What is Third-Party Risk Management?

Third-party risk management (TPRM) is a subset of overall risk management that focuses on the total vendor ecosystem of your business, including partners, service providers, and even fourth parties—vendors contracted to work with your vendors—if those fourth parties interact with your systems and data.

Managing the risks associated with this ecosystem has never been more important. Our 2024 survey of more than 500 cybersecurity and risk management leaders found that the number of vendors per company and the risk associated with these relationships are on the rise. The average company now works with 237 vendors, while 88% of all security incidents and breaches originate with a third party—that’s an 11% increase over 2023. 

The discipline of TPRM involves identifying, assessing, mitigating, and managing these growing risks. In this overview, we’ll discuss the:

• Importance of sound TPRM practices 
• Challenges to overcome in building and executing a successful program
• Steps in the TPRM process
• Features of a mature TPRM program
• Opportunities to innovate in the process

Why TPRM Excellence Matters for Your Business

The rise in third-party-based security breaches and incidents mirrors organizations' increased reliance on their vendors. Such cybersecurity incidents pose a clear and measurable risk. A 2023 IBM study found that the average cost of a data breach was $4.5M per incident. 

This alone speaks to the need for a robust TPRM approach. But cyber threats are just one of the many kinds of risks that can be introduced through your third-party environment. 

Types of Third-Party Risks

In addition to the aforementioned cybersecurity risks, vendors can expose you to: 

• Operational Risks—A vulnerable third party can lead to disruptions in your supply chain and service delivery.
• Compliance Risks—Failure to meet regulatory requirements can lead to fines or other legal action, which can, in turn, disrupt business operations.
• Financial Risks—Vendors that do not meet service standards can cripple your business activity, with potential impacts on the bottom line. But the financial health of your vendors (or lack thereof) is also an important consideration. 
• Reputational Risks—Third-party related incidents or disruptions of your service can damage your brand in the marketplace.

How TPRM addresses these risks

While the kinds and severity of risks will vary from business to business, third-party risk management processes can help to avoid or mitigate these various risks in a number of ways:

• Regulatory compliance—Vendor assessments that utilize industry-standard frameworks and regulatory guidelines ensure that your vendors are compliant; it’s also important to maintain a regular reassessment schedule with your vendors as regulations change and evolve. 
• Brand protections—TPRM is about building trust that your vendor partners can be an extension of your brand identity; seek vendors that are open communicators and transparent about their own financial and cybersecurity postures.
• Operational continuity—A thorough TPRM program includes business continuity planning; ensure the service-level agreements (SLAs) with your vendors include contingencies for disaster recovery and clearly articulated lines of responsibility and communication.  
• Financial stability—Financial due diligence for your vendors may include a review of financial statements, a general understanding of the viability of their business model, and a detailed service record. 
• Data protections—Fully review the cybersecurity posture of your vendors based on the kinds of data they will have access to and your specific risk factors.  

Common Challenges to Building a Strong TPRM Program

Like any business process, building and maturing a third-party risk management program is ongoing and iterative. There are a number of common challenges that organizations face as they work to build their TPRM discipline, including: 

• Complexity and scale—Managing a large number of third parties can be a hugely complex undertaking for several reasons. Vendor information often exists in multiple systems requiring oversight. Your controls and requirements will change vendor to vendor, making scale more difficult to achieve and impeding automation. And TPRM impacts numerous business stakeholders, each with unique needs and (sometimes competing) priorities
• Limited visibility—Shadow IT, the unsanctioned addition of new technology by a business unit or individual, means your TPRM team may not know every vendor your organization is using. Unless business units adhere to a consistent vendor onboarding process (even for lower-tier vendors and applications), cataloging your entire vendor inventory may not even be possible, and this exposes you to additional risk.   
• Resource constraints—Nearly 87% of companies have a TPRM team of ten or fewer individuals. For these companies, the average team size is six, and the average team member is responsible for assessing 36.7 vendors, not including new or prospective vendors. The average team spends roughly 23.9 hours every week on vendor assessments. And while 86% of companies use some kind of software in their TPRM, the process remains highly manual and time-consuming.
• Lack of transparency—Vendors are protective about the details of their security posture, and many organizations are not proactively transparent with documentation, certifications, or vulnerabilities. This makes the vendor security assessment process more time-consuming and highly manual, often involving several rounds of back-and-forth and clarification. This slows down the procurement process for buyers and the sales cycle for vendors. 

The Third-Party Risk Management Process

Overcoming these challenges requires a strong foundation of a clear, consistent, documented process. In this section, we’ll dive into the steps of a strong TPRM process. 

Step 1: Create a vendor inventory and vendor profiles

A vendor inventory is a centralized repository of every vendor your organization works with and detailed information on each vendor, called a vendor profile. Vendor profiles may vary based on the needs of your business, but they commonly include:

• Security documentation pertaining to the vendor, such as a SOC 2 audit report or certifications
• Vendor contracts
• Documentation related to any existing or potential issues to monitor
• Contact information and the amount you spend with the vendor

Maintaining a strong inventory ensures that you have greater visibility into your third-party ecosystem and can develop a consistent approach for ongoing risk management. Make updating this vendor inventory a necessary step for your vendor onboarding process. 

Step 2: Create a risk ranking methodology for your vendors

Risk ranking is the process of classifying the levels of inherent risk relating to a given vendor. By creating a consistent rubric for determining risk, you can organize your vendor inventory into tiers of risk to better develop a scalable assessment process.

Your risk-ranking criteria may include:

• The kinds of data the vendor will have access to, such as personally identifiable information (PII) for your employees or customers, proprietary intellectual property, or financial records. 
• The volume of data you’re sharing with the vendor
• The systems and networks the vendor can access
• Any regulatory requirements that will apply to the vendor
• The criticality of the vendor to your business operations
• Any specific risk factors for your business or industry you can quantify 

Once you’ve determined the factors that influence risk, create a classification system for ranking. This system can be as simple as identifying High, Medium, or Low-Risk vendors, and this classification can be added to your vendor profiles. 

It’s important that your risk formula accurately reflects the right factors and magnitude of risk for each vendor so you can effectively and consistently allocate the proper resources and time to risk management. If your system over-indexes for high risk, you may spend more time managing these vendors than necessary, while underestimating risk levels can expose vulnerabilities. 

Step 3: Conduct a vendor assessment

A strong risk-ranking approach gives you an objective view of your vendor environment, which helps you identify where risks may occur and diagnose the potential impact of an incident. Based on this degree of risk, you can determine the appropriate type of assessment for your vendor risk tiers. 

The assessment process should thus correspond to your risk factors and include:

• Required questions—What are the essential pieces of information you need to determine acceptable levels of vendor trust? Is there an industry-standard framework (such as CAIQ, SIG, or ISO 27001) that you can utilize to answer these questions, or is it necessary to customize a questionnaire based on unique circumstances or degree of inherent risk?
• Assessment frequency—What is the right schedule for reassessment based on risk category? 
• Additional review—Because there are several kinds of third-party risks, a questionnaire or framework may only be one of several types of information you need to make a secure, informed decision on a vendor. Determine whether you require additional, specific documentation for certain controls or use cases, attestation of financial statements from a certified public accountant (CPA), or even an on-site visit to validate business continuity plans. 
• Tracking and documenting—Create a single system of record for cataloging and tracking risk factors, as well as outlining next steps. 

Step 4: Develop a remediation plan

So far, the steps in the process have helped you identify risk factors, group vendors by tiers of risk, and apply consistent assessment criteria based on those risk groups. This process allows you to: 

• Properly allocate resources to risk mitigation, management, and incident response
• Determine the cadence and veracity of regular reassessments 
• Establish proper lines of communication, collaboration, and accountability among business units and stakeholders, so you can maintain proper visibility into your vendor ecosystem, prevent shadow IT, and recognize any changes to your risk profile 
• Document a specific business continuity plan to use in the event of an incident

Elements of a Mature Third-Party Risk Management Program

Once you’ve established a clear process for identifying, assessing for, monitoring, and mitigating risk, you can take steps to refine and mature your program.

There are many reasons to continue evolving and sharpening your approach to third-party risk management. Mature TPRM programs improve key business outcomes, including:

• Faster, safer procurement—TPRM excellence helps to eliminate friction or redundancies in the purchasing process, so stakeholders across the business can more quickly add the solutions and services they need to grow your business. For vendors, mature TPRM can accelerate the sales cycle, too. 
• Greater insight—With improved visibility through the TPRM process, your organization can make more sophisticated decisions about the types of vendors you work with, better understand your risk tolerance (which may, in turn, allow you to take bigger swings on innovation); and give you richer cost/benefit analyses to help control costs and ensure your vendors are providing value. 
• Efficient resource management—Optimized TPRM programs are critical for teams with limited headcount or resources because they help them clearly identify the best use of their finite resources. Time saved through hyper-efficient TPRM can be reallocated away from manual, administrative tasks and toward more business-critical security activity.

And of course, great TPRM reduces costly risks to your business. Here are the six core elements of a fully mature third-party risk management program.

1. Program governance

Governance of your third-party risk management program establishes clear lines of responsibility and accountability, ensuring there are defined roles for a diverse group of stakeholders across the organization—a list that may include representatives from IT, Compliance, Legal, Procurement, and Cybersecurity. 

Strong governance establishes oversight, accounts for regulatory compliance requirements, details lines of communication and reporting, and lays a foundation for continuous improvement. A great program also helps to maintain vendor relationships through contract management and ongoing transparency. 

TPRM governance includes:

• The creation of an oversight committee of key stakeholders
• Defined metrics for reporting to senior management/boards of directors
• Contract language for vendor security requirements
• Documented requirements for fourth parties 

2. Policies and procedures

Policies and procedures provide a standardized and consistent approach to managing third-party risks. They create a framework for assessing, monitoring, and mitigating risk associated with vendors in your supply chain, aligning every part of your business to shared practices to reduce gaps and inconsistencies. 

You should have clear policies in place for identifying and measuring risk, assigning controls for risk reduction, and planning for crises and incident response. You should also document standards for vendor relationships, including expectations for vendor performance and ongoing compliance.

3. Risk assessment processes

The assessment process helps identify potential risks associated with engaging third parties. By conducting these evaluations, organizations can uncover risk factors, including data-security vulnerabilities, compliance gaps, financial instability, operational weakness, and reputational risks. 

In addition to helping to manage risk, the assessment process is critical for demonstrating due diligence, aiding in procurement and vendor selection, and building strong business relationships with the third parties you rely on. 

4. Ongoing program management through key performance indicators

The only way to manage the outcomes of your third-party risk management program is to measure results. Metrics around risk indicators, performance, and compliance—aligned to proper stakeholders across the business through transparent communication—guide informed decisions about vendor selection, contract negotiations, risk-mitigation strategies, and resource allocation. 

Establish baseline metrics drawn from historical data to set realistic targets for improvement. These benchmarks should reflect your organization’s risk appetite and compliance goals. Base performance on data from all relevant sources, including risk assessments, compliance reports, vendor performance evaluations, and audit findings. Aggregate data for a comprehensive view of overall TPRM performance.

5. Data and technology

TPRM involves handling vast amounts of data among multiple vendors and sources. Technology solutions provide efficient data-management tools that allow organizations to centralize, store, and access all that data quickly and easily, so relevant information is always readily available for decision-making and analysis. 

There are many technology options available, but there are several important aspects to consider when selecting your platform or solution. Your tool should be easy to use and adopt, scale with your growing business, integrate with other systems you use most frequently, and help you track and report on important metrics.

6. Integrated AI

Artificial Intelligence makes it possible to automate the vendor assessment process, generate insights from a wider range of data sources, and maximize existing resources to assess more vendors in greater detail. 

A fully optimized, mature TPRM program integrates AI solutions with established workflows, a centralized system of record, and a defined governance model to generate automated responses to your security assessments. AI-first TPRM gives your program the flexibility to more easily and safely exchange information with your vendors and better manage risk. 

Optimized for Innovation: Next Steps for Modern, AI-First TPRM

As we’ve mentioned, TPRM is an ever-evolving process due to constant changes in technology, increased reliance on third parties to achieve scale and accelerate capability, and adaptable cybercriminals and bad actors. 

Excellent TPRM programs have the robust foundation necessary to keep pace with these near-constant changes—if they can remain nimble enough to innovate, and if they avoid some of the common growing pains of maturing TPRM teams.

Moving past ‘Legacy TPRM’

One of the biggest hurdles to creating a fully modern TPRM discipline is overcoming the questionnaire-only approach to vendor assessments. 

There are many good reasons to use a customized security questionnaire in your TPRM process: they ensure your specific risk factors are addressed, they help resource-strapped teams organize information quickly and consistently, and they can be updated as needs change. 

The problem is that this is often a manual process of sending the questionnaire, waiting for a response, copious back-and-forth haggling over those responses for clarification, and sifting through reams of security documentation hunting for a single piece of info—if you get a response at all. Questionnaire-only TPRM also limits the kinds of security data you can utilize in your assessments and makes the two-way exchange of information between you and your vendors more arduous. 

This highly manual approach is ‘legacy’ TPRM, and it causes many organizations to take on unnecessary risks and cut corners in their TPRM process. Survey data shows that 93% of organizations would assess more of their vendors if they had the time or resources to do so, while 96% of companies report that they would do more in-depth assessments.  

Outcomes of Modern TPRM 

The goals of modern TPRM are the same goals as every approach to vendor management: identify, avoid, and mitigate risk associated with your third parties. 

But a modern approach incorporates AI-first automation and insight to shift the focus away from administrative tasks so you can focus resources on actual risk mitigation. The key outcomes of modern TPRM are:

• A centralized system of record for all available security documentation. 
• Automated assessments that allow you to assess all the vendors you’d like without at the depth of assessment you need without adding headcount. 
• Cost reduction through greater efficiencies that reduce waste and increase the pace of assessments.
• Access to a wider range of security data and documentation than using questionnaires alone, allowing you to generate more in-depth insights to aid decision-making. 
• More risk mitigation as the time and resources saved on manual assessments can be applied to actual risk management as opposed to managing emails, links, multiple systems, or spreadsheets. 

AI’s Role in Modern TPRM

The kind of rapid insight and automation necessary to achieve the goals of Modern TPRM is only possible with AI integrated at every step of the process.

AI is the single biggest development impacting our industry. AI capabilities use Large Language Models (LLMs) in combination with your repository of both structured security data (such as answers to specific, customized questionnaires or established frameworks) and unstructured security data (such as raw SOC 2 reports or trust centers) to fully understand your security posture. 

Generative AI then makes it possible to query your database of documentation to get detailed answers to security questions in plain language—effectively automating the assessment process by unlocking the insights across all available data sources. 

Components of an AI-first approach

AI-first, Modern TPRM builds on the foundational processes of your mature program—a system of record, finely calibrated risk ranking criteria, a detailed vendor inventory, strong governance, and stakeholder engagement. In addition to building these disciplines, AI-first TPRM should also include:

• Clear systems of control—Your TPRM and security team should be able to maintain continual oversight of AI-based automated responses during the assessment process. Look for an AI solution that allows you to control exactly what information the AI model has access to and be able to audit the outputs of your automated responses. 
• Trust validation—Your AI TPRM solution should include key features to ensure trusted, consistent outcomes. Your AI model should not respond to questions if it doesn’t have evidence of an answer. The responses you do receive should include a confidence score to help you spot questions that require additional follow-up, document citations that validate the response and help you avoid digging through hundreds of pages of documents, and the ability to accept or reject a response. 
• Continual improvement—Select an AI solution that allows you to continually add validated, vetted responses to your document repository. This will allow the AI model to access those responses in future assessments and provide answers to more questions with greater confidence and accuracy. Your AI tool should also be able to create summaries and generate metrics for reporting and to measure the maturity of your program. 

Whistic’s AI-First TPRM Platform

Whistic’s all-in-one TPRM Platform for both buyers and vendors is the industry leader and gold standard in fully integrated AI. The Whistic AI-first platform comes standard with these ground-breaking capabilities:

• Knowledge Base and Smart Search—Find answers to security questions fast by automating searches across your entire library of documentation; receive context-rich responses in minutes, complete with links to sources and confidence scores. 
• Smart Search for Vendors—Quickly find answers to questions about a specific vendor using information you’ve already collected.
• Vendor Insights—Ask questions that apply across your entire vendor catalog to find out which third parties meet a requirement without having to search through records individually.
• Smart Response—Vendors can reduce the amount of time it takes to respond to a questionnaire request from days or weeks to minutes with AI-generated responses to even customized questionnaires. Review the sources and confidence levels of the auto-populated answers before you share the completed assessment. 

Whistic AI also has a specific set of capabilities designed especially for automated assessments, called Assessment Copilot:

• SOC 2 Summaries—With a single click, extract key details and risk insights aligned to your specific controls from hundreds of pages of SOC 2 reports to generate a customized summary. This eliminates the need to pore through lengthy reports line-by-line. 
• Vendor Summary—Automatically identify, assess, and measure risk and compliance against your controls from all available data sources. 
• Automated Review—Generate a vendor’s final assessment report, review findings, and make risk-based decisions informed by AI insights and automation. 

Conclusion

Your TPRM program should be an essential part of your overall cybersecurity and risk functions. Based on the specific needs and risk factors of your business, TPRM helps to identify and mitigate myriad vulnerabilities that may arise from your vendor ecosystem. 

By building sound processes and practices, your program can mature rapidly to scale at the pace of your business, deliver value to stakeholders across the business, and pave the way for an AI-first, fully automated vendor assessment process—so you better allocate resources to risk mitigation, helping you to avoid financial risk, reputational harm, and regulatory non-compliance. 

If you’re interested in learning more about how Whistic’s AI-first platform can be the cornerstone of your total TPRM program, schedule a brief consultation with our team. We’ll show you how it works for businesses of all sizes and industries—no matter where you’re starting from.