Overcoming Common Pitfalls in Third-Party Risk Management Implementation

In today’s interconnected business environment, companies rely heavily on external vendors and partners. However, this reliance comes with significant risks. Third-party risk management (TPRM) is the process of identifying and mitigating risks that arise from working with outside parties. A well-run TPRM program helps organizations avoid disruptions, data breaches, compliance violations, and other vendor-related issues. Implementing TPRM effectively is a challenging task. Many organizations fall prey to common pitfalls that undermine their vendor risk efforts. This article explores these pitfalls and provides guidance on how to overcome them.

Visibility and Ecosystem Mapping

Organizations often lack a complete, up-to-date inventory of all vendors, suppliers, and partners across the enterprise. Overlooking certain vendors can create dangerous blind spots. Supplier risk management can’t succeed if you don’t have visibility into all the external entities touching your business. Incomplete vendor inventories lead to unidentified risks that often go undetected. If an “invisible” fourth-party has a critical vulnerability, it might expose your organization without you even realizing it. Many firms focus only on their primary vendors (Tier 1 suppliers) and fail to map out multi-tier relationships, which means they might miss risks introduced by subcontractors or downstream suppliers.

Start your TPRM program by building a comprehensive third-party inventory. This involves cataloging every external entity that provides goods, services, or technology to your organization. It’s essential to coordinate across all departments, including procurement, IT, finance, operations, and others, to ensure that no vendor is overlooked. Each entry in the inventory should include key details, such as the vendor’s name, services provided, the department that owns the relationship, and contact and contract information. Once created, the inventory must be maintained as a living document. New vendors should be added during onboarding, and departures or scope changes should be updated promptly. Consider scheduling periodic audits of the vendor list to catch any “rogue” suppliers that might have been engaged outside of standard processes. To aid in this effort, some organizations leverage supply chain risk management software to map their vendor ecosystem and visualize how third parties connect to critical operations. By utilizing technology tools or supplier risk management solutions that consolidate supplier data, companies can enhance visibility and ensure that no third-party relationship falls through the cracks.

Misconceptions and Program Gaps in TPRM Solutions

Despite growing awareness of third-party risk, many organizations still fall victim to persistent misconceptions and program gaps that undermine their ability to manage vendor-related threats effectively. One widespread myth is that third-party risk is solely an IT or cybersecurity issue. In reality, vendor risks extend far beyond technology, including operational, financial, reputational, and compliance domains. When companies delegate TPRM responsibilities exclusively to IT or security teams, they risk overlooking non-technical vulnerabilities, such as supply chain disruptions or unethical labor practices. Another common mistake is assuming that completing an initial vendor assessment is sufficient. This “set it and forget it” mindset ignores the dynamic nature of risk; vendors’ circumstances, business practices, and threat exposures can change rapidly, rendering one-time evaluations obsolete. Blind spots also arise when organizations rely too heavily on standardized questionnaires or self-reported vendor information. While these tools are helpful, they can create a false sense of security if not supplemented with independent verification, such as audits or external intelligence. Vendors may unintentionally downplay risks, leaving organizations exposed to hidden threats.

Lacking a Structured Vendor Risk Assessment Process

Another common pitfall is taking an inconsistent or ad-hoc approach to evaluating vendor risks. Without a standardized vendor risk assessment process, some organizations perform only cursory reviews of new vendors, while others apply the same one-size-fits-all questionnaire to every third party. These approaches can leave serious risks unaddressed. Treating a critical cloud software provider the same as a low-impact office supplies vendor will either overburden the small vendor or, more dangerously, under-scrutinize the critical one. Lack of standardization also means results are not easily comparable. One business unit might vet vendors thoroughly, while another might skip important steps. The absence of clear risk categorization is a related issue: without assigning vendors to risk tiers (high, medium, low) based on factors like data access or business criticality, it’s very difficult to prioritize efforts. Organizations that don’t incorporate risk tiering into their due diligence often struggle to determine which vendors are safe to work with and which require urgent risk mitigation.

Establish a formal, repeatable framework for vendor risk assessment. This process should begin with a risk classification step, where each third party’s inherent risk is evaluated based on the sensitivity of the data they handle, their access to systems, regulatory impact, and operational importance. Assign a risk rating or tier that will determine the depth of due diligence required. Then, conduct a thorough assessment of each vendor appropriate to its tier. This typically involves sending out vendor security assessment questionnaires or checklists covering areas like information security, data privacy, business continuity, financial stability, and compliance. Using standardized questionnaires ensures consistency. A well-defined vendor risk assessment process, with tiering and automation, enables you to focus your risk mitigation efforts where they matter most.

Challenges in Prioritizing Risks and Implementing Effective Remediation Strategies with Vendors

One of the most complex aspects of 3rd-party risk management is not only identifying risks but also effectively prioritizing them and collaborating with vendors to remediate the most critical vulnerabilities. Organizations often face an overwhelming number of identified risks, each varying in severity, likelihood, and potential business impact. The first major challenge is establishing a consistent and objective method for risk prioritization. Without a clear framework, teams may focus on easily remediable issues or those that appear urgent, rather than those that pose the greatest risk. This can lead to resource misallocation and leave the organization exposed to significant threats. Additionally, risk prioritization can be complicated by incomplete or inconsistent data from vendors, making it difficult to assess the true nature and urgency of each risk accurately. Communication gaps between internal teams and vendors may further hinder the ability to gain a comprehensive understanding of vulnerabilities, particularly when vendors are reluctant to share sensitive information or lack mature risk management practices themselves.

Once critical risks are prioritized, the next hurdle is implementing effective remediation strategies. This process is rarely straightforward, as it often requires close collaboration with vendors who may have differing priorities, limited resources, or varying levels of technical expertise. Vendors might resist remediation efforts due to cost, operational impact, or lack of understanding of the risk’s significance. Negotiating timelines and agreeing on remediation actions can be challenging, mainly when vendors serve multiple clients with competing demands. Furthermore, organizations may struggle to monitor progress and verify that remediation steps have been properly executed.

Pitfalls in Due Diligence and Vendor Onboarding

A critical phase in third-party compliance is the due diligence conducted during vendor selection and onboarding. However, many organizations stumble at this initial hurdle, inadvertently introducing risk by failing to perform thorough and structured assessments. One of the most common pitfalls is the absence of a formal risk tiering process. Without segmenting vendors according to their risk profiles, organizations may either overburden low-risk suppliers with unnecessary scrutiny or, more dangerously, fail to vet high-risk vendors adequately. This lack of risk-based differentiation can result in wasted resources and, more importantly, leave significant vulnerabilities unaddressed. Another frequent issue is the superficial execution of background checks and evaluations. Organizations might rely on self-reported questionnaires or standard checklists that do not probe deeply enough into a vendor’s security posture, financial stability, or compliance history. Failing to assess a vendor’s experience, data management protocols, and employee background screening processes can expose organizations to considerable risk. For example, neglecting to verify whether a vendor conducts pre-employment background checks or has robust data disposal practices could lead to data breaches or regulatory violations. Moreover, some organizations overlook the importance of reviewing independent audit results, penetration test outcomes, or the vendor’s ability to remediate known deficiencies—steps that are essential for identifying hidden weaknesses.

Relying on Manual Processes and Limited Resources

Implementing TPRM can be resource-intensive, and many organizations stumble by trying to do everything manually without adequate tools or staff. This pitfall is evident in the fact that a large proportion of companies still manage third-party risk via spreadsheets, emails, and ad-hoc efforts. Approximately 69% of enterprises continue to run their TPRM programs manually, consuming a significant amount of time for their risk and compliance teams. Manual workflows not only strain personnel, but they also don’t scale as vendor numbers grow, and can lead to oversight fatigue. With hundreds or even thousands of vendors, a small team cannot effectively track each vendor’s risk status using spreadsheets alone. Essential tasks like tracking assessment responses, updating risk scores, and monitoring vendor news become error-prone or delayed. Additionally, some organizations under-invest in their TPRM function altogether – there may be no dedicated third-party risk manager, or the responsibility is tacked onto someone’s already full plate. A limited budget can also mean that the company hasn’t purchased any software or external expertise to assist with vendor risk.

To break out of this cycle, organizations should invest in both technology and people for third-party risk management. Adopting dedicated TPRM software is a game-changer for scaling your program. These platforms can automate many repetitive tasks – from sending and scoring questionnaires, to tracking risk metrics and reminding vendors to update their information. For example, an integrated third-party vendor management software solution allows you to maintain a centralized repository of all vendor data, documents, and risk analysis in one place. Automation ensures that assessments are triggered on schedule and that you receive real-time alerts if a vendor’s risk profile changes. With dashboards and reports, it becomes far easier to gain an overview of risk across your vendor portfolio and demonstrate compliance to auditors.

Alongside technology, evaluate whether you have sufficiently skilled personnel for your TPRM program. If hiring dedicated staff is not feasible, consider leveraging third-party risk management services to augment your capabilities. These services specialize in vendor risk assessments, continuous monitoring, and even handling the onboarding/offboarding workflow. They can bring expertise and additional resources to manage a large volume of vendors or to address complex areas, such as cybersecurity assessments.

The Role of Automation and Technology

Automation and technology have become essential in modern third-party risk management (TPRM) programs, fundamentally transforming how organizations identify, assess, and monitor vendor risks. As the number and complexity of third-party relationships grow, manual processes are increasingly unsustainable. Automated TPRM platforms address these challenges by streamlining repetitive tasks, centralizing vendor data, and enabling real-time risk monitoring and management. This not only saves significant time and reduces the administrative burden on risk teams but also improves consistency and accuracy in risk evaluations. As mentioned, with dashboards and customizable reports, organizations gain a comprehensive view of their entire vendor ecosystem, enabling better prioritization of risk mitigation efforts and more robust compliance reporting.

Treating Third-Party Risk as a One-Time Assessment (Lack of Continuous Monitoring)

Many organizations make the mistake of viewing third-party risk assessment tools as a project that ends once the contract is signed or the initial due diligence is completed. In reality, vendor risk is dynamic – a partner that was low risk at onboarding could become high risk later due to changes like a cyber breach, financial troubles, or new regulatory requirements. A common pitfall is failing to conduct ongoing third-party risk monitoring. Some companies only review vendors annually, leaving long gaps during which significant issues can arise unnoticed. Without continuous oversight, you might miss warning signs such as a vendor’s deteriorating security practices, negative news, or lapses in compliance. To ensure third-party risks are under control throughout the vendor lifecycle, establish a robust continuous monitoring process. Key elements include:

• Regular performance and compliance reviews: Track whether the vendor is meeting service-level agreements and complying with regulations or contract terms. High-risk vendors might warrant quarterly check-ins or reports, whereas low-risk ones could be reviewed annually.
• Real-time alerts and intelligence: Leverage automation and external data sources to get notified of important developments. For example, utilize cybersecurity rating services or news feeds to catch signs of data breaches, operational disruptions, leadership changes, or legal issues at the vendor. This way, if a vendor suffers a security incident or negative press, you can respond promptly.
• Periodic risk re-assessments: Update the vendor risk assessment, periodically re-score the vendor’s risk based on any changes in their situation or in the broader threat environment. This may involve sending updated questionnaires or reviewing new documentation. Regular re-assessment ensures that your earlier due diligence remains valid over time.

In addition, maintain open lines of communication with vendors. Have designated vendor relationship owners internally who meet with key vendors to discuss performance and emerging risks. The goal is to shift from a static, snapshot approach to a dynamic one, where third-party risk management software is part of business as usual.

Limited Vendor Transparency and Weak Contractual Terms

An effective vendor management program depends on cooperation and clear expectations between you and your vendors. A frequent pitfall in implementation is failing to establish the transparency and contractual protections needed to manage vendor risks. This can manifest as vendors being uncooperative or slow to provide important information. For example, they might resist sharing details about their security controls or notifying you promptly about incidents. Often, this reluctance arises because the groundwork for transparency wasn’t laid during contracting. Suppose your contract with the vendor doesn’t explicitly require them to, say, undergo security audits, provide compliance reports, or report breaches within a certain timeframe. In that case, you’re relying purely on goodwill. Many smaller suppliers might not volunteer negative news unless pressed. Building trust and fostering open communication with third parties is essential, but it can be challenging if they are protective of sensitive data or fear jeopardizing the relationship.

The solution has two parts: communication and contract design. First, set the tone for an open partnership with your vendors. During onboarding and throughout the relationship, emphasize that you value transparency and that it’s in both parties’ interest to manage risks proactively. You can encourage openness by sharing your security expectations and even resources that help vendors improve. Also, designate clear points of contact for risk and compliance issues so that information finds the right channels quickly. Regular meetings or check-ins specifically about risk and performance can institutionalize this dialogue.

Challenges in Contract Management and Negotiation with Third Parties

Managing contracts with third parties is a critical, yet often underestimated, component of effective third-party risk management. One of the primary challenges organizations face is negotiating contracts that genuinely protect their interests rather than simply accepting a vendor’s standard terms. Many organizations may feel pressured to sign boilerplate agreements, which often lack the specific provisions needed to address their unique risk and compliance requirements. This can lead to significant vulnerabilities, as standard contracts may omit essential clauses related to data security, regulatory obligations, or incident reporting. The negotiation phase is a crucial opportunity to set the tone for the entire vendor relationship.

Another common pitfall is failing to manage the entire contract lifecycle effectively. Contract management should not be viewed as a one-time event at the start of a relationship; instead, it requires continuous oversight from drafting and negotiation through ongoing performance monitoring, periodic reviews, and eventual termination or renewal. Key details such as contract renewal dates, changes in scope, or modifications to regulatory requirements must be tracked and managed proactively. Without a robust contract management process, organizations risk missing critical updates, allowing outdated terms to persist, or overlooking opportunities to renegotiate protections as the risk landscape evolves.

Regulatory Compliance and Legal Challenges in Third-Party Risk Management

A complex and persistent challenge organizations face in third-party risk management is ensuring that all vendor relationships remain compliant with a growing web of regulations and legal requirements. As regulatory frameworks evolve, ranging from global data privacy laws like the General Data Protection Regulation (GDPR) and the California Consumer Privacy Act (CCPA), to industry-specific mandates such as HIPAA in healthcare or the Digital Operational Resilience Act (DORA) in finance—organizations must not only maintain their own compliance, but also verify that every third party with access to sensitive data or critical systems does the same. This task is complicated by the fact that vendors may be subject to different regulatory regimes depending on their location, the nature of the data they process, or the services they provide. Organizations must navigate overlapping and sometimes conflicting requirements across jurisdictions, which can introduce significant legal risk if a third party fails to comply.

A key difficulty lies in the lack of direct control over third-party operations. While organizations can implement robust internal compliance programs, they typically have far less visibility into a vendor’s day-to-day practices, security controls, and legal obligations. Vendors may also subcontract services to other providers (fourth parties), further complicating oversight and increasing the risk of regulatory violations.

Challenges in Identifying and Assessing Vendor Risks

Organizations today face a complex landscape when it comes to identifying and evaluating risks associated with third-party vendors. One of the primary challenges is the sheer diversity and volume of vendor relationships, which often span multiple departments, geographies, and business functions. As companies expand their reliance on external partners for critical operations, the risk surface becomes significantly broader. This makes it challenging to maintain a comprehensive view of all third-party engagements and ensure that no vendor is overlooked. Compounding this challenge is the dynamic nature of the modern threat environment—cybersecurity threats in particular have become more sophisticated, targeting not just organizations directly, but also their vendors and even their vendors’ vendors (fourth parties). High-profile incidents, such as data breaches resulting from compromised supplier credentials or insecure APIs, highlight how third-party vulnerabilities can quickly become organizational crises.

Implementing a successful third-party risk management program is no small feat; however, avoiding these common pitfalls can significantly improve your outcomes. By maintaining a comprehensive vendor inventory, standardizing vendor risk assessment practices, investing in the right tools and resources, and committing to ongoing oversight, organizations can mitigate many of the hazards that derail TPRM efforts. It’s equally important to incorporate regulatory compliance checkpoints, insist on transparency and robust contracts with vendors, and foster an internal culture that supports risk management at every level. In today’s volatile risk landscape, companies must be proactive and thorough in managing their relationships with third parties.