Conducting Effective Third-Party Risk Management: A Comprehensive Guide 

In a world where agility is paramount, third parties are businesses’ number one allies. External integrations enable companies to quickly adapt to customer demand and ensure a competitive offering with low to zero impact on internal workload or resources.  

However, just as organizations can leverage the best that third parties offer, they must also contend with their risks. With systems now incredibly interconnected, third-party risks are more prevalent and challenging to mitigate.  

Third-party data breaches are up 49% annually, and 61% of companies reported breaches last year. Those part of the lucky 49% who weren’t affected must live with the unsettling fact that a cyberattack may be imminent.  

From gigantic financial losses, regulatory non-compliance, and associated fees to reputational harm and loss of customer trust, there is simply too much at stake for businesses not to hold their vendors accountable to their own security standards.  

The Importance of Third-Party Risk Management  

According to a recent SecurityScorecard report, approximately 29% of all breaches in 2023 were attributable to a third-party attack vector. This percentage will only increase in years to come as vendors incorporate technologies like AI into their stack. Another report by SecurityScorecard highlights that 98% of organizations have relationships with at least one third-party that has experienced a breach in the past two years.  

When partnering with external service providers, their risks become your risks. As they adopt new technologies and integrate with additional providers, your attack surface expands to include not just third-party risks but also fourth- and fifth-party risks. 

It’s important to note that your third-party partners—and the vendors they work with—are likely already leveraging AI in some capacity, and adoption is continuing to grow. The main challenge with AI and other advanced technologies lies in the lack of transparency and oversight. 

New technologies often fall outside the established security controls designed for legacy applications. This lack of visibility makes it difficult for enterprises to assess whether their third parties use AI systems that comply with relevant regulations and are safeguarded by adequate data protection measures. 

In addition to this rapidly evolving avalanche of risks, regulations like the General Data Protection Regulation (GDPR) and the Health Insurance Portability and Accountability Act (HIPAA) are imposing increasingly stringent data protection requirements. 

A third-party risk assessment is imperative to understand the level and breadth of risks you could expose your systems to. This evaluation also keeps third parties accountable and safeguards customer data while enabling you to provide the seamless service customers expect.   

Five Core Components of Third-Party Risk Management  

Integrate assessments into your organization’s Third-Party Risk Management (TPRM) Program to enhance your ability to systematically identify, assess, and mitigate risks. This alignment ensures that third-party risk management complements your broader security and compliance objectives, such as aligning with frameworks like the NIST Risk Management Framework (RMF). A successful TPRM program should include: 

1. Governance and Policy Framework 

Strong governance ensures consistency, accountability, and a shared understanding of risk across the organization. It involves establishing clear policies that define roles, responsibilities, and risk tolerances. Key elements include: 

• Criteria for vendor onboarding and performance evaluation. 

• Processes for monitoring compliance and escalating concerns. 

• Alignment with frameworks such as NIST RMF, ISO 27001, or other relevant standards. 

2. Risk Assessments  

Risk assessments provide a structured way to evaluate potential vulnerabilities associated with vendors. When evaluating third-party vendors—whether they provide SaaS, consultancy, legal services, storage, or computing—it’s critical to assess their internal security measures, such as authentication protocols, access controls, and network security.  

For example, regarding data security, you should assess how vendors collect, store, and transmit data and confirm they have encryption and secure deletion policies to safeguard sensitive information throughout its lifecycle. Don’t overlook application penetration testing and adherence to the Secure Software Development Lifecycle (SSDLC).  

Overall, your assessments should be: 

• Comprehensive: Cover security posture, data handling practices, regulatory compliance, and incident response readiness. 

• Continuous: Include periodic reassessments to adapt to vendor operations or technology adoption changes. 

• Targeted: High-risk vendors should undergo deeper scrutiny, such as audits or site visits, to verify critical controls are in place. 

Assessments are foundational but must feed into broader monitoring and management processes to remain actionable. 

3. Vendor Risk Classification 

Classifying vendors by their level of risk ensures resources are allocated appropriately. Common criteria include: 

• Access to sensitive systems or data. 

• The impact of potential downtime on business operations. 

• Compliance requirements tied to regulatory or contractual obligations. 

Risk classifications should inform not only assessments but also ongoing monitoring efforts. You can typically classify vendors into high-risk (requiring the most detailed oversight as they are critical to operations, with access to sensitive data or systems), medium-risk (play important but non-critical roles, with moderate data access and a lower impact on operations), and low-risk (have minimal access to sensitive data or critical systems, posing the least risk).  

4. Incident Response and Business Continuity Integration 

Disruptions involving vendors can have significant operational and reputational impacts. TPRM programs must include an integrated incident response plan to minimize these risks. Ensure your vendors have tested processes for identifying and managing incidents with clear escalation pathways to your organization.  

You can then assess how quickly they can respond to a potential breach and how they can maintain business continuity during disruptions to minimize your business’s impact.  

If the vendor provides critical services or applications, integrate them into your incident response and business continuity planning. Include them in tabletop exercises to test and refine your collective preparedness for unforeseen circumstances. 

5. Continuous Monitoring and Adaptation  

Vendors’ risk profiles can shift due to new technologies, evolving regulations, or internal changes. For example, as ​​technologies like AI and machine learning are increasingly integrated into vendor operations, they introduce new risks. Continuous monitoring is critical to maintaining an up-to-date understanding of vendor risks and should include: 

• Automated tools to track compliance with standards like SOC 2, GDPR, or HIPAA; 

• Regular reviews of certifications, audit results, and other evidence of security practices; 

• Alerts for any incidents or changes that could affect their risk posture. 

It’s also crucial that your security partner stays informed of regulatory developments and evolving industry best practices so they can provide you with the most relevant guidance in this ever-changing risk environment.  

A Step-by-Step Approach to Third-Party Risk Management  

As seen earlier, third-party risk management is only effective if it is all-encompassing. However, the breadth of security controls and processes is so vast that, without guidance or previous experience, building a TPRM program can feel like a mountain too big to climb. To embed risk management into every stage of the vendor lifecycle, consider the following steps: 

1. Define Governance and Develop Policies 

Establish a framework that sets clear expectations for vendor management, including how your team should identify, monitor, and mitigate risks. Policies should align with industry standards and regulatory requirements. 

2. Create and Maintain a Vendor Inventory 

Develop a centralized database of all vendors, detailing their roles, access levels, and criticality to operations. This inventory forms the foundation for classifying and managing vendor risks. 

3. Perform Targeted Risk Assessments 

Conduct initial and ongoing assessments tailored to each vendor’s risk profile. Use these evaluations to identify vulnerabilities and prioritize mitigation efforts. 

4. Implement Risk-Based Monitoring 

Deploy tools and processes to monitor vendors continuously, focusing on those classified as high-risk. Automation tools can enhance oversight while reducing administrative burdens. 

5. Integrate Vendors into Continuity Planning 

Add critical vendors to your organization’s incident response and business continuity planning. Regularly test and refine these plans through joint exercises. 

6. Update the Program as Risks Change 

Regularly review and update your TPRM program to address new and emerging risks.  

Why Partner with Richey May for Third-Party Risk Management? 

Comprehensive assessments are the very foundation for an effective third-party risk management program. At Richey May, we understand the importance of having an assessment tailored to the organization’s unique needs and emerging risks so that security controls and policies are in place to cover every gap within inhibiting operations or partner relationships.  

For example, your assessment’s scope should be broad enough to cover detailed questions about AI usage, data protection, and related policies. Richey May aligns with frameworks such as NIST and follows Cloud Security Alliance‘s best practices, which are continuously updated to reflect current industry challenges. This way, we can ensure our assessments remain thorough and relevant as technology evolves.  

Additionally, we understand that, albeit crucial, comprehensive assessments are just the first step out of many required to maintain healthy and secure third-party connections, particularly as your system expands. Our expertise and tailored solutions enable organizations to build comprehensive TPRM programs that adapt to a dynamic risk environment. 

We are committed to staying ahead of emerging industry trends, risks, and opportunities to deliver effective solutions. As part of this commitment, our team regularly attends leading industry events and talks to vendors directly to learn more about the new technology they are leveraging. Our approach includes:  

• Customized Risk Assessment Plans: Tailored plans to meet relevant compliance and security requirements and tackle unique business challenges.  

• Industry Expertise: Decades of experience working with organizations of all levels (from start-ups to Fortune 100) and across industries, including finance, healthcare, and technology. 

• Integration of Advanced Tools: Streamlined vendor management through leading automation tools, explicitly chosen based on the organization’s unique needs. 

• Proactive Risk Management: Regular updates to address new challenges and technologies so businesses are always one step ahead.  

Transforming Third-Party Risk into Operational Strength 

Third-party risk management is more than just a checkbox exercise; it is critical for maintaining operational resilience and strengthening your vendor ecosystem. By implementing a detailed program, organizations can ensure they partner with compliant providers and uphold the same high security and customer care standards. Contact our team to learn more about how we can create a tailored and effective third-party risk management program for your organization.