In 2024, the majority of companies worked with more than 100 vendors, and the average company worked with 237—that’s a 38% increase over 2023. At the same time, third-party risk was increasing: 88% of breaches within the last three years originated with a vendor.

With greater numbers of vendors representing a growing threat, it’s critical that companies have a sound strategy for third-party risk management (TPRM). The discipline of TPRM helps to scope, identify, manage, and mitigate risks that come from third parties—defined as any outside company your business works with, be they suppliers, vendors, resellers, or distributors. It can also extend to fourth parties, which are companies that are contracted to work with your vendors that may have access to sensitive data or systems.

Managing this ecosystem can be a complex undertaking that requires a strategic approach. This guide is intended as a comprehensive TPRM framework that includes:

Essential definitions and terms to understand while building or evolving your process
Key challenges that TPRM teams face (and how to solve them)
Core pillars to implement mature, aligned TPRM programs
AI’s role in moving beyond “legacy” TPRM and embracing a modern approach
How TPRM tools can help you meet your program’s goals

What is TPRM and Why is it Critical?

Third-party risk management is a subset of overall enterprise risk management that focuses on the impact of vendors and service providers in your supply chain.

Every link in your supply chain interacts with at least one aspect of your business infrastructure. The kinds of access will vary depending on the type of third party, but it may include sensitive consumer data, business-critical systems, or proprietary information.

Types of third-party risks

These points of contact with vendors create access for a wide variety of risks, including:

Cybersecurity risks—Cyber threats arise from malicious attacks that compromise critical systems and data. Such security breaches can be massively damaging to your business. A 2023 IBM report found that the average cost of a breach was $4.5M per incident. Vendor security risk-management should be a huge part of your overall TPRM plan.

Operational risks—Vulnerabilities in your third parties can cause disruptions to business-critical systems. For example, say you rely on a cloud-based vendor for your point-of-sale system. If that vendor is compromised or experiences an outage, it may be impossible to operate.

Compliance risks—If you face regulatory requirements, a vendor that falls out of compliance can result in fines or legal action that can disrupt business operations. A vendor may, for example, utilize customer data in ways that violate privacy regulation such as GDPR or CCPA.

Financial risks—This goes beyond just the cost of a breach. The financial stability of your third parties is also an important consideration. An established vendor with a long track record of success may pose a different kind of risk than a start-up.

Reputational risks—Incidents across your third-party ecosystem or disruptions of service can damage the perception of your brand in the marketplace. It can impact consumer trust, expose a key market segment to additional risks, or give competitors a head-to-head advantage.

How TPRM addresses these risks

Third-party risk management helps you get a handle on your specific risks through a process called a third-party risk assessment.

What is a third-party risk assessment?

A TPRM assessment is a systematic approach to evaluating the potential risks that a vendor may pose to your organization. Your specific assessment needs may vary, but in general, an assessment is the collection and analysis of vendor information in order to make informed decisions about the risks you assume by working with a given third party.

There are a number of sources that can be used for conducting a third-party risk assessment:

Standardized questionnaires and frameworks—Typically developed by neutral parties like the National Institute of Standards and Technology (NIST), these usually take the form of a questionnaire your vendors fill out. They are extremely useful because they are vetted, cover a wide variety of risk domains, provide consistency across vendors, and align with industry-specific regulations. Some examples include the NIST Cybersecurity Framework, ISO 27001, and SIG frameworks.
Customized questionnaires—To cover the specific risk needs of your business, you may need to include security questions not included in standards.
Public and private Trust Centers—Many organizations collect their essential security documentation and make it available publicly through their website or other online marketplaces like G2 or Whistic’s own Trust Catalog. These trust centers may also be kept private, requiring permission or the signing of a non-disclosure agreement (NDA) to view sensitive documents.
Previously completed assessments and questionnaires—If your security requirements or the nature of your vendor relationship hasn’t changed since your last assessment, responses to completed questionnaires can be another source of security data. Even if changes have taken place, such previous assessments can be a huge head start.
Security audits—Because vendors are assessed often as part of their sales cycles, they may choose to hire an outside audit firm to validate their security posture. The output of these audits is a thorough report that can be an invaluable source of information. SOC 2 and ISO certifications are two of the most common examples.

How are assessments used in the TPRM process?

By collecting myriad sources of security information, an assessment allows you to identify a wide range of risks that may originate with your third parties. You can use security documentation to assess for:

Regulatory compliance—Security assessments can ensure your vendors are compliant with your regulatory needs. Third-party regulation, particularly around privacy and the use of consumer data, can change rapidly, so it’s important to reassess vendors regularly to ensure continued compliance.
Cybersecurity vulnerabilities—Be sure to have thorough documentation about vendor security controls and practices commensurate with their levels of inherent risk (that is, risk that exists independent of any mitigation or controls) and the kinds of data or systems they’ll have access to.
Operational resilience—It’s important that you assess the continuity planning of your vendors. Ensure that service-level agreements (SLA) in vendor contracts include documented contingencies for disaster recovery or outages, along with clear lines of responsibility.
Financial stability—Conduct financial due diligence as part of your assessment process, which might include a review of financial statements, near- and long-term projections on their industry and business model, and a detailed service record.
Trust and transparency—Ultimately, the purpose of an assessment is not to entirely prevent risk, but to identify risk and partner with the vendor on a plan to monitor and mitigate that risk—including risks to your own brand reputation. Seek vendors that are open and forthcoming with their security posture.

Common Challenges in TPRM

Your business never remains static, and the risks you face evolve, too. Your TPRM program must be adaptable to change. In order to build and mature a nimble program that drives business value, you’ll need to keep in mind some of the key challenges involved in the process. These include:

Scope and complexity—Vendor information can exist in multiple systems, making it difficult to track or collect. You may also have unique controls or requirements for every vendor depending on the business context. You may not historically have a consistent approach to vendor onboarding or the right buy-in from stakeholders. All these factors can make it hard to scale your program and contribute to complexity.
Lack of visibility—Shadow IT occurs when unapproved technology or software is adopted by users in your organization. Your TPRM team may not even know such technology exists in your environment; that makes it pretty hard to assess the risk (at least before it’s too late).
Limited resources—Whistic survey data shows that 93% of organizations would assess more of their vendors if they had the time and talent, while 96% said they would do deeper vendor assessments if they could. But almost 87% of companies—even enterprise organizations—have a TPRM team of ten or fewer individuals. The average team member spends about 24 hours each week on the task.

TPRM software is helping here; 86% of companies use some kind of TPRM software to help. But even for many of these companies, traditional or “legacy” TPRM is still a highly manual process involving multiple document repositories, lots of back-and-forth (and waiting), and manual review of documents.
Lack of transparency—Vendors can be protective about their security posture or non-responsive when it comes to providing information. The process of responding to questionnaires is also manual and time-consuming: Whistic platform data shows that the average vendor response takes 12 days.

Implementing a Modern TPRM Program

Overcoming these challenges requires a strategic, modern approach to TPRM—one that is consistent, engaged with the business, designed for automation and efficiency, and (most importantly) useful in preventing and managing risk. When implementing (or simply updating) your third-party risk management program, develop these six core pillars to get the most out of your program:

1. Governance

This is a documented gameplan for your overall program to create alignment, establish roles and responsibilities, define risk tolerance, create metrics to measure improvement, and engage stakeholders that may include IT, Compliance, InfoSec, Legal, and Procurement. Your governance plan may also include contract language for vendor security requirements.

2. Policies

These are standard, consistent approaches your organization commits to for managing third-party risk. These policies will inform your vendor assessments, risk monitoring, and risk mitigation efforts. Your policies should include a documented process for measuring risk, assigning controls, planning for incident response, and vendor-performance criteria.

3. Process for vendor risk assessments

Your program should have a documented process for assessing the various vendors you may work with. This includes the types of assessments that are required, the types of documents that are sufficient as evidence of compliance, recommendations for mitigation, and a schedule of regular reassessments.

4. Continual improvement through KPIs

Whether building or merely refining your program, use historical data to establish TPRM performance baselines and set realistic targets for improvement based on these metrics. Develop a reporting system for relevant stakeholders to drive improvement and increase visibility.

5. Data management

TPRM requires vast amounts of data that is sometimes collected and stored piecemeal across multiple systems or repositories—even for the same vendor. Your TPRM process should leverage technology to centralize, store, and access data in a uniform way. There are many kinds of TPRM technology that might work; the right solution for your business should be easy to use and adopt, scale with your business needs, integrate with systems you use frequently, and assist with reporting.

6. AI-first capabilities

Artificial Intelligence (AI) can make it faster and more efficient to collect, analyse, and report on vendor risk by automating manual steps in the process. We’ll learn more about how it works in a moment, but look for an AI-first solution; that is, an AI-driven platform that integrates AI into your existing workflows, augmenting them with speed and insights, but without sacrificing oversight, control, and adaptability.

TPRM Best Practices—A Step-by-Step Approach

With the core pillars of your program in place, let’s take a look at what the TPRM process looks like in practice. Here are the four key steps to execute your third-party risk management program:

Step 1: Build a comprehensive vendor inventory

Having visibility into your vendor ecosystem is critical for successful TPRM. A vendor inventory is a centralized location for storing and accessing detailed information on each vendor. This information can be organized into a vendor profile, which may include information like:

Security docs you’ve already collected from the vendor (like SOC 2 reports or certs)
Vendor contracts
Documentation of known risks or potential issues for ongoing monitoring

A good vendor inventory helps you develop a consistent approach to identifying and assigning risk—which allows you to better compare apples to apples when it comes to risk across vendors and better allocate resources to higher risks.

Step 2: Develop a rubric for ranking risk across vendors

Sometimes simply called “risk ranking,” this is the process of classifying levels of inherent risk in a given vendor. When applied to your vendor inventory, this allows you organize vendors into tiers of risk according to your ranking criteria, which may include:

The kinds and volume of data the vendor will have access to
The systems the vendor can access
Regulatory requirements associated with the vendor
Criticality of the vendor to your operations

These risk criteria will allow you to classify vendors using a simple system such as “high risk,” “medium risk,” and “low risk” to develop a consistent and proportionate management approach for each tier.

Step 3: Perform a vendor risk assessment

Risk ranking can tell you which kind of assessment is appropriate for each vendor, as well as how often it’s necessary to reassess them.

The assessment process entails the exchange, collection, and analysis of vendor security documentation. This exchange may take place through a TPRM platform or may be conducted via email. We talked about the various data sources for security info, but most commonly, buyers send their vendors a questionnaire and the vendor responds with either answers or documents from which answers can be culled. (AI, as we’ll see, can fully automate this stage of the process, too).

Step 4: Develop a remediation and mitigation plan

Your assessment will equip you with the information you need to fully understand the risk posed by a vendor. If they meet your risk threshold and you decide to work with the third party, you’ll need a plan for risk remediation.

This can mean requests you make of the vendor to tighten a security control or meet compliance requirements, but it will also include how you continue to work to control risks once the vendor is in your environment. This includes what kinds of resources you dedicate to them, what the role of the vendor is in the process, and how often a reassessment is necessary.

The Role of AI in Modern TPRM

Companies have long taken what we call a “legacy” approach to executing the TPRM process. The manual nature of legacy TPRM limits the amount of data you can access for assessments, adds days or weeks to the process, and leaves more room for human error. With limited resources to carry out manual tasks, many companies simply choose not to do a thorough assessment. All this means more risk.

Modern TPRM, in contrast, utilizes AI integrated with your existing TPRM workflows to automate the manual exchange and analysis of security information. Modern TPRM results in:

Centralized system of record that houses all available security information
Automated assessments so you can utilize the data you have to begin an assessment, reducing the amount of back and forth necessary
Cost reduction through greater efficiency
Simpler exchange of information—vendors can simply send documents rather than manually respond to questionnaires
More time and resources available for actually managing and mitigating risk

Let’s take a look at how it works in practice in Whistic’s Platform.

Features of AI-first TPRM

Whistic AI is the only TPRM solution that integrates AI with your existing workflows through capabilities designed specifically to automate the assessment process. We call this Assessment Copilot.

Assessment Copilot modernizes TPRM in three key ways:

1. SOC 2 Summaries—Rather than manually mine lengthy SOC 2 reports line-by-line, SOC 2 Summaries extract the most critical information, aligned with your specific security needs. The result is a five-page summary of insights, tailored to your business, in minutes.

2. Vendor Summaries—Automatically run your assessment questionnaire against the existing documentation in your repository to determine the security posture of the vendor. Vendor Summaries generate detailed answers to security questions, provide confidence scores for AI responses, and site sources for the response in case you need to do a deeper dive. Once you’ve completed the automated portion of the assessment, you can send a truncated version of your questionnaire for any remaining issues.

3. Vendor Insights—Query your entire vendor inventory at the same time. This is especially helpful in the event of a security incident. For example, if there is a breach of a commonly used software, you will need to identify which of your vendors may be impacted so you can issue a proper reassessment. With Vendor Insights, AI will source answers to these kinds of global questions automatically.

AI for vendors and third parties

Whistic AI also helps vendors to automate the manual steps in their side of the assessment process with a capability called Smart Response.

This allows vendors to create a pre-approved set of documents that can be sourced for security information. When the vendor receives a questionnaire, they can run that assessment against their approved documents to generate responses. In addition to the increased speed, this also allows InfoSec to maintain visibility and control without having to drop everything to answer hundreds of security questions.

Vendors can now respond to more requests faster, accelerating sales cycles and creating greater value.

Conclusions

TPRM is a critical part of your overall organizational risk management program and cybersecurity approach. It allows you to understand, categorize, manage, and mitigate risks—so you can more easily understand the cost/benefit of a vendor and make smarter, more secure business decisions.

AI is helping TPRM to modernize and evolve past its manual, “legacy” stage and into an automated, decision-making value hub for your business. But AI-first, Modern TPRM still relies on sound processes, stakeholder engagement, and metrics-driven improvement. When sound fundamentals are combined with AI capabilities, both sides of the TPRM process—buyers and vendors—can reduce costs, increase speed and efficiency, meet compliance requirements, and reduce harmful risk.

If you’d like to learn more about Whistic’s AI-first platform and see automated TPRM for yourself, schedule a consultation with our team of experts.