRM through an array of features, such as:

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• Centralized vendor inventory and a detailed dashboard for real-time tracking
• Automated risk assessments and third-party scoring based on configurable parameters
• Simplified security questionnaires with pre-built workflows and security review tracking
• Shadow IT discovery to detect hidden third parties within your network

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Vanta has over 300 integrations, letting you connect with other tools you need to maintain your security posture. You and your network of third parties can also leverage Vanta’s dedicated Trust Center to share security reports and questionnaires in a more secure and efficient manner.

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For a closer look at Vanta, watch our webinar. Or schedule a custom demo today.

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