What Is Third-Party Risk Management? TPRM Clearly Explained

Third-Party Risk Management (TPRM) is the process of analyzing and minimizing risks associated with outsourcing to third-party vendors or service providers.

There are many types of digital risks within the third-party risk category. These could include financial, environmental, reputational, and security risks.

These risks exist because vendors have access to intellectual property, sensitive data, personally identifiable information (PII), and protected health information (PHI).

Because third-party relationships are vital to business operations, Third-Party Risk Management is an essential component of all Cybersecurity programs.

What is a Third-Party?

A third party is any entity that your organization works with. This includes suppliers, manufacturers, service providers, business partners, affiliates, distributors, resellers, and agents.

They can be upstream (suppliers and vendors) and downstream (distributors and resellers), and can include non-contractual entities.

For example, they could provide a SaaS product that keeps your employees productive, provide logistics and transportation for your physical supply chain, or they could be your financial institution.

What's the Difference Between a Third-Party and a Fourth-Party?

A third party is a supplier, vendor, partner, or other entity doing business directly with your organization, whereas a fourth-party is the third-party of your third party. Fourth parties (or "Nth parties") reflect relationships deeper in the supply chain that aren't necessarily contractually contacted to your organization but are connected through third parties.

Learn more about mitigating fourth-party risk.

Why is Third-Party Risk Management Important?

Third-party risk management is important because the use of third parties, whether directly and indirectly, impacts your cybersecurity. Third-parties increase the complexity of your information security for several reasons:

  1. Every business relies on third-parties as it's often better to outsource to an expert in a given field.
  2. Third-parties aren't typically under your control nor do you have complete transparency into their security controls. Some vendors have robust security standards and good risk management practices while others leave much to be desired.
  3. Each third-party is a potential attack vector for a data breach or cyber attack. If a vendor has a vulnerable attack surface it could be used to gain access to your organization. The more vendors you use, the larger your attack surface and the more potential vulnerabilities you could face.
  4. The introduction of general data protection and data breach notification laws like GDPR, CCPA, FIPA, PIPEDA, the SHIELD Act, and LGPD have dramatically increased the reputation and regulatory impact of inadequate third-party risk management programs. For example, if a third-party has access to your customer information, a data breach at that third-party could result in your organization facing regulatory fines and penalties–even if you weren't directly responsible for the breach. A famous example of this is when one of Target's HVAC contractors led to the exposure of millions of credit cards.

Read our complete guide on the importance of third-party risk management.

What Types of Risks Do Third-Parties Introduce?

There are many potential risks that organizations face when working with vendors. Common types of third party risks include:

  • Cybersecurity risk: The risk of exposure or loss resulting from a cyberattack, security breach, or other security incidents. Cybersecurity risk is often mitigated via a due diligence process prior to onboarding a vendor and continuous monitoring throughout the vendor lifecycle.
  • Operational risk: The risk of a third-party causing disruption to the business operations. This is typically managed through contractually bound service level agreements (SLAs), and business continuity and incident response plans.  Depending on the criticality of the vendor, you may opt to have a backup vendor in place which is common practice in the financial services industry.
  • Legal, regulatory, and compliance risk: The risk of a third-party impacting your compliance with local legislation, regulation, or agreements. This is particularly important for financial services, healthcare, and government organizations and their business partners.
  • Reputational risk: The risk of negative public opinion due to a third-party. Dissatisfied customers, inappropriate interactions, and poor recommendations are only the tip of the iceberg. The most damaging events are third-party data breaches resulting from poor data security, like Target's 2013 data breach.
  • Financial risk: The risk that a third-party will have a detrimental impact on the financial success of your organization. For example, your organization may not be able to sell a new product due to poor supply chain management.
  • Strategic risk: The risk that your organization will fail to meet its business objectives because of a third-party vendor.

Why You Should Invest in Third-Party Risk Management

There are a number of reasons why you should invest in third-party risk management:

  • Cost reduction: It's appropriate to think of third-party risk management as an investment. It costs you money (and time) upfront but saves you money over the long-term. The average cost of a data breach involving third-parties is $4.29 million. An effective third-party risk management strategy can dramatically reduce the risk of a data breach.
  • Regulatory compliance: Third-party management is a core component of many regulatory requirements such as FISMA, SOX, HITECH, CPS 234, GLBA, and the NIST Cybersecurity Framework. Depending on your industry and the type of data you handle (e.g. PII or PHI), you may be legally required to assess your third-party ecosystem to avoid being held responsible for third-party security incidents. The truth is third-party risk management is now part of industry standards in most sectors and non-compliance is not an option.
  • Risk reduction: Performing due diligence streamlines the vendor onboarding process and reduces the risk of third-party security breaches and data leaks. In addition to initial due diligence, vendors need to be reviewed on a continuous basis over their lifecycle as new security risks can be introduced over time.
  • Knowledge and confidence: Third-party risk management increases your knowledge and visibility into the third-party vendors you are working with and improves decision-making across all stages, from the initial assessment process to offboarding.  

Learn how to Implement TPRM into your Existing Security Framework.

What Does Third-Party Risk Management Entail?

In order to develop an effective third-party risk management framework that can feed into your overall enterprise risk management, it's important to establish a robust third-party risk management process that includes the following steps.

Step 1: Analysis

Before onboarding a third party, it's important to identify the risks you would be introducing to your organization and the level of due diligence required.

An increasingly popular way of doing is this is to use security ratings to determine whether the external security posture of the vendor meets a minimum accepted score. If it does, you then move onto step 2.

UpGuard Vendor Risk can help you find and assess the security performance of new vendors against 50+ criteria.

Learn how to calculate the risk appetite for your TPRM program.

Step 2: Engagement

If the vendor's security rating is sufficient, the next step is to have the vendor provide (or complete) a security questionnaire that provides insights into their security controls that aren't visible to outsiders.

Consider using UpGuard Vendor Risk to automate your security questionnaire workflows with our in-built questionnaire library. And if you want more information on a specific questionnaire, see our posts on HECVAT, CAIQ, SIG, CIS Top 20, NIST SP 800-171, and VSA questionnaires.

Step 3: Remediation

If the vendor has unacceptable risks, you may decide that you don't want to work with them until they fix the security issues you have found. This is where a tool that can help with remediation is important as without one, you can lose important issues in Excel spreadsheets and email inboxes easily.

We can also help with remediation. The UpGuard Vendor Risk dashboard automatically prioritizes the most critical risks and our remediation workflows ensure risks are resolved quickly and with an audit trail.

Step 4: Approval

After remediation (or lack thereof), your organization can decide whether to onboard the vendor or choose to look for a different vendor based on your risk tolerance, the criticality of the vendor, and any compliance requirements you may have.

Step 5: Monitoring

It's important to not stop monitoring the security of a vendor once they have been onboarded. If anything, it's more important to monitor them as they now have access to your internal systems, sensitive data, and are used in your business processes.

This is where continuous security monitoring (CSM) comes in. Continuous security monitoring (CSM) is a threat intelligence approach that automates the monitoring of information security controls, vulnerabilities, and other cyber threats to support organizational risk management decisions.

Read our guide on continuous security monitoring for more information.

What is a Vendor Management Policy?

A vendor management policy identifies vendors who pose the risk most and then defines controls to minimize third-party and fourth-party risk.

This could include ensuring all vendor contracts meet a minimum security rating, implementing an annual inspection or replacement of existing vendors with new vendors who can meet security standards, or the requirement of SOC 2 assurance for critical vendors.

It may also provide a short overview of your organization's third-party risk management framework and processes.

Many organizations enter vendor relationships not fully understanding how the vendor is managing and processing theirs and their customers' data despite investing heavily in their own internal security controls.

Read our guide on how to create a vendor management policy.

How to Evaluate Third-Parties

There are various solutions and methods that exist for evaluating third-parties. Generally, senior management and the board will decide on the ways that are most relevant to them, which depends on their industry, number of vendors employed, and information security policies. Common solutions and methods include security ratings, security questionnaires, penetration testing, and virtual and onsite evaluations.

Security Ratings

Security ratings, like those offered in UpGuard Vendor Risk, are an increasingly popular part of third-party risk management. They can help with:

Learn more about security ratings.

Security Questionnaire

Security questionnaires (or third-party risk assessments) are designed to help you identify potential weaknesses among your third-party vendors, business partners, and service providers that could result in a data breach, data leak, or other types of cyber attack. If you're looking to add security questionnaires to your third-party risk management processes, see our vendor risk assessment template and guide to the top questionnaires for more information.

And if you're looking for a pre-built library and a complete vendor risk management solution designed to streamline and automate the security questionnaire process look no further than UpGuard Vendor Risk.

Penetration Testing

Penetration testing, pen testing, or ethical hacking, is the practice of testing a computer system, network, or web application's cybersecurity by looking for exploitable security vulnerabilities. Penetration testing can be automated with penetration testing tools or manually by penetration testers.

Read our complete guide to penetration testing here.

Virtual and Onsite Evaluations

Virtual and onsite evaluations are typically performed by an outside entity and can include policy and procedure reviews, as well as a physical review of physical security controls.

What are the Common Challenges of Third-Party Risk Management?

There are a number of common difficulties most organizations face when implementing and running a third-party risk management program.

Lack of Speed

It's no secret that getting a vendor to complete a security questionnaire and processing the results can be a lengthy process. A process that is made worse when questionnaires come in the form of lengthy spreadsheets with no version control, resulting in an error-prone, time-consuming, and impractical process that doesn't scale.

Lack of Depth

Many organizations make the mistake of believing they don't need to monitor low-risk third parties, such as marketing tools or cleaning services. In today's world, you need to be monitoring all vendors, which is why most companies have turned to automated tools like UpGuard Vendor Risk.

Lack of Visibility

Traditional risk assessment methodologies like penetration testing, security questionnaires, and on-site visits are time-consuming, point-in-time, expensive, and often rely on subjective assessment. Additionally, it can be difficult to verify the claims a vendor makes about their information security controls.

Even if a questionnaire reveals the effectiveness of a given vendor's security controls, it only does so for that point in time. IT infrastructure is in flux at most organizations, so it may not reflect the current realities a few months down the line.

This is why organizations are using security ratings alongside traditional risk assessment techniques.

By using security ratings in conjunction with existing risk management techniques, third-party risk management teams can have an objective, verifiable, and always up-to-date information about a vendor's security controls.

According to Gartner, cybersecurity ratings will become as important as credit ratings when assessing the risk of existing and new business relationships…these services will become a precondition for business relationships and part of the standard of due care for providers and procurers of services. Additionally, the services will have expanded their scope to assess other areas, such as cyber insurance, due diligence for M&A and even as a raw metric for internal security programs.

Lack of Consistency

Ad-hoc third-party risk management processes mean that not all vendors are monitored and when they are, they are not held to the same standard as other vendors.

While it's fine, even recommended, to assess critical vendors more heavily than non-critical vendors, it's still important to assess all vendors against the same standardized checks to ensure nothing falls through the cracks.

Lack of Context

Many organizations fail to provide context around their assessment, even though different types of vendor relationships (even with the same vendor) can pose different levels of risk. For example, a supplier may only be used to transfer non-sensitive information such as blog posts while another supplier may handle, store, and process your customer's sensitive data.

While protecting one may not be a priority, taking action to mitigate any risks associated with the latter is critical as they pose a significant risk to you and your customers' privacy.

Many UpGuard Vendor Risk customers use our labeling feature to label vendors based on their criticality, allowing their security teams to focus on the biggest threats first and make effective use of their limit time and budget.

Lack of Trackability

Your organization likely employs hundreds or even thousands of third parties and keeping track of them can be a challenge.

It's important to closely monitor who your vendors are and who have been sent security questionnaires, how much they have answered, and when they were completed.

Lack of Engagement

Communicating the importance of cybersecurity, particularly to time-poor vendors who may have different perspectives and goals than your organization is difficult. It's not uncommon to have to follow up for weeks or even months to get a vendor to answer a questionnaire.

This is why it's so important to have a centralized place where you can send and review security questionnaires without having to keep track of different files and emails.

Learn about the top frustrations of vendor risk management.

What Features Should I Look For in a Third-Party Risk Management Platform?

Software can be an effective way to manage third-party risk. It's important to consider all the lists outlined above when assessing a potential third-party risk management platform like UpGuard Vendor Risk. A good product will be able to address the complete lifecycle from analysis through to continuous monitoring.

Security Ratings

Security ratings or cybersecurity ratings are a data-driven, objective, and dynamic measurement of an organization's security posture. They are created by a trusted, independent security rating platform making them valuable as an objective indicator of an organization's cybersecurity performance.

Just as credit ratings and FICO scores aim to provide a quantitative measure of credit risk, security ratings aim to provide a quantitative measure of cyber risk.  

The higher the security rating, the better the organization's security posture.  

Questionnaire Library

Look for a solution that provides a library of pre-built questionnaires so you can quickly monitor your vendors against industry best practices and regulatory requirements.

Customizable Questionnaires

Beyond standardized questionnaires, some organizations may want to develop their own security questionnaires based on their unique needs and desires. With UpGuard Vendor Risk, you can create your own security questionnaires or pay to have our team of experts create one for your organization.

Scalability and Automation

Not every solution will be able to provide the automation needed to rapidly scale and manage hundreds or even thousands of third parties.

Nor does every solution provide the same level of coverage. If your organization employes small specialist vendors, ensure the solution covers them. For example, UpGuard scans over 2 million organizations every day, and customers can automatically add new vendors.

Remediation Workflows

A platform with remediation workflows will allow you to request remediation from a specific vendor based on automated scanning and completed questionnaires. It will also allow you to view current remediation requests, what risks were requested to be remediated, and when the remediation request was sent.


It's important to be able to report on the results of your third-party risk management program, whether that be to the Board, senior management, regulators, or colleagues. This is why a robust and easy-to-understand reporting capability is an important part of

Fourth-Party Discovery

It's important to understand who your fourth-party vendors are. While you may not have a contractual agreement with them, they can still impact the confidentiality, integrity, and availability of your organization.

For example, even if you don't rely on AWS, but you have lots of vendors who do, an AWS outage could result in your organization being unable to operate as well.

Continuous Monitoring

To ensure you stay on top of new risks, you need a solution that is always up-to-date.

Accuracy and Thoroughness

Your third-party risk management program is only as effective as the data it relies on. If you use security questionnaires, try to use a well-tested template, and if you use security ratings look for ones that adhere to the Principles of Fair and Accurate Security Ratings.  

  • Transparency: UpGuard believes in providing full and timely transparency not only to our customers but to any organization that wants to understand their security posture, which is why you can request your free security rating here and you can book a free trial of our platform here.
  • Dispute, Correction, and Appeal: UpGuard is committed to working with customers, vendors, and any organization that believes their score is not accurate or outdated.
  • Accuracy and Validation: UpGuard's security ratings are empirical, data-driven, and based on independently verifiable and accessible information.
  • Model Governance: While the datasets and methodologies used to calculate our security ratings can change from time to time to better reflect our understanding of how to mitigate cybersecurity risk, we provide reasonable notice and explanation to our customers about how their security rating may be impacted.
  • Independence: No commercial agreement or lack thereof, gives an organization the ability to improve its security rating without improving their security posture.
  • Confidentiality: Any information disclosed to UpGuard during the course of a challenged rating or dispute is appropriately protected. Nor do we provide third-parties with sensitive or confidential information on rated organizations that could lead to system compromise.

Third-Party Risk Management (TPRM) by UpGuard

UpGuard combines Third-Party Risk Management (TPRM) with vendor data leak detection to reduce the risk of data breaches and increase the efficiency of cybersecurity scaling initiatives.

Get a preliminary assessment of your organization's data breach risk. Click here to request your free instant security score now!

Third-Party Risk Management FAQs

What is a third-party risk management?

Third-Party Risk management is a risk management framework focused on identifying and mitigating all forms of third-party risks.

What is a third-party risk?

Third-party risks include any risks to an organization originating from its third-party vendors. Third-party risks commonly refer to vendor security risks.

What is a third-party risk management process?

The third-party risk management process, in the context of mitigating cyber risks, involves identifying critical vendors, continuously monitoring vendor security postures, and remediating security risks before they develop into breaches.

How do you create a third-party risk management program?

Identify all your vendors and their sensitive data access levels. Perform due diligence to compare each vendor’s risks against your risk appetite. Implement security controls to keep vendor risk below your risk threshold. Establish a risk management team for managing ongoing compliance with security regulations.

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What is Third-Party Risk Management?

Third-Party Risk Management (TPRM) is the process of analyzing and minimizing risks associated with outsourcing to third-party vendors or service providers.
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