Organizations commonly rely on third parties such as vendors, suppliers, and other business partners to handle critical operations. While third-party relationships can provide many benefits, they also introduce a range of risks that can threaten data security, compliance, and business continuity. Therefore, it's crucial to recognize and manage these risks with a robust Third-Party Risk Management policy.

A third-party risk management policy is a set of guidelines that helps organizations manage risks associated with third-party sources such as vendors, suppliers, contractors, and service providers. This policy provides a clear structure for an organization’s TPRM program, including guidelines for different vendor situations throughout the entire third-party lifecycle.

This blog explains TPRM policies, their key components, and why your organization should implement one. Included is a free TPRM policy template that provides a structured approach to document and address the risks associated with third-party relationships, which your organization can customize to its specific TPRM goals.

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What is a third-party risk management policy?

A third-party risk management policy is a set of guidelines and procedures an organization adopts to manage its third-party risk management program. This program includes identifying, evaluating, and mitigating any risks associated with third parties such as vendors, suppliers, contractors, and service providers.

This policy safeguards the organization from potential adverse impacts that may arise from these third-party relationships, such as data breaches, compliance violations, operational failures, and harm to the organization's reputation.

While third-party risk management involves various risks, it is primarily a term used in relation to third-party cybersecurity risk management. This type of risk management involves assessing the vendor's security controls, monitoring their activities, and implementing measures to reduce the risk of a security breach or data loss. Effective third-party risk management is critical for businesses to ensure the security and integrity of their systems and data and to maintain the trust of their customers and stakeholders.

Key components of TPRM policies

A third-party risk management policy includes several key components that help organizations structure their TPRM program, establishing controls and processes for managing any security risks introduced by third parties. These components include:

  • Risk identification
  • Due diligence and assessment
  • Risk evaluation
  • Contract management
  • Continuous monitoring
  • Incident management
  • Termination procedures

These components work best together in a TPRM policy, which provides organizations with structure and established processes for managing their third-party relationships while minimizing risks.

Why organizations need a TPRM policy

Third-party risk management policies provide organizations with various benefits, all aimed at protecting an organization from third-party risks, especially cybersecurity risks. Other benefits of establishing a TPRM policy include:

  • Risk reduction
  • Regulatory compliance
  • Data security
  • Financial stability
  • Reputational protection
  • Operational continuity
  • Strategic alignment
  • Efficient resource allocation

Third-party risks can cause serious security incidents for organizations, so having a robust TPRM policy is vital for organizational stability and business continuity.

Third-party risk management policy template

Below is a free TPRM policy template that covers key sections like risk assessment, vendor onboarding, ongoing monitoring, and organizational roles and responsibilities. Use this template as a starting point to develop a comprehensive TPRM framework that enhances your organization’s security and compliance posture.

Remember to customize this template to fit your organization's needs by incorporating your business objectives, contexts, and regulatory requirements.

1. Purpose

[Organization Name] engages with external entities such as vendors, suppliers, contractors, partners, software providers, and open-source projects to support business operations. Recognizing the risks these third-party relationships introduce, [Organization Name] is committed to managing and mitigating potential disruptions that could impact its operational capabilities and business objectives.

This policy establishes a Third-Party Risk Management (TPRM) program designed to assess, respond to, monitor, and manage the risks associated with [Organization Name]’s third-party relationships. The TPRM program will be aligned with enterprise-wide standards and tailored to meet the specific requirements and risks posed by third-party interactions. Through effective implementation of this program, [Organization Name] aims to protect its data, assets, and mission-critical functions from third-party risks, ensuring sustained business operations and achievement of strategic goals.

2. Organizational roles and responsibilities

The success of this TPRM policy relies on the clear definition and delegation of roles and responsibilities to ensure effective oversight and execution of third-party risk management processes. The following roles are crucial for the administration and enforcement of the TPRM policy.

2.1 Chief Information Security Officer (CISO)

The CISO provides overall leadership and strategic direction for implementing the TPRM policy. They ensure alignment of the TPRM strategy with [Organization Name]’s overall security posture and business objectives, approve third-party risk management frameworks and major risk decisions, and report on third-party risk exposures to the executive management and board of directors. This role may operate under different titles including Chief Information Officer (CIO), Chief Technology Officer (CTO), VP of Security, etc.

2.2 TPRM Team

The TPRM Team develops, maintains, and updates the TPRM policy and associated procedures. This office oversees risk identification, evaluation, and mitigation tasks related to third parties, conducting regular audits and compliance checks on third-party vendors to ensure adherence to the TPRM policy. Additionally, the TPRM Team serves as the central point of communication for issues related to third-party risks. This team may include outsourced Third-Party Risk Analysts.

2.3 TPRM Lead

TPRM Leads each manages different day-to-day operations of third-party risk assessments and monitoring, including leading the due diligence and ongoing monitoring processes for third-party vendors. TPRM Leads ensure that personnel document, communicate, and resolve risk assessment findings in accordance with this policy. TPRM Leads also train the TPRM team on risk assessment techniques and policy enforcement.

2.5 Department Heads

Department heads ensure that their respective departments comply with the TPRM policy during all stages of third-party engagements, including informing the TPRM team about any planned changes in third-party relationships that may affect the organization's risk posture. Department heads work with TPRM leads to address any specific risks related to their department's third-party engagements.

3. Oversight and coordination

[Organization Name] shall establish the following coordination mechanisms to facilitate effective implementation and ongoing management of third-party risks:

3.1 TPRM Committee

This cross-departmental committee, led by the CISO and composed of the TPRM Lead and key Department Heads, meets quarterly to review third-party risk exposures, discuss significant changes in the risk landscape, and adjust the TPRM strategy as necessary.

3.2 Regular reporting

The TPRM Security Office will provide monthly reports on third-party risk status to the CISO, TPRM Committee, and relevant stakeholders, ensuring timely information dissemination and decision-making.

4. Risk tolerance minimum security requirements

[Organization Name]’s Third-Party Risk Management policy sets forth clear guidelines regarding the acceptable level of risk tolerance and the minimum security requirements that third-party vendors must meet to maintain a business relationship with our company. This section outlines these standards and the mechanisms used to enforce them.

4.1 Risk tolerance minimum

[Organization Name] determines its level of risk acceptance by considering the importance of the services offered by third-party vendors and the potential effects on our business operations, reputation, and compliance responsibilities. The TPRM Committee reviews this tolerance level on a yearly basis and modifies it as required based on changes in the business environment and regulatory framework.

4.2 Minimum security requirements

The following outline minimum security requirements all third parties must adhere to when working with [Organization Name]:

  • 4.2.1 Security ratings: Third-party vendors must maintain a minimum security rating that reflects [Organization Name]’s risk tolerance. Ratings are assessed based on security practices, data protection, incident response, access control, and compliance. The minimum acceptable rating is defined by the TPRM Security Office and approved by the CISO using standardized tools.
  • 4.2.2 Continuous monitoring: [Organization Name] continuously scans third-party vendors' systems and networks to detect vulnerabilities, misconfigurations, and non-compliance with minimum security requirements. The monitoring frequency and scope depend on the third-party service's criticality and potential risk to the organization.
  • 4.2.3 Compliance and enforcement: The TPRM team reviews vendors with failing security ratings. Remedial actions include rectification measures, enhanced monitoring, or contract termination if a vendor does not meet contract requirements within the proposed timeframe.
  • 4.2.4 Reporting and documentation: All findings from continuous monitoring and security assessments are documented and reported to the TPRM Committee. Reports include details of the vendor’s compliance status with the minimum security requirements and any corrective actions taken or recommended.
  • 4.2.5 Stakeholder communication: The TPRM Security Office is responsible for communicating with stakeholders about any changes to vendor risk statuses and ensuring all concerned parties understand potential impacts and planned responses.

5. Vendor risk management tools

To effectively manage third-party risks, it is important to have a comprehensive set of tools to help identify, assess, and monitor risks associated with external vendors. This section outlines the various tools that our organization uses as part of our VRM program to ensure that all third-party vendors meet our security and compliance standards.

5.1 Security rating services

[Organization Name] uses security ratings to pre-screen potential vendors and continuously monitor existing ones, ensuring they meet the minimum security standards this policy sets. These ratings evaluate a vendor’s security posture through a quantifiable score based on public and propriety data.

5.2 Risk assessment tools

[Organization Name] uses vendor risk assessment tools to perform initial and periodic risk assessments on each vendor, evaluating cybersecurity practices, compliance with relevant regulations, and operational resilience. These tools automate the risk assessment process by collecting and analyzing data on vendor risk exposures.

5.3 Security questionnaires

[Organization Name] sends risk-mapped customizable questionnaires to vendors as part of the onboarding process and at regular intervals throughout the vendor lifecycle or when significant changes occur within the vendor’s organization or the services they provide. These questionnaires gather detailed information directly from vendors regarding their security policies, practices, and data management procedures.

5.4 Penetration testing

If the third party is a critical vendor, your organization must require them to perform penetration tests. Penetration testing must be conducted annually or bi-annually, depending on the criticality of the vendor’s services. Security personnel use these results to identify vulnerabilities and enforce corrective measures. This type of testing evaluates the security of vendors’ systems by simulating cyber-attacks.

5.5 Compliance tracking tools

Compliance tracking tools track and verify a vendor's compliance status with specific regulatory requirements relevant to the services they provide. These tools ensure ongoing compliance with standards such as GDPR, HIPAA, SOC 2, etc., and document compliance for audit purposes.

5.6 Contract management systems

Contract management systems manage and monitor the contractual aspects of third-party engagements, including compliance with risk-related clauses and conditions. [Organization Name] uses these tools to enforce and track adherence to security and risk management requirements specified in contracts with third parties.

5.7 Vendor portals

Vendor portals streamline communication and information sharing with vendors regarding risk management practices and requirements. Portals are a central hub for submitting and reviewing security documentation, risk assessments, and compliance certificates, facilitating transparency and efficiency in vendor interactions.

5.8 Automated alerting systems

Automated alerting systems provide real-time alerts when a vendor’s risk status or security posture changes. This system is integrated with other VRM tools to trigger notifications based on predefined risk thresholds, ensuring that any risk exceeding the organization’s tolerance is quickly identified and addressed.

5.9 Continuous monitoring software

This software continuously monitors and evaluates the security and operational status of third-party vendors, providing ongoing visibility into vendor activities, alerting the organization to new risks or changes in risk levels, and enabling proactive management of potential issues.

6. Vendor onboarding process

This section outlines the procurement process and criteria for the due diligence and evaluation of prospective third-party vendors to ensure they align with the organization’s VRM objectives and risk thresholds.

6.1 Due diligence process

  • 6.1.1 Initial screening: Prospective vendors must undergo an initial screening process, which collects and reviews basic information about the vendor's business, financial stability, and market reputation. This preliminary step helps determine whether a prospective vendor meets the organization's basic criteria and standards.
  • 6.1.2 Comprehensive due diligence: Following initial approval, a more detailed due diligence process begins. This includes security assessments, compliance reviews, operational resilience evaluations, and reference checks.
  • 6.1.3 Criticality rating assignment: A potential vendor is assessed for criticality during due diligence based on factors like the nature of data accessed, the vendor's role in operations, and the difficulty of replacing them. The vendor's criticality is then categorized as high-risk, medium-risk, or low-risk.
  • 6.1.4 Risk assessment: A risk assessment is conducted to evaluate the identified risks against [Organization Name]’s predefined risk threshold. This assessment considers the criticality rating, the results of the security and compliance reviews, and any other relevant risk factors.
  • 6.1.5 Approval and risk mitigation: If the vendor meets or exceeds the  [Organization Name]’s VRM objectives and falls within acceptable risk thresholds, they proceed to final approval. If any risks exceed acceptable levels are identified, they must be mitigated through additional controls, revised contract terms, or specific vendor commitments before proceeding.
  • 6.1.6 Contract finalization: Upon successful completion of the due diligence and risk assessment processes, and once all risk mitigation strategies are in place, a contract can be finalized. This contract will include all necessary clauses related to compliance, data security, risk management responsibilities, and penalties for non-compliance.
  • 6.1.7 Vendor onboarding: The vendor is formally onboarded and integrated into [Organization Name]’s systems and processes. This includes providing access to necessary resources, conducting training on compliance and security requirements, and establishing lines of communication for ongoing management and reporting.

6.2 Failed due diligence outcomes

  • 6.2.1 Rejection of vendor: If a prospective vendor fails the due diligence process by not meeting the necessary security, compliance, or operational requirements or poses a risk beyond the [Organization Name]’s defined tolerance, the pending partnership may be revoked.
  • 6.2.2 Communication and feedback: The decision and the reasons for rejection are communicated to the prospective vendor, who has an option for feedback to understand the decision-making process, ensuring transparency and fairness in vendor selection.

7. Vendor criticality

This section outlines the methodology used to assess the criticality of vendors, which informs  [Organization Name]’s management and monitoring strategies based on the potential impact a vendor could have on our organization’s operations, security, and compliance.

7.1 Determination of vendor criticality

Vendor criticality can be categorized into three main levels: High, Medium, and Low. Each level reflects the potential impact on [Organization Name]’s operational integrity, business continuity, data security, and compliance status. The criticality assessment is based on a combination of quantitative and qualitative evaluations conducted using various tools and metrics.

  • 7.1.1 High criticality: This category includes vendors whose failure or breach could significantly disrupt critical business operations or lead to substantial non-compliance or security issues. Examples include vendors handling sensitive or regulated data, providing essential infrastructure services, or being integral to the supply chain.
  • 7.2.2 Medium criticality: These vendors are necessary for business operations, but their failure would not result in immediate or catastrophic disruption. Examples of such vendors include those who provide non-critical but important services that have indirect impacts on [Organization Name], or those whose services or products are more easily replaceable.
  • 7.3.3 Low criticality: These vendors are necessary for business operations, but their failure would not result in immediate or catastrophic disruption. Examples of such vendors include those who provide non-critical but important services that have indirect impacts on [Organization Name], or those whose services or products are more easily replaceable.

7.2 Tools used to determine criticality

  • 7.2.1 Security ratings: These ratings are utilized to gain a real-time, objective measure of a vendor's security posture. Higher security risks usually contribute to a higher criticality rating, particularly if those risks directly impact  [Organization Name]’s business operations or data security.
  • 7.2.2 Risk assessments: These assessments are comprehensive evaluations that analyze the operational and security risks a vendor may pose. This process includes reviewing the potential impacts of a vendor’s failure, the nature of data accessed, and the vendor's compliance with relevant regulations.
  • 7.3.3 Questionnaires: These questionnaires are tailored to help gather specific information directly from the vendor about their business practices, security measures, data handling practices, and compliance with standards. The responses are critical in assessing how integral the vendor is to [Organization Name]’s business operations and what risks they might carry.

7.3 Criticality review process

  • 7.3.1 Initial assessment: When a vendor is first considered for engagement, the TPRM team conducts an initial criticality assessment using the tools mentioned above. This initial rating is provisional and subject to confirmation.
  • 7.3.2 Ongoing re-assessment: Vendor criticality is not static and is reviewed regularly or when significant changes occur in the vendor’s services, our business needs, or the regulatory environment. This process ensures that the criticality rating remains current and reflective of the actual risk.
  • 7.3.2 Documentation and reporting: All criticality assessments and subsequent updates are thoroughly documented. Reports are maintained within the TPRM system and are accessible for audit purposes and routine reviews.

8. Ongoing vendor monitoring

Ongoing monitoring ensures that all third-party vendors continuously adhere to the agreed-upon standards and regulations throughout the duration of their engagement with  [Organization Name]. This section outlines the continuous monitoring processes that are implemented after the initial due diligence phase.

8.1 Objectives of ongoing monitoring

  • 8.1.1 Ensure compliance: Continuous oversight to ensure that vendors meet the compliance requirements of all relevant laws, regulations, and standards that impact their services to our organization
  • 8.1.2 Maintain security standards: Regular assessments to verify that vendors maintain high levels of security as per their contractual obligations and  [Organization Name]’s security requirements
  • 8.1.3 Detect and address changes: Identify any changes in the vendor’s service delivery, business stability, or security posture that might affect their risk level or performance.

8.2 Monitoring methods

  • 8.2.1 Automated security scanning: Automated tools are used to scan vendors' systems and services for vulnerabilities on a regular basis. This process includes utilizing security rating services to continuously monitor the vendor's security posture. Depending on the vendor's criticality, these scans can be conducted monthly, quarterly, or bi-annually.
  • 8.2.2 Regulatory compliance audits: Scheduled and ad hoc audits are conducted to ensure that vendors continue to comply with relevant regulatory requirements, including vendors handling sensitive data or operating in heavily regulated industries. Documentation of compliance status and any audit findings are reviewed and addressed promptly.
  • 8.2.3 Performance reviews: Regular performance reviews are conducted to assess the quality and reliability of the vendor's services. Reviews are based on performance metrics agreed upon at the start of the contract and monitored through key performance indicators (KPIs).
  • 8.2.4 Regular risk assessments: Periodic risk assessments are conducted annually to identify any new or evolving risks associated with the vendor. These assessments consider changes in the vendor’s business, the external environment, or within [Organization Name]. More frequent assessments may occur if significant changes are implemented.
  • 8.2.5 Stakeholder feedback: Feedback is gathered from internal stakeholders of the vendor’s services to gain insights into the vendor’s performance and any issues that may not be evident through automated systems or formal audits.
  • 8.2.6 Contract compliance monitoring: The vendor’s adherence to contractual terms, particularly those related to security and compliance obligations, is reviewed on an ongoing basis. Contract management tools alert the TPRM team about upcoming renewals, terminations, or breaches of contract.

8.3 Response procedures

  • 8.3.1 Escalation process: [Organization Name] has established clear guidelines for escalating issues found during monitoring, including who is responsible for taking action and the timelines for response.
  • 8.3.2 Remediation and incident response plans: Vendors are provided with procedures for addressing any non-compliance, security issues, or other concerns identified during monitoring. This process involves  [Organization Name] and vendor working together to develop and implement corrective action plans.
  • 8.3.3 Contractual adjustments: If ongoing issues are identified, adjustments to the vendor contract may be necessary to better protect the organization and enforce compliance.

8.4 Reporting and documentation

  • 8.4.1 Regular reporting: Management will receive monthly or quarterly reports detailing vendor performance, compliance status, and any issues or risks identified.
  • 8.4.2 Documentation: For auditing and review purposes, comprehensive records are maintained of all monitoring activities, findings, and communications with the vendor.

9. Vendor contract termination

This section outlines the procedures and consequences associated with the termination of vendor contracts due to violations of the TPRM policy, including failure to meet required standards, compliance issues, or breaches of contract terms.

9.1 Grounds for termination

  • 9.1.1 Non-compliance with TPRM policy: A vendor fails to adhere to specific security measures, operational requirements, or regulatory compliance as stipulated in the TPRM policy and the contractual agreement. Examples include inadequate data protection, unauthorized data access, and failure to maintain the agreed-upon security certifications or standards.
  • 9.1.2 Breach of contract: A vendor violates any contractual obligations that relate to performance standards, confidentiality, data security, and compliance with laws and regulations. This contract breach includes failure to correct deficiencies or address issues highlighted during regular audits, assessments, or as notified by [Organization Name].
  • 9.1.3 Operational failures: A vendor continuously underperforms or cannot meet service level agreements (SLAs), which critically impacts our operations. Significant disruptions caused by the vendor affect [Organization Name]’s business continuity or operational integrity.

9.2 Termination procedures

  • 9.2.1 Notification: The vendor will receive a formal notification outlining the reasons for potential contract termination. This notice will specify the nature of the violation, the supporting evidence, and any prior warnings issued. Vendors will typically be given an opportunity to respond to the allegations, rectify breaches, or appeal the decision within a specified timeframe, usually 30 days.
  • 9.2.2 Rectification period: If applicable, a rectification period may be offered, allowing the vendor to correct the breach and comply with the policy requirements. The length and terms of this period depend on the severity and nature of the breach. Failure to rectify the cited issues within the given timeframe will result in immediate contract termination.
  • 9.2.3 Formal termination: If [Organization Name] pursues termination post-notification and rectification period (if provided), the contract will be formally terminated in accordance with the terms specified within the agreement. Access to all organizational resources, data, and systems will be revoked, and the vendor must comply with all contract exit requirements, including the return or destruction of confidential information.
  • 9.2.4 Legal and financial considerations: The termination process will consider any legal implications or financial liabilities incurred by either party. This includes penalties for breach of contract, any outstanding payments, and damages. Legal counsel should review all termination actions to ensure compliance with contractual terms and applicable laws.

9.3 Documentation and record keeping

All proceedings related to contract termination due to policy violations must be thoroughly documented, including the initial notice, communications, corrective actions taken by the vendor, and final termination notices. These records are essential for legal protection and for auditing purposes.

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  • Regulatory compliance tracking: Our compliance reporting feature enables customers to view their own or their vendor’s risk details (including web risks) mapped against recognized security standards or compliance frameworks like NIST CSF or ISO 27001.
  • Vendor security posture tracking: Utilize UpGuard’s data-driven security ratings to gain insight and dynamic measurement of an organization’s security posture.
  • Cybersecurity reporting workflows: UpGuard's Reports Library provides customized reports for different stakeholders in one centralized location. This allows you to effectively report on your third-party risk management program to the Board, C-Suite, and other interested parties.

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