What is Third-Party Risk Management? TPRM Explained

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

Third-party risk management is critical for any organization that relies on external vendors or service providers to conduct business. Failing to properly manage these risks can result in significant financial, reputational, and legal consequences.

Sounds alarming, right? It’s because it actually is.

As businesses continue to rely on third-party vendors and service providers for various aspects of their operations, the need to manage and minimize the risks associated with these relationships has become increasingly important. That's where Third-Party Risk Management (TPRM) comes into play. 

In this article, we'll explore what TPRM is, why it's crucial for businesses of all sizes, and the types of digital risks that fall under the TPRM umbrella. We'll also discuss the role TPRM plays in cybersecurity programs and how it helps to protect sensitive information from falling into the wrong hands.

What is considered to be a third-party?

In the context of business and cybersecurity, a third-party refers to any external entity or organization that provides goods, services, or support to a company. This can include vendors, contractors, resellers, suppliers, partners, and service providers. Third-parties are essential to many business operations, but they can also introduce security risks that must be managed and mitigated.

For example, a third-party vendor could provide a SaaS product for your company's HR management or customer relationship management, allowing your employees to be more productive and efficient in their work.

What is third-party security risk?

Third-Party Security Risk refers to the potential cybersecurity risks that an organization faces from the vendors, suppliers, or other third parties that it works with. These risks can arise from third-party access to sensitive data or systems, the use of insecure software or hardware by third-party vendors, or a lack of proper security controls on the part of the third-party. Third-Party Security Risk Management involves assessing, monitoring, and mitigating these risks to ensure that the organization's security posture is not compromised by the actions of third parties.

Why do third-parties pose security and compliance risks?

Third parties, particularly in the context of SaaS usage, can introduce security and compliance risks due to factors such as the statistic mentioned above. When employees use SaaS applications without explicit approval from internal IT departments, it creates potential vulnerabilities and challenges for organizations:

According to a study conducted by IBM, approximately one-third of employees in Fortune 1000 companies utilize software-as-a-service (SaaS) applications that have not received explicit approval from their internal IT departments. (Source)

Shadow IT

The use of unauthorized SaaS apps, also known as shadow IT, bypasses the oversight and control mechanisms of the organization's IT department. This lack of visibility and control increases the risk of data breaches, as IT teams are unaware of potential security vulnerabilities in these unapproved applications.

Compliance Issues

By using unapproved SaaS apps, organizations may unknowingly violate industry regulations and internal compliance policies. Data stored or processed in these applications may not adhere to required security standards or meet data privacy requirements, leading to legal and regulatory consequences.

Data Exposure

SaaS applications that haven't undergone proper security vetting may have weak security controls or inadequate data protection measures. This exposes sensitive organizational data to the risk of unauthorized access, data leaks, or other security incidents.

Suggested reading: What is SaaS Security Posture Management (SSPM)?

Integration Challenges

When employees use a variety of unapproved SaaS apps, it becomes challenging for IT departments to integrate and manage them effectively. This lack of centralized control and coordination increases the complexity of maintaining data integrity, user access management, and overall security across the organization.

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

The terms "third-party" and "fourth-party" are commonly used in the context of business relationships and risk management. A third-party is an external entity that provides goods or services to a company, while a fourth-party is an external entity that manages the relationship between the company and the third-party.

In other words, a third-party is a direct provider of goods or services to a company, while a fourth-party acts as an intermediary between the company and the third-party. Fourth-party entities are often hired to manage the relationship with the third-party, negotiate contracts, monitor compliance, and assess risks.

Understanding the difference between third-party and fourth-party entities is important for businesses to effectively manage risks associated with their external relationships and ensure that they comply with applicable regulations and standards.

Definition of third-party risk management (TPRM)

Third-Party Risk Management (TPRM) is a process of identifying, assessing, and mitigating potential risks that come with outsourcing tasks or services to third-party vendors or service providers. It is a crucial component of cybersecurity programs as third-party relationships are essential to business operations but also presents a significant potential for security breaches and data breaches. By proactively managing third-party risk, organizations can protect their reputation and customer trust and reduce the overall risk of financial and legal liabilities.

What are the key elements of third-party risk management?

1. Identification and classification of third-party vendors: The first step in TPRM is identifying all third-party vendors and service providers that your organization works with and then categorizing them based on the level of risk they pose.

2. Risk assessment and due diligence: Once the vendors are identified, they should be assessed for risk through due diligence checks such as financial stability, reputation, compliance with regulations, and security posture.

3. Contractual controls: Contracts with third-party vendors should include provisions that outline the vendor's responsibilities, service levels, and security measures.

4. Ongoing monitoring and review: Regular monitoring and review of third-party vendor performance and compliance with contractual obligations should be carried out to identify potential risks.

5. Incident response and termination: There should be a plan in place to respond to security incidents involving third-party vendors and to terminate relationships with vendors who do not meet the established risk criteria.

6. Communication and training: Employees who work with third-party vendors should receive training on the risks associated with third-party relationships, and there should be clear communication channels established between the organization and the vendor.

Suggested reading: What is SaaS Governance?

Why is Third-Party Risk Management Important?

Third-Party Risk Management (TPRM) is crucial for any organization that relies on third-party vendors or service providers. Here are some reasons why it is important:

Protection of Sensitive Data

Third-party vendors can access sensitive data, intellectual property, personally identifiable information (PII), and other confidential information. TPRM helps ensure that this data is protected and not compromised.

Compliance

Many industries and organizations have regulatory compliance requirements that extend to third-party vendors. TPRM ensures that these requirements are met by third-party vendors.

Reputation

A security breach or data leak through a third-party vendor can damage an organization's reputation and lead to a loss of trust with customers and partners.

Financial Loss

A security breach or data leak through a third-party vendor can result in financial losses for an organization, including costs associated with data recovery, legal fees, and reputational damage.

Business Continuity

Third-party vendors are often critical to business operations. TPRM helps ensure that these vendors are reliable and can continue to provide services in the event of a disruption.

What are the risks that third-parties bring in?

Third-party vendors can introduce various types of risks to an organization, including:

Cybersecurity Risks: Third-party vendors may not have adequate security measures in place to protect their own systems and networks, which can create vulnerabilities and expose sensitive data to unauthorized access. Examples include:

• Inadequate access controls that allow unauthorized users to view or modify data
• Poor network security that exposes data to hacking or data breaches
• Lack of encryption that puts sensitive data at risk of interception or theft

Compliance Risks: Third-party vendors may not be compliant with regulatory requirements or industry standards, which can result in fines, penalties, and reputational damage for the organization. Examples include:

• Non-compliance with data privacy regulations like GDPR or CCPA
• Failure to comply with industry-specific standards like HIPAA or PCI-DSS
• Violation of anti-bribery or anti-corruption laws

Operational Risks: Third-party vendors may not have effective processes and controls in place to ensure reliable service delivery and operational continuity. Examples include:

• Poor service quality that impacts the organization's operations or reputation
• Inadequate business continuity and disaster recovery plans that disrupt service delivery
• Dependence on a single third-party vendor that creates a single point of failure

Financial Risks: Third-party vendors may not be financially stable, which can lead to supply chain disruptions or contractual disputes. Examples include:

• Bankruptcy or insolvency of a key third-party vendor
• Contractual disputes over pricing, service levels, or deliverables
• Currency exchange rate fluctuations that impact the cost of services

Also read Ensuring Cybersecurity in Finance.

Strategic Risks: Third-party vendors may not align with the organization's strategic goals and objectives, which can create conflicts of interest or reputational damage. Examples include:

• A third-party vendor engaging in practices that conflict with the organization's values or mission
• A third-party vendor that has a poor reputation or is associated with controversial issues
• A third-party vendor that competes with the organization in the same market or industry

You can also take a look at How to Perform a Cybersecurity Risk Assessment for a more comprehensive explanation.

How to conduct a robust third-party management process

Step 1. Identify and assess third-party risks

Before engaging with third-party vendors, it is essential to identify and evaluate the associated risks. This involves creating a comprehensive inventory of all third-party relationships and vendors and assessing the potential risks they pose based on factors such as data access, criticality of services, and security practices.

• Create a comprehensive inventory of all third-party relationships and vendors.
• Evaluate the potential risks associated with each vendor, considering factors such as their access to sensitive data, the criticality of the services they provide, and their security practices.

Step 2. Establish clear policies and procedures

To ensure consistency and compliance in third-party management, it is crucial to establish well-defined policies and procedures. These guidelines outline the expectations and requirements for third-party vendors, covering aspects such as security controls, data protection, compliance standards, and incident response.

• Develop well-defined policies and procedures that outline the expectations and requirements for third-party vendors.
• Include guidelines for security controls, data protection, compliance standards, and incident response.

Step 3. Conduct due diligence

Prior to entering into partnerships or contracts with third-party vendors, it is important to conduct thorough due diligence. This involves conducting assessments of the vendors' financial stability, reputation, security practices, and compliance history.

• Perform thorough due diligence on potential vendors before engaging in partnerships or contracts.
• Assess their financial stability, reputation, security practices, and compliance history.

Step 4. Define contractual terms and obligations

Clearly defining the terms of the vendor relationship in legally binding contracts is essential for effective third-party management. These contracts should specify security and privacy requirements, data handling procedures, confidentiality agreements, and dispute resolution mechanisms.

• Clearly define the terms of the vendor relationship in legally binding contracts.
• Specify security and privacy requirements, data handling procedures, confidentiality agreements, and dispute resolution mechanisms.

Step 5. Monitor and audit vendor activities

Ongoing monitoring and auditing of vendor activities help ensure compliance and adherence to agreed-upon terms and requirements. Regular security assessments, vulnerability scans, and compliance audits can help identify any potential risks or deviations from the established standards.

• Establish ongoing monitoring and auditing mechanisms to ensure vendors adhere to agreed-upon terms and requirements.
• Conduct regular security assessments, vulnerability scans, and compliance audits.

Resmo helps you automate your security assessments over the configurations and assets of 3rd-party SaaS applications and cloud services used in your organization. See it in action by creating a free account.

Step 6. Implement ongoing vendor performance reviews

Evaluating the performance of third-party vendors on an ongoing basis is crucial for maintaining the desired level of service and risk management. Establishing key performance indicators (KPIs) and conducting periodic performance reviews can help assess vendor adherence to service-level agreements and contractual obligations.

• Establish key performance indicators (KPIs) and metrics to measure vendor performance.
• Conduct periodic performance reviews to evaluate their adherence to service level agreements and contractual obligations.
• It’s also critical to map your attack surface in terms of third-parties, including your SaaS assets and configurations.

Step 7. Develop incident response and remediation plans

Preparedness for security incidents involving third-party vendors is essential. Developing robust incident response and remediation plans, including procedures for reporting and addressing incidents, escalation paths, communication protocols, and defined responsibilities, ensures a coordinated and effective response.

• Create robust incident response and remediation plans that include procedures for reporting and addressing security incidents involving third-party vendors.
• Define escalation paths, communication protocols, and responsibilities for incident management.

Step 8. Foster strong communication and collaboration

Establishing and maintaining open communication channels with third-party vendors fosters collaboration and enables the proactive identification and resolution of concerns and emerging risks. Building strong relationships based on trust and transparency facilitates effective risk management.

• Maintain open and transparent communication channels with vendors.
• Foster collaborative relationships to address concerns, share information, and mitigate emerging risks.

Step 9. Monitor and Audit Vendor Activities

Establish continuous security monitoring and auditing mechanisms to ensure vendors consistently adhere to agreed-upon terms and requirements. By implementing ongoing monitoring, you can proactively identify any potential risks or non-compliance issues and take immediate action. 

Conduct regular security assessments, vulnerability scans, and compliance audits to gain continuous visibility into vendor security practices and ensure they meet the necessary standards.

• Establish continuous monitoring and auditing mechanisms to ensure ongoing vendor compliance.
• Conduct regular security assessments, vulnerability scans, and compliance audits for continuous visibility into vendor security practices. Resmo can help you gain visibility over your assets and configurations spread across SaaS applications used in your company.

What is a Vendor Management Policy?

A Vendor Management Policy is a set of guidelines and procedures that organizations put in place to effectively manage their relationships with third-party vendors. It outlines the expectations, requirements, and best practices for engaging and working with vendors throughout the vendor lifecycle. 

The policy typically covers aspects such as vendor selection, onboarding, performance monitoring, risk assessment, and contract management. By implementing a Vendor Management Policy, organizations can ensure consistency, transparency, and accountability in their interactions with vendors, mitigating risks and maximizing the value derived from these partnerships.

How to Evaluate Third-Parties

Evaluating third parties is an essential step in third-party risk management. By conducting thorough evaluations, organizations can assess the risks associated with potential vendors and make informed decisions about engaging with them. Here are some steps to effectively evaluate third parties:

Security Ratings

In the realm of third-party risk management, security ratings have emerged as a valuable approach to assess and quantify the security posture of third-party vendors and partners. These ratings leverage a combination of external data sources, threat intelligence, and proprietary algorithms to assign a numerical score that reflects the overall security performance of a third party. By utilizing security ratings, organizations gain a standardized and objective measure of the risk associated with their third-party relationships, enabling them to prioritize their risk mitigation efforts effectively.

Security Questionnaires

Another critical approach in evaluating third-party risk is the use of security questionnaires or assessments. These questionnaires consist of a series of structured inquiries that aim to assess the security controls, practices, and compliance of third-party vendors. 

By sending these questionnaires to third parties, organizations can gain insights into their security measures, data protection practices, incident response capabilities, and adherence to regulatory requirements. This approach allows organizations to identify any potential vulnerabilities or gaps in security and address them through remediation plans or additional risk mitigation measures.

Penetration Testing

Penetration testing is a proactive and hands-on approach to assessing the security of third-party systems, networks, and applications. It involves authorized security experts attempting to exploit vulnerabilities within the third-party's infrastructure, mimicking the tactics of real-world attackers. 

Through penetration testing, organizations can uncover vulnerabilities that may not be identified through traditional assessments, gaining a deeper understanding of the potential risks associated with their third-party relationships. The insights gained from these tests enable organizations to strengthen security controls, implement necessary patches or updates, and mitigate the risk of external attacks.

Virtual and Onsite Audits

Virtual and onsite audits provide organizations with a comprehensive evaluation of the security controls and practices of their third-party vendors. These audits typically involve reviewing policies, procedures, documentation, and physical security measures in place. 

By conducting virtual or onsite audits, organizations can verify that third parties adhere to established security standards, regulatory requirements, and contractual obligations. These audits offer a valuable opportunity to identify any non-compliance issues, address gaps in security, and ensure that third parties meet the necessary security criteria.

Threat Intelligence Monitoring

Another effective approach to evaluating third-party risk is through the use of threat intelligence monitoring. This involves leveraging real-time threat intelligence feeds and security monitoring tools to continuously monitor the activities and behavior of third-party vendors. 

By analyzing threat intelligence data, organizations can identify any indicators of compromise, suspicious activities, or emerging threats related to their third-party relationships. This proactive monitoring allows organizations to quickly detect and respond to potential security incidents, minimizing the impact of any security breaches or unauthorized access.

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

Third-party risk management comes with its own set of challenges that organizations must address to ensure effective risk mitigation. Some common challenges include:

Lack of Visibility: One of the major challenges is the lack of visibility into the activities and security practices of third-party vendors. Organizations may have limited visibility into the vendor's infrastructure, processes, and controls, making it difficult to assess their level of risk accurately.

Complexity and Scale: Managing third-party relationships becomes increasingly complex as organizations work with a larger number of vendors and engage in various types of outsourcing arrangements. Each vendor may have different security requirements, compliance standards, and contractual obligations, which can create challenges in maintaining consistency and ensuring compliance across the board.

Limited Resources: Many organizations face resource constraints when it comes to dedicating sufficient time, personnel, and budget to third-party risk management. This can hinder their ability to conduct thorough due diligence, perform ongoing monitoring, and respond effectively to emerging risks.

Regulatory and Compliance Requirements: Meeting regulatory and compliance requirements adds another layer of complexity to third-party risk management. Organizations must navigate various industry-specific regulations and standards, such as GDPR, HIPAA, PCI-DSS, and others, while ensuring that their third-party relationships align with these requirements.

Evolving Threat Landscape: The constantly evolving threat landscape poses challenges in identifying and mitigating emerging risks associated with third-party vendors. New vulnerabilities, attack vectors, and techniques may emerge, requiring organizations to stay updated and adapt their risk management strategies accordingly.

Lack of Speed in SaaS Products: With the rapid development and deployment of SaaS products, organizations may face challenges in keeping up with the speed of updates and ensuring that third-party vendors maintain a high level of security and compliance. This can create potential gaps in risk management and expose organizations to vulnerabilities.

Vendor Reliance and Dependency: Organizations may become heavily reliant on certain vendors for critical services or access to sensitive data. This dependency can create additional risks if the vendor experiences financial instability, operational disruptions, security incidents, or lacks the agility to keep up with the speed of SaaS products and technological advancements.

To address these challenges, organizations should develop a robust third-party risk management program that includes comprehensive vendor assessment, ongoing monitoring, clear policies and procedures, and effective communication and collaboration with vendors. By taking a proactive and holistic approach, organizations can effectively manage and mitigate third-party risks to protect their assets, reputation, and overall business operations.

How Resmo Enables Effective Third-Party SaaS Monitoring in Your Organization

With the increasing reliance on third-party SaaS solutions, organizations face the challenge of monitoring and managing the associated risks. Resmo provides a comprehensive solution to enhance your third-party SaaS monitoring capabilities, ensuring the security and compliance of your organization's digital ecosystem. Here's how Resmo helps you monitor third-party SaaS effectively:

Centralized Visibility: Resmo offers a centralized platform aggregating and consolidating data from third-party SaaS applications. Gain a unified view of all your SaaS providers, their access privileges, and usage patterns, allowing you to identify potential risks and vulnerabilities in real-time.

Real-Time Risk Assessment: Resmo continuously monitors your third-party SaaS vendors' security posture and compliance. Leverage automated risk assessment capabilities to evaluate adherence to industry standards, regulatory requirements, and best practices. Receive instant alerts on any deviations or anomalies, empowering you to take immediate action.

Compliance: Streamline your compliance efforts with Resmo's compliance management capabilities. Define and enforce security policies, data privacy requirements, and regulatory standards across your third-party SaaS vendors. Conduct regular audits and assessments to ensure compliance and mitigate the risk of non-compliance.

SaaS Discovery: Resmo helps you find the SaaS tools your employees login with their business emails. You can detect whether they are following your company's security best practices or not. For example, you can receive alerts when they use weak passwords, have excessive permissions, or do not use MFA.

Start securing your company’s third-party usage by creating a Resmo account for free.