4 Best Practices for Successful Third Party Risk Management

Modern organizations increasingly rely on third-party vendors and partners to support their operations. However, these external relationships introduce significant risks. Nearly 30% of data breaches now involve a third party, a substantial increase from just a few years ago. This surge underscores the importance of third-party risk management as a top priority. To protect business continuity and reputation, companies need to implement structured risk management best practices for their vendors. Only by taking proactive steps can firms achieve truly effective risk management of third-party relationships.

Vendor Segmentation and Risk Tiering

A critical best practice in third-party risk management is vendor segmentation and risk tiering—the process of categorizing vendors based on the level of risk they pose or the potential business impact of their services. By grouping vendors into tiers such as high, medium, or low risk, organizations can efficiently prioritize risk management activities and allocate resources where they are needed most. High-risk or business-critical vendors warrant more rigorous due diligence, frequent assessments, and closer ongoing monitoring. In contrast, lower-risk vendors may only require periodic reviews, allowing teams to focus their attention and resources on the relationships that matter most. A structured approach not only streamlines the risk management process but also ensures that the organization’s efforts are aligned with its risk appetite and business objectives. Effective vendor segmentation ultimately leads to stronger oversight, improved resilience, and optimized use of risk management resources.

Collaboration and Stakeholder Engagement

There is a need for cross-functional collaboration, stakeholder buy-in, and clear communication channels within the organization and with external partners. Securing buy-in from executive leadership, risk, compliance, procurement, IT, and business units ensures that TPRM is recognized as a strategic priority, not just a siloed function. Involving diverse perspectives helps identify risks that might otherwise be missed and fosters a shared sense of ownership over vendor relationships. Establishing clear communication channels enables prompt information sharing, coordinated response to emerging risks, and alignment on expectations. Regular updates and transparent reporting keep all stakeholders informed and engaged, while also supporting a culture of accountability and continuous improvement.

Establish a Comprehensive TPRM Program and Framework

The first best practice is to lay a strong foundation by building a formal Third-Party Risk Management (TPRM) program. This means integrating vendor risk oversight into your overall enterprise risk management program and governance structure. Start by securing executive buy-in and a clear tone at the top. Leadership should recognize third-party risk as a strategic issue, not just an IT problem. Define the scope of your TPRM program by creating an inventory of all third-party relationships and identifying the data or systems they can access. With a complete vendor inventory in hand, you can begin to map out the inherent risks each vendor might pose. Early in the planning phase, establish risk ownership and roles, and assign responsibilities to a cross-functional team to collectively manage third-party risks.

Another is developing a formal risk management framework. This framework should outline how you will identify, assess, mitigate, and monitor third-party risks throughout the vendor lifecycle. For example, you might adopt or adapt industry standards as a guide to structure your process. The framework will also tie into internal policies, such as setting criteria for vendor onboarding and requirements for ongoing oversight. By following defined steps and policies, your team can consistently and repeatably address vendor risks. The TPRM program should align with overall corporate risk appetite and compliance obligations. In highly regulated industries, regulators increasingly expect robust third-party risk oversight and board-level visibility. Including TPRM in enterprise risk discussions ensures leadership stays informed and supportive.

Perform Rigorous Third-Party Risk Assessment and Due Diligence

Before entering into any new vendor relationship, it is critical to conduct thorough due diligence. This second best practice focuses on evaluating potential third parties comprehensively so you only engage those that meet your risk criteria. A robust third-party risk assessment process should examine vendors from multiple angles.

Collect information from the vendor using questionnaires and documentation requests. You may request evidence of cybersecurity controls, proof of regulatory compliance, insurance coverage details, financial statements, and references from other clients. Create a checklist of due diligence items and require the vendor to complete it as part of the proposal or contracting phase. It’s important to verify critical claims. If a vendor handles sensitive data, ensure they have appropriate data protection and breach response protocols in place, not just on paper but in practice.

During the risk management steps of assessment, involve the right internal experts. IT security teams should evaluate the vendor’s cybersecurity posture. Compliance or legal teams should check for any regulatory red flags. Finance can review credit ratings and financial health to measure the risk of vendor bankruptcy or instability. The business unit seeking the vendor’s service should weigh strategic and operational fit. By bringing together a cross-functional perspective, you’ll catch more potential issues. It can be helpful to assign an overall risk rating or tier to each vendor after assessment. Classifying vendors as high, medium, or low risk based on impact and likelihood of something going wrong. Risk management techniques like scoring and tiering help prioritize attention on the highest-risk third parties. Consider a few key domains you should examine for every significant vendor:

• Security Practices: Evaluate the vendor’s information security program and cyber hygiene. Do they encrypt data and have up-to-date firewalls and patch management? Have they undergone penetration tests or security audits? A formal third-party security assessment can reveal gaps in their defenses.
• Regulatory and Legal Compliance: Confirm the vendor adheres to all laws and standards relevant to the service. For example, if they will handle personal data, are they GDPR or HIPAA compliant? Check for any past compliance violations or fines.
• Financial and Operational Stability: Review financial reports to ensure the vendor is financially stable and not at risk of failure during the contract. Consider their operational resilience – do they have backup systems and business continuity plans in place to fulfill their obligations in the event of an issue? A supplier who lacks redundancy could disrupt your operations if they suffer an outage.
• Reputation and Performance History: Research the vendor’s industry reputation and track record. Have they experienced recent data breaches or service failures? What do other clients say about their reliability? Performing background checks and reference calls can uncover warning signs that aren’t obvious from documentation.

By conducting multidimensional due diligence, you significantly increase your chances of onboarding only trustworthy and capable third parties. If a vendor fails to meet your minimum requirements in any critical area, it’s wise to mitigate that risk or reconsider the relationship. Rigorous supplier risk evaluation at the start sets the tone for a safer partnership.

Fourth-Party and Subcontractor Risk Management

As organizations strengthen their third-party risk management practices, attention must also turn to the often-overlooked risks introduced by vendors’ own suppliers and subcontractors, collectively known as fourth-party risks. Unlike direct vendors, fourth parties typically operate outside your organization’s contractual reach, making their activities less visible and more challenging to control. However, their impact can be significant: a security lapse or operational failure deep within the supply chain can cascade upward, resulting in disruptions, data breaches, or regulatory violations that ultimately affect your business. Effective fourth-party risk management begins with transparency. Require your vendors to disclose their key suppliers and subcontractors, particularly those who have access to sensitive data or play a critical role in service delivery. Contracts should obligate your vendors to extend your organization’s security, compliance, and performance standards to their own partners—a practice often referred to as “flow-down” of requirements. This ensures that foundational controls, such as data protection protocols or business continuity plans, are consistently applied throughout the supply chain. Additionally, request regular evidence from vendors demonstrating their oversight of third parties, such as audit reports, compliance attestations, or summaries of risk assessments conducted on their suppliers.

Incorporate fourth-party risk considerations into your own vendor risk assessments, evaluating how deeply a vendor depends on external partners and what controls are in place to manage those dependencies. It’s also prudent to establish communication protocols for incident reporting that account for incidents originating with third parties, ensuring you are promptly informed of any potential impact. By proactively addressing fourth-party risks, organizations can close critical blind spots in their risk management programs, reduce the likelihood of supply chain disruptions, and demonstrate to regulators and stakeholders a mature, end-to-end approach to vendor oversight. Robust fourth-party risk management not only protects against downstream threats but also builds greater resilience and trust across the entire supply chain ecosystem.

Enforce Risk Controls Through Contracts and Compliance Management

Even after selecting a reputable third party, your job isn’t done when the contract is signed. The third best practice is to bake risk management into your vendor agreements and continuously manage compliance. Legal contracts are a powerful tool to ensure vendors uphold your standards and to protect your organization if they fail to do so. Start by including specific clauses that address the various risk areas:

• Data Protection and Security Requirements: The contract should stipulate how the vendor must safeguard your data. Outline the consequences if these requirements are not met.
• Right to Audit and Assess: Incorporate a “right to audit” clause allowing your organization to audit or assess the vendor’s controls and processes periodically. This obligates the vendor to cooperate with audits or provide relevant compliance reports upon request. Audit rights create transparency and ensure you can verify that the vendor’s practices remain up to par throughout the relationship.
• Service Level Agreements (SLAs): Define clear performance metrics the vendor must achieve. Also specify penalties or remedies if SLAs are missed, such as service credits, financial penalties, or the right to terminate the contract for serious or repeated failures. SLAs help manage operational and third-party cyber risk management by holding vendors accountable for maintaining resilient services and prompt incident response.
• Regulatory Compliance and Liability: Include clauses requiring the vendor to comply with all applicable laws and industry regulations. The contract should state that the vendor will indemnify your company for any legal/regulatory penalties arising from the vendor’s failures. Clearly assign responsibilities. Who is responsible for notifying affected individuals in the event of a data breach caused by the vendor, and who covers the associated costs?
• Termination and Exit Strategy: Lastly, ensure the contract has provisions for how you can exit the relationship if needed. For critical services, you might require the vendor to assist in the transition of data or processes to a new provider upon termination. Having a well-defined exit plan mitigates strategic risk if a vendor relationship goes south.

Using a standardized vendor compliance checklist during contract drafting can be very helpful. Such a checklist would include all the above points and any other controls important to your organization. Before finalizing any vendor contract, review your checklist to ensure that each risk area is addressed in writing.

Incident Planning and Risk Mitigation Strategies

Developing robust contingency plans and proactive risk mitigation strategies is essential for minimizing the impact of vendor-related incidents or disruptions. Organizations should establish clear incident response protocols tailored to third-party scenarios, including defined roles, communication channels, and escalation paths. Regularly conducting tabletop exercises and scenario planning helps teams identify vulnerabilities and refine response procedures. Also, maintaining backup vendors or alternative supply arrangements can ensure business continuity if a primary vendor fails.

Automation and Technology Enablement

Automation and advanced technology tools are essential for streamlining third-party risk management processes and minimizing manual errors. Automated platforms can handle repetitive tasks such as vendor onboarding, risk assessments, and compliance monitoring, freeing up staff to focus on higher-value analysis and decision-making. These tools for managing third-party risk facilitate real-time data collection, centralize vendor information, and provide continuous monitoring capabilities, ensuring that no vendor is overlooked. By reducing reliance on spreadsheets and manual workflows, organizations can enhance accuracy, accelerate response times, and maintain consistent oversight across their entire vendor ecosystem.

Establishing Internal Triggers, Controls, and Response Mechanisms

To effectively manage third-party risks, organizations must implement robust internal triggers, controls, and response mechanisms tailored specifically to vendor relationships. Internal triggers serve as early warning signals, automatically flagging deviations from expected vendor behavior or performance, such as missed service levels, unusual access patterns, or changes in financial stability. These triggers can be set based on key risk indicators identified during due diligence and should be monitored continuously throughout the vendor lifecycle. Complementing these triggers, well-defined internal controls limit the potential impact of vendor failures or misconduct. Deploying role-based access controls ensures that vendors only access the data and systems necessary for their function, reducing the risk of data breaches. Equally important are clearly documented response mechanisms that outline step-by-step actions when a trigger is activated or a control is breached. This includes escalation procedures, designated response teams, and predefined communication channels to ensure swift mitigation. Testing and updating these mechanisms ensures organizational readiness and resilience.

Continuously Monitor Vendor Risks and Leverage Technology Tools

Third-party risk management is not a “set and forget” task. After onboarding a vendor and signing a contract, the fourth best practice is to monitor and manage the risk throughout the relationship continuously. The risk landscape is dynamic. A vendor that was low-risk at onboarding could become high-risk later due to new threats or changes in their situation. Organizations must move beyond one-time assessments toward ongoing oversight. Adopting this proactive mindset is at the heart of effective vendor risk management.

For example, Certa is one platform that takes an automation-first approach to third-party lifecycle management. Solutions like Certa can automate vendor onboarding workflows, conduct ongoing screenings, and continuously monitor compliance requirements. Such third-party risk tools not only reduce administrative burden, but also ensure that no vendor falls through the cracks unmonitored. When selecting any TPRM technology, organizations should look for adaptability and integration capabilities. The tool should fit your processes and be able to pull data from relevant sources. The ultimate goal is to have an “always-on” view of third-party risk: at any moment, you should have an up-to-date understanding of each vendor’s risk level and be quickly alerted to any emerging issue.

In today’s interconnected business environment, no company is an island – your security and success are intertwined with those of your suppliers and partners. By planning carefully, conducting thorough research on each third party, holding partners to high standards, and maintaining a vigilant approach to developments, you can effectively pursue the benefits of outsourcing and partnerships while keeping risk within acceptable bounds. Investing in strong third-party risk management yields dividends in fewer surprises, smoother operations, and greater peace of mind. Successful third-party risk management isn’t just about avoiding negatives; it creates positive value by enabling your organization to collaborate and innovate with external partners confidently. Embrace these best practices as an integral part of your enterprise risk strategy, and you will be well on your way to a resilient and effective risk management program for all your third-party relationships.

Sources:

• Business Wire – SecurityScorecard Report Reveals 5 in 6 Organizations at Risk Due to Immature Supply Chain Security (June 2025)
• Insurance Edge – Third Party Risks Need Close Attention & Careful Management, Says Gartner (June 2025)

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