What is Third Party Risk Management (TPRM)?

Third-Party Risk Management (TPRM) is the process of managing risks with third parties that are integrated into your business IT infrastructure, and an essential cybersecurity practice for businesses today.

At the beginning of 2024, the headlines already started announcing third-party data breaches. This time it was Fallon Ambulance Services, a Boston-area service acquired by Transformative Healthcare more than six years ago. The breach occurred when malicious actors gained unauthorized access to archived files in the ambulance service’s data storage. Transformative Services announced that the personal and medical data of nearly a million customers was exposed, including social security numbers, vaccination information and employment information from applicants who had displayed interest in working with the ambulance service.

With stories of third-party breaches being reported in the news among even leading organizations and brands, CISOs and security teams are looking more at third-party risk management to step up their security.

But how exactly does third-party risk management (TPRM) work, and why is it so crucial for a strong cybersecurity strategy?

Why Third-Party Risk Management is Important

Third-party risk management (TPRM) is the process an organization implements to manage risks that are a result of business relationships with third parties that are integrated into their IT environment and infrastructure. 

These risks can be operational, cybersecurity, regulatory, financial, and reputational. According to a survey from Cyber Risk Alliance, the average organization uses 88 IT third parties (including software and service providers, partners, external contractors, agencies, suppliers, and vendors), and larger organizations can rely on nearly twice as many (175) third parties.

The Most Common Third-Party Cyber Risks

Risk management technology can help your organization consolidate vendor information and conduct an ongoing third-party risk assessment of all your vendors, to help identify risk factors and evaluate each vendor’s inherent risk. Often, the technology determines the risk according to risk scores. After identifying the risk level that each vendor poses, a risk reduction strategy can be put into place according to your organization’s risk tolerance. This is the heart of third-party risk management.

Third-party risks include:

• Cybersecurity risk. A data breach, phishing, DDoS, social engineering, or ransomware attack from a third party can cost your organization in time and resources, halt or disrupt operations, and significantly impact its reputation.
• Operational risk. If a third party provides a critical component of your system and is disrupted due to a natural disaster, political conflict or cybersecurity attack, it poses a critical risk to your business continuity.
• Financial risk. If a supply chain is poorly managed, it can result in financial risk to a third party, as they are unable to properly evaluate which products they offer are in high demand and which are not.
• Strategic risk. Market changes, new acquisitions or mergers, and changing expectations of customers can make it difficult for all parties in the supply chain to align on business strategy.
• Compliance risk. Compliance requirements depend on the industry (e.g. HIPAA and PCI DSS), your company’s location, and your customer’s location (e.g. GDPA, CCPA, EBA).
• Geopolitical risk. For example, political tensions can make it difficult to continue a business relationship with a supplier or vendor. Political instability can motivate companies to look for a vendor in another location.

Who is Responsible for TPRM?

Traditionally, TPRM has been the responsibility of the procurement or risk and compliance teams. For example, at one time a banking system had limited interaction with third parties. Perhaps a consultant would come in to evaluate specific programs or procedures, or a lawyer might examine internal processes to determine any legal risk. 

Only networks such as SWIFT,an international system for exchanging monetary transactions, were integrated into banking systems. But as software systems became more interdependent, each bank evolved a complex layer of third, fourth, and even fifth-party systems, which made robust third-party risk management a necessity.

As a result, a dedicated third-party risk professional is an essential part of today’s third-party risk management process, particularly in the banking and finance industries. This person is responsible for assessing and managing the third-party risks, with a wide range of responsibilities such as collecting information from third parties, assessing their ability to manage compliance, prioritizing third-party risks, creating and sending questionnaires to third parties, and overseeing legal contracts such as SLAs to mitigate any legal risks to the organization.

A recent Panorays survey on third-party risk management priorities found that:

• In more than half of cases (54%), the responsibility for third-party cyber risk management falls to dedicated IT and Risk teams who have specific technology expertise. These include Operations and Logistics teams, Compliance and Privacy, Information Security, Risk Management, and Technology or IT.
• In 36% of cases, the Back Office Team is in charge, which includes Legal, Finance and Procurement. This may include tasks like managing cyber questionnaires, onboarding third parties to internal systems, or handling payments.
• While 10% outsource third-party cyber risk management to external service providers, this is predominantly the case in enterprises with under 5k employees.

What Are the Key Elements of Third-Party Risk Management?

Third-party risk professionals have a heavy burden in today’s risk-fraught landscape. The process of managing third-party risks involves a number of individual steps, each of which has an important role in enabling you to minimize the threats that face your organization. These steps include: 

• Mapping your vendor ecosystem to identify all third-party access 
• Assessing potential third-party risks based on a range of factors
• Categorizing and prioritizing risks to focus your resources on the most urgent needs
• Ensuring compliance to relevant regulations and standards 
• Preparing incident response plans to manage breaches or incidents that arise

Identifying Third Parties

Mapping your supply chain is a prerequisite to successful third-party risk management. You have to know which companies populate your vendor landscape, otherwise you’re flying blind. Each third party represents a potential source for vulnerabilities, cyber attacks, and business disruptions, so you need visibility into which vendors, service providers, and contractors have access to your sensitive data and/or critical systems. 

Your vendor inventory should also be updated regularly so that it reflects the current risk landscape. Only then can you move on to evaluate risk levels, enforce compliance, and resolve vulnerabilities. 

Assessing Third-Party Risk

The next step is to evaluate all potential third-party risks, so that you can assess which vulnerabilities could be introduced and the level of damage they might cause to your organization. Reviewing vendor risk levels allows you to identify weaknesses and take steps to resolve them. 

Risk assessments involve carefully considering a whole range of factors, including your vendor’s security protocols, financial stability, resilience, and exposure to geopolitical disruption; their level of access to your sensitive data and systems; and your own ability to contain and resolve the threats that may arise. 

Risk Categorization and Prioritization

Categorizing and prioritizing risks is another crucial step in third-party risk management, and part of the process of assessing and addressing risks. Risks should be categorized according to a number of concerns, including the sensitivity of the data that each vendor accesses, the vendor’s security posture, and how critical their services are to your business continuity. 

This enables you to direct your resources towards the most significant threats first, reducing the chances of a serious incident that causes significant harm to your organization. High-risk vendors will receive more rigorous scrutiny and mitigation measures, and you won’t waste resources on low-risk vendors that don’t need the same level of attention. 

Ensure Regulatory Compliance

The regulatory burden keeps rising, especially if you’re in a critical industry like finance or health. Many regulations include third-party risk management as part of your own compliance requirements, so it’s vital to build in processes for measuring and monitoring third-party compliance. 

Ensuring regulatory compliance with laws like GDPR, HIPAA, or PCI DSS helps you avoid legal penalties, financial losses, and reputational damage. It demonstrates due diligence and corporate responsibility, while also helping reveal gaps in third-party practices that could lead to breaches or serious security incidents. 

Incident Response Planning

Last but not least, every third-party risk management strategy needs to include incident response planning. It’s almost inevitable that you’ll encounter some type of third-party incident, so you need to be ready to identify, contain, and remediate issues as fast as possible to minimize damage. Incident response planning is also mandated by many regulations. 

Defining response tactics, communication protocols, roles and responsibilities, and vendor coordination ahead of time enables you to respond more quickly when an incident occurs. This helps you to maintain business continuity, protect sensitive data, and reduce recovery time and costs.

What Are the 5 Phases of Third-Party Risk Management?

Third-party risk management is a multi-step process that covers a number of different tasks, from an initial risk survey to ongoing methods for continuous visibility into changing risk levels. These include:

• Carrying out due diligence to evaluate vendor weaknesses
• Conducting comprehensive vendor risk assessment 
• Onboarding new vendors in a structured way
• Taking steps to remediate and mitigate third-party risks
• Establishing continuous monitoring for ongoing risk management 

TPRM Step 1: Due Diligence

Third-party risk management begins well before a vendor joins your third-party network. Due diligence is a comprehensive evaluation that’s vital for ensuring that you’re aware of any major vulnerabilities or red flags before they enter your ecosystem, and can decide whether to work with them and what steps to take to mitigate the risks. 

You need to carefully scrutinize their cybersecurity measures, financial stability, legal standing, attack surface, compliance history, and overall resilience. It’s a process that includes reviewing documentation, conducting audits, analyzing security practices, and obtaining references. 

TPRM Step 2: Vendor Risk Assessment

Risk assessment follows your due diligence processes, because it’s a deeper and more systematic examination of vendor risks. In this phase, you’ll analyze the vendor’s security controls, data protection measures, and compliance in greater detail, and try to quantify the impact of any risks they pose to your data, reputation, and operations. 

A comprehensive vendor risk assessment involves security questionnaires, on-site visits, audits, security documentation review, and sometimes employee interviews. Your goal is to produce clear risk levels that guide your mitigation efforts and help you to decide on appropriate controls and monitoring mechanisms to protect your organization. 

TPRM Step 3: Onboarding

Onboarding is in many ways the most important step in third-party risk management. It’s important to have a structured process for integrating a new vendor into your organization’s ecosystem, so you can minimize risks and lay the foundation for a secure and productive working relationship. 

Onboarding is itself made up of a number of activities, including initial security evaluations, due diligence, and contractual agreements around security measures. Formalize expectations and make sure that your risk management strategies are aligned by laying out requirements for regulatory compliance, data protection measures, and incident response.

TPRM Step 4: Remediation and Mitigation 

Once you’ve gained a clear understanding of third-party risk and onboarded your new vendors, you want to take action to resolve or reduce the risks they bring. Remediation involves actively addressing any issues that you discovered, by adjusting your security controls and operating policies, and closing operational gaps. 

Mitigation means minimizing the potential impact of risks that can’t be fully eliminated. It usually includes tasks like strengthening contractual obligations on your third parties, adding additional controls, or creating contingency plans. Together, remediation and mitigation reduce the chances of serious breaches, security incidents, compliance failures, or business disruption. 

TPRM Step 5: Continuous Monitoring

Finally, you’ll need to set up continuous monitoring, meaning an ongoing oversight for all your vendor relationships. Continuous monitoring tracks vendor performance and security practices to ensure compliance with internal policies and regulatory requirements. 

Continuous monitoring can involve a number of different methods, including regular audits and automated monitoring tools that pick up on changes in the vendor’s security posture, financial stability, or regulatory compliance status. These generate alerts so that you can quickly identify and address new or evolving risks, and make informed decisions about contract renewals or adjustments.

What is an Example of Third-Party Risk Management? 

For example, imagine a non-profit organization that runs global education initiatives. We’ll call it the HopeWell Foundation. The HopeWell Foundation relies on third-party vendors to manage donor databases, process donations, and run virtual fundraising campaigns. 

These vendors do a great job, allowing the Foundation to focus on its core activities, but they also open the Foundation up to a number of risks. Those third-party risks include:

• Data breaches: Exposing sensitive donor information, such as personal details and payment data.
• Vendor non-compliance: Failure to adhere to GDPR, HIPAA, or other regulatory requirements.
• Operational downtime: Disruptions in fundraising activities due to vendor system failures.

Here’s what the HopeWell Foundation did to ensure effective TPRM and minimize those risks. 

Steps Taken for TPRM

First, the Foundation carried out a thorough due diligence before onboarding vendors. This includes a vendor assessment, where they requested security certifications such as SOC 2 Type II reports and ISO 27001 compliance, and carried out background checks to assess vendors’ reputation and past performance. 

Then they took risk mitigation measures, ensuring that the vendor encrypts all donor data both at rest and in transit, and confirming that vendors meet GDPR, HIPAA, and local regulations for handling sensitive data. They also checked that the vendor has robust incident response and breach notification processes, and made sure that the vendor contract includes clauses about incident response and reporting timelines. 

Finally, they set up processes to continue to manage risks through ongoing monitoring. The Foundation reviews vendor performance metrics and compliance reports every quarter, and regularly runs vulnerability assessments and penetration tests on vendor systems. It also uses TPRM software to monitor vendor compliance with regulations. 

Outcome of TPRM

Thanks to its TPRM activities, the HopeWell Foundation succeeded in minimizing the risk of data breaches and operational disruptions. It protected donor data, demonstrated adherence to GDPR and HIPAA regulations, and reduced its legal and financial liabilities, which enhanced trust with stakeholders while safeguarding the organization’s reputation. 

This example shows how a proactive approach to TPRM ensures operational stability and defends an organization’s reputation. By integrating TPRM into its risk management strategy, HopeWell Foundation not only protected sensitive donor data but also strengthened its ability to fulfill its mission without interruptions, reinforcing stakeholder confidence and long-term sustainability.

What We Saw in TPRM in 2024

Let’s take a quick look at a few of the trends we saw this past year.

• An increase in supply chain attacks and third-party breaches. We continued to see major digital supply chain attacks such as the Polyfill.io and Discord attacks, third-party breaches such as Cisco Dua, and simple third-party mistakes that disrupted business operations, like the Microsoft CrowdStrike incident.  All of these attacks emphasize the need for greater visibility not only of their third-party ecosystem but identifying and mapping fourth, fifth and n-th parties as well.
• Third parties continue to offer cybercriminals more opportunities for attacks. The integration of IoT devices, the rise in remote workers using unsecured devices and locations, the expansion of supply chains to include fourth, fifth, and Nth parties is expanding attack surfaces. Advanced TPRM platforms are necessary to defend against attacks on Nth parties that may not have robust security systems.
• Regulatory compliance is rising burden. 2024 saw new regulations enacted and others como into effect, including the EU’s  Network and Information Security (NIS) Directive 2 and Cyber Resilience Act (CRA); the US’ National Cybersecurity Strategy; and Singapore’s  Operational Technology Cybersecurity Masterplan 2024. This makes third-party compliance more significant, and raises the importance of incorporating it into TPRM strategies. 
• Understanding the criticality of your third parties is essential. As supply chains increase in complexity and the number of third-party risks increase, organizations must determine the importance of each vendor to their business and the sensitivity of data shared with them. They can then monitor them regularly and communicate with the third party at the head of the supply chain to remediate these threats or vulnerabilities as they are identified.

Trends in TPRM We Should Expect to See in 2025

Now that we’ve reviewed the trends in TPRM of the past year, what are the TPRM security risks we should be aware of in 2025? Here are a few of the trends that third-party risk management and security teams will need to stay on top of, and learn to communicate how they impact the company’s business goals.

1. Increasing use of artificial intelligence (AI)

We will witness artificial intelligence continue to be a double-edged sword in terms of security in 2025. On the one hand, AI-powered third-party risk platforms can assist organizations to scale third-party risk management by improving the accuracy of risk assessments. 

For example, it can accelerate the process of completing and evaluating cybersecurity questionnaires through AI-generated answers and AI-powered validation. AI can also map the digital supply chain and identify the KEVs, CEVs and vulnerabilities relevant to each party, so that organizations can prioritize and remediate against risk more efficiently.

At the same time, third-party AI use poses continued security risks. These include:

• Data privacy and control. If third parties use customers’ personal information, proprietary source code, or intellectual property (IP) information to train models, the data could be leaked. 
• Customer trust. Biased data samples, misinformation and “hallucinations” result in inaccurate responses that hurt an organization’s reputation and damage user trust.  Companies integrating third-party AI applications should consider how their combined lack of resources and knowledge of third-party risk management make them vulerable.
• Cybersecurity. Malicious actors use AI to create convincing, well-written phishing emails for polymorphic attacks at scale, or use prompt engineering and indirect injection from training data direct an AI to act maliciously. For example, users can direct GenAI platforms to reveal sensitive information, generate misinformation, or produce code for a cyberattack. Indirect injection from training data can embed malicious instructions or data from sources the AI ingests, or insert malicious content into the training data itself.
• Supply chain risks. As suppliers adapt AI, attack surfaces expand without your awareness. You can easily lose track of new Nth parties, the risks they pose and the level of criticality each business relationship has with your organization. It’s increasingly challenging to meet compliance and regulations related to third-party risk management.

2. Emphasis on cloud-first strategies

As the cloud migration continues, companies are risk losing control of applications that used to be on-premise. This is particularly true with regard to their data security. Many cloud infrastructure systems, such as AWS, operate on a shared responsibility model, where Amazon deals with physical infrastructure security, but software updates, configurations and data security remains in the hands of SaaS providers. 

When a company outsources a service to a SaaS payment service, for example, and that payment service uses a cloud provider such as AWS to host your company’s data, the company can’t make any assumptions about the SaaS service’s security practices.

Take the Uber breach in 2015, which exposed the names and driver’s license numbers of 50,000 Uber drivers from its third party, Github. The breach occurred because of a misconfiguration of the AWS bundle, which allowed a user to access the GitHub password and user credentials stored on the public application. Uber was responsible for data security, but it relied on Github to securing configure AWS hosting settings for that data. 

Although best practices controls, such as the Principle of Least Privilege (PoLP) Access and separations of networks, can form kill chains to defend against these types of attacks, mistakes still can and do occur.

3. Increased regulatory focus on the cyber risks posed by outsourcing to third parties

Increasing reliance on AI and migration to cloud services means that organizations must embrace accelerated governance while accepting greater accountability for third-party risk management. In the past few years, complex regulations have appeared that specifically deal with the security risks posed by outsourcing to third parties.

These include:

• DORA. The Digital Operational Resilience Act (DORA) was developed to regulate cybersecurity resilience for financial institutions in the EU. This includes adopting Information and Communications Technology (ICT) security provisions such as mapping third-party assets, evaluating third-party criticality, and establishing a mitigation and remediation plan to deal with vulnerabilities.
• NYDFS. The New York Department of Financial Services (NFDFS) regulation is aimed at protecting the non-public sensitive information of financial institutions that conduct business with New Yorkers. It specifies guidelines for ensuring that data shared with third parties remains secure, including periodic risk assessments, multi-factor authentication (MFA), encryption, and notification of any cyber incidents or data leaks.
• NIS2 Directive. This EU resilience regulation includes more organizations and industries than DORA. It outlines the types of security incidents that should be reported, including unauthorized access to services, data breaches, and DDoS attacks. It also emphasizes the importance of proactive risk management, including third-party and digital supply chain risk assessments.

In 2025, we will see standards and regulations related to TPRM accelerate. But AI-related regulation has only just started to develop. This past year we saw:

• The EU AI Act take effect. The European regulations pose limits on AI technology, banning the use of certain applications in specific contexts. It also holds companies responsible for any damage incurred by the new technology.
• California pass the Safe and Secure Innovation for Frontier Artificial Intelligence Models Act (SB 1047). This act sets guidelines for testing, deployment, and monitoring for AI models, defining specific safety standards and requiring that frontier AI models are developed with transparency, accountability, and ethical considerations.

The Benefits of Third Party Risk Management

You can conduct third party security risk management using an internal team, or by working with a third party security risk management specialist. Either way, you’ll need to spend time and money and implement new business processes to improve your risk profile. Either way, investing in third party risk management offers a number of benefits.

They include:

• Cost reduction. Think of a third-party risk management program as an investment, not an expense. Even though it will cost you some time and money upfront, you stand to save money in the long run. A data breach could cost your company thousands if not millions of dollars, but an effective third-party cybersecurity risk management strategy could prevent you from ever facing this scenario.
• Regulatory compliance. You’re legally required to meet industry regulations, which  include components of TPRM. Whether or not you implement TPRM directly or outsource it to an external party, you are still bound by these regulations. This is particularly true for industries that deal with customer data.
• Knowledge and confidence. Third-party risk management increases your knowledge and visibility of the third-party vendors with whom you’re working. The more confident you are in your network of vendors and partners, the more you’ll be able to work without pausing to look over your shoulder.
• Risk reduction. Continuous third-party risk management is instrumental in order to tier your third parties properly and gain better insight into risk posed by fourth parties. When new vulnerabilities and data breaches are discovered, you’ll have the context to prioritize them effectively.

Why CISOs are Choosing to Invest in TPRM

A recent survey conducted by Panorays found that the vast majority – 94% of CISOs are concerned about third-party cybersecurity attacks; and 16% rate it as their top priority. The level of concern may depend on different factors, such as the size of the organization, how reliant it is on third parties for critical services, and the need for it to adhere to various regulations. 

As a basic rule of thumb, the larger the enterprise, the more concerned it is about third-party attacks, due to the potential risk and consequence of a third-party breach.

No Silver Bullet in Terms of Third-Party Tools

CISOs realize that combining multiple tools is the key to success when building a third-party risk management program. Although CISOs have slightly different opinions as to the effectiveness of different tools, they agree on the importance of a few main ones.

Nearly 73% found cybersecurity questionnaires to be effective; 69% compliance management tools; 68% compliance management; 67% audit and assurance software and 66% external attack surface monitoring of third parties.

What to Consider When Selecting a TPRM Platform

According to a recent Panorays survey, 65% of CISOs have increased their budget for third-party risk management, and 92% of them are allocating these resources to implementing a designated solution for third-party threats. But how can they ensure that they spend that budget efficiently? 

When considering a TPRM platform, there are a number of features and functionalities to look for:

• Mapping of the supply chain. Many organizations aren’t even aware of how many third parties they use, let alone the types of critical services they provide. Profile each vendor, grouping them with similar vendors. It should list what service they provide, the criticality of that service, the types of data they are handling, their access to sensitive data, and the internal contact managing the vendor. This will help you determine which questionnaires to send out to your vendors, according to your regulatory requirements and risk appetite.
• Scalability. With enterprise-level companies relying on as many as 175 third parties, it’s important to have minimal friction when dealing with suppliers. This reduces time spent on security assessments, and helps resolve issues quickly. Automated and customized security questionnaires and external cyber posture assessments streamline the work, with targeted questions that apply only to the specific third party and its relationship with you.
• Attack surface assessment. An external assessment can provide a picture of the third party’s exterior attack surface. Your platform should perform regular third-party risk assessments to identify weaknesses and vulnerabilities inherent within vendor IT networks, applications and human layer.
• Continuous monitoring. Hackers are constantly developing new methods to exploit vulnerabilities and engage in cyberattacks. In addition, suppliers add new assets and software and change or update their internal policies, resulting in new cyber gaps. With continuous monitoring, your organization receives real-time data that enables a more proactive approach by uncovering issues, detecting suspicious activity and staying updated about security policy changes.
• Remediation. The right tools can provide third parties with remediation or mitigation plans, along with visibility about how you identified these cybersecurity gaps. You should set realistic deadlines and provide an intuitive method for communication. In short, you and your third party should establish a collaborative business relationship.

How Panorays Helps Manage Third-Party Risks

Panorays is the only third-party cyber management solution that delivers contextual third-party risk management. By mapping your full threat landscape and continuously monitoring and reassessing the Risk DNA of each business connection, it pinpoints early threat indications within the unique business context of every relationship, enabling companies to adapt their defenses, minimize risk and proactively prevent the next breach from affecting their business.

The platform includes:

• AI-powered cybersecurity questionnaires. Unlike cumbersome security questionnaires that can take days or weeks to complete, AI-powered cybersecurity questionnaires streamline third-party risk management and can be completed in minutes. On the supplier’s end, AI assists in generating answers based on questionnaires conducted in the past. On the evaluator’s end, AI assists in evaluating the accuracy of responses by validating them with internal documents from both the organization and vendor.
• Extended attack surface assessments. These assessments start with first identifying and mapping third, fourth, fifth and n-th party relationships, identifying risk and prioritizing it according to the level of criticality, so that organizations gain deeper visibility into the digital supply chain.
• Risk DNA Assessments. Assess the cybersecurity posture of your third parties with AI-based accuracy, taking into account the dynamic nature of every relationship. Risk DNA evolves to reflect changes that impact your third-party risk, including shifts in data access and severity, changes in business criticality, and developing vulnerabilities.
• Continuous monitoring. Conduct attack surface assessments and send vendors cybersecurity questionnaires when necessary, such as when a change is made in your organization, the vendor’s IT infrastructure, or industry regulations.
• Automatic discovery of third, fourth, and n-th party vendors. Panorays automatically maps third, fourth and Nth party vendors to understand the business relationship between them and your organization. Then it ranks them according to their level of criticality.
• Evaluation of compliance. Verify whether your suppliers are meeting compliance requirements, and continuously monitor for new issues in regulations and standards such as GDPR, NDFS and PCI DSS. Replace clunky spreadsheets with efficient frameworks to document process-oriented regulations such as the OCC and EBA.
• Customized remediation. After sending cybersecurity questionnaires and identifying cyber gaps that need to be addressed, vendors and organizations can collaborate using a detailed plan to remediate risk, customized according to each organization’s specific risk appetite.

Want to learn more about how you can manage third-party risk across your extended attack surface? Get a demo of our third-party risk management platform today.

Third Party Risk Management FAQs