As organizations become increasingly interconnected with external vendors and partners, third party risk management (TPRM) has evolved beyond its traditional focus on cybersecurity. While cyber risks remain critical, today’s TPRM landscape requires a comprehensive approach that addresses multiple risk domains. The traditional focus on only cybersecurity is simply no longer sufficient.
The Expanding Scope of Third-Party Risk Management
In the past, when discussions centered on third-party risk management, most organizations thought exclusively about institutional cybersecurity and the traditional security questionnaire. But as we see today, third party risk management encompasses much more than just cyber concerns.
Cybersecurity remains very important and shouldn’t be discounted. However, experience with clients has shown that other areas are just as important, if not more so in some cases.
Today’s interconnected business landscape means that almost every aspect of an organization is touched by third parties—from finance and operations to legal compliance and corporate social responsibility. This expanding scope has created both challenges and opportunities for effective risk management.
Five Areas of Third Party Risk Management
Comprehensive TPRM must address five key domains:
1. Cybersecurity
While no longer the only focus, cybersecurity remains a critical component of TPRM. This includes assessing a third party’s security posture, data protection capabilities, breach notification processes, and overall security governance.
2. Privacy
Privacy requirements often overlap with cybersecurity, but they represent a distinct area of risk. Organizations must assess how third parties collect, use, store, and share data—especially considering global regulations like GDPR, CCPA, and other privacy frameworks.
3. Compliance
Compliance extends beyond privacy. Third parties must adhere to laws and regulations, industry standards, environmental and social requirements, contract obligations, open litigation, fines, and other relevant standards that could impact and increase compliance risks for your organization.
4. Finance
The financial stability of third parties represents a significant risk area. Organizations need to assess third party financial stability & solvency, creditworthiness, and other financial factors that could impact service delivery.
5. Operations
Operational risk includes factors like service delivery capabilities, business continuity, geopolitical risks, supply chain resilience, and the third party’s own third party management practices (fourth-party risk).
The Challenge: Siloed Risk Management Approaches
A common challenge organizations face is siloed risk management, where different departments assess third party risk independently without coordination.
Often, groups within organizations are unaware of what others are doing. From the third party’s perspective, it feels like the left hand doesn’t know what the right hand is doing. While internal groups are trying to do a good job and be thorough, there’s often no holistic, cross-functional approach to assessment.
This siloed approach creates significant problems:
- Duplication of effort: Multiple teams frequently ask the same questions of third parties, making the process more cumbersome and time-consuming for vendors as they repeatedly answer similar questions.
- Risk gaps: Assumptions that another group is addressing certain risks can lead to critical oversights. A comprehensive, holistic view is essential to identify all relevant risk factors.
- Issues & remediation: Potential gaps and remediation are often not coordinated and monitored. This could negate the expected remediation activities from Third Parties.
These challenges highlight the need for a cross-functional approach to TPRM that brings all stakeholders to the table.
Moving Beyond Tiering: The Integrated Approach to TPRM
Many organizations use tiering to categorize third parties by risk level, but this approach has limitations. A more effective method is an integrated approach.
TPRM requires more than just tiering—it demands thoughtful categorization and a structured matrix of how different groups work together. What’s important for cybersecurity isn’t necessarily important for privacy or for corporate social responsibility.
This integrated approach ensures:
- Each risk domain is incorporated into the assessment criteria.
- Questions are rationalized across domains to eliminate duplication.
- High-risk indicators are identified early in the process.
- Resources are allocated appropriately based on comprehensive risk.
Getting all stakeholders aligned on this common framework can be challenging in many organizations but is essential for effective TPRM.
Early Risk Identification: The Power of Go/No-Go Questions
Organizations should consider how many times they’ve declined to work with a third party and what specific questions serve as absolute disqualifiers. The frequency of these rejections demonstrates an organization’s risk appetite toward third parties.
By identifying critical risk factors early, organizations can:
- Save time by not conducting comprehensive assessments on unacceptable vendors
- Establish clear risk boundaries across the organization
- Communicate risk appetite effectively
- Create efficiency in the assessment process
Asking these critical questions at the front end of the process—where a specific answer means immediate disqualification—can save teams considerable time and effort. This approach prevents wasted resources on vendors that would ultimately be rejected.
The Full Lifecycle: From Onboarding to Offboarding
Effective TPRM doesn’t end with initial assessment. It requires a complete lifecycle approach that includes ongoing monitoring and proper offboarding.
While organizations often conduct robust evaluations during vendor onboarding, they frequently neglect ongoing assessment. A three or five-year contract might run its course with little or no risk monitoring after initial approval. In today’s rapidly changing environment, this approach significantly exposes the organization to emerging risks.
The TPRM lifecycle must include:
- Initial assessment: Comprehensive evaluation based on risk categorization
- Ongoing monitoring: Regular reassessment based on risk level
- Contract changes: Reassessment when services or scope changes
- Offboarding: Proper termination of access and relationship
It’s important to recognize that organizations often have multiple contracts with the same third party. When services change, risk profiles should be reconsidered. This may require additional assessments to determine if the risk tier or category has changed based on the new services being purchased.
The Role of Contract Management in TPRM
While third-party risk management isn’t the same as contract management, the two functions should work closely together.
Third party risk management and contract management are distinct functions, but they should operate in close coordination to effectively mitigate and manage risk.
The TPRM process often identifies necessary contract clauses that protect the organization, such as:
- Security requirements and standards
- Compliance attestations (e.g., SOC 2)
- Indemnity clauses
- Data handling requirements
- Technology-specific provisions (e.g., AI, cloud services)
A robust TPRM program uncovers additional contracting clauses that should be included to properly protect the organization. When business units handle third party relationships independently, they may lack expertise in cybersecurity, privacy, operational requirements, and other specialized areas that should inform contract terms.
Building a Holistic TPRM Program: Key Steps
To develop a comprehensive TPRM program that addresses all five risk domains, organizations should:
- Map current processes: Document existing TPRM activities across all departments
- Identify stakeholders: Bring together representatives from all risk domains
- Establish governance: Create clear roles, responsibilities, and escalation paths
- Standardize assessment: Develop consistent risk categorization and assessment methodologies
- Implement technology: Deploy tools that support cross-functional collaboration
- Measure success: Track metrics that demonstrate risk reduction and process efficiency
The Value of Holistic TPRM
A comprehensive approach to third-party risk management does more than just check compliance boxes—it creates real business value.
Organizations must ensure that risk management adds tangible value rather than simply serving as a box-checking exercise. Too often, companies haven’t stepped back to consider how their TPRM processes could provide competitive advantages through better risk insights.
By breaking down silos, eliminating duplication, and addressing all five risk domains, organizations can transform TPRM from a compliance burden into a strategic advantage. This holistic approach provides greater visibility into third-party relationships, reduces the likelihood of unexpected disruptions, and enables more informed decision-making about external partnerships.
In today’s complex risk landscape, organizations that take this comprehensive approach to TPRM will be better positioned to navigate the challenges of an increasingly interconnected business ecosystem.