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Third-Party Risk Management Framework

Managing third-party risks is important in the interconnected business world. Companies rely on a network of external vendors, suppliers, and partners to run their operations smoothly. However, these relationships have risks, including financial losses, security breaches, and compliance issues.

According to the analyst firm Forrester, “…larger enterprises are more affected by third-party vulnerabilities than smaller, midsized firms. While this may seem counterintuitive, larger enterprises have larger third-party ecosystems, meaning they have a larger set of suppliers that could offer an entry point. Attackers have favored exploiting weaknesses in suppliers with access to large organizations, overattacking them directly due to the weaker security practices seen in many of these suppliers.” A growing number of data breaches reported in publications involved third parties. This research and common news headlines highlight the vulnerabilities that can arise from these partnerships and the need for a third-party risk management program.

A strong Third-Party Risk Management (TPRM) framework is important to protect your business from these challenges. A framework can help organization’s just starting a vendor third-party risk management program and can help refine and optimize existing programs. Organizations should adopt robust frameworks to assess and mitigate risks associated with their third-party relationships.

Let’s explore the key components of an effective TPRM framework and the best practices for managing third-party risks to keep your company secure and compliant.

What is a Third-Party Risk Management Framework?

A third-party risk management framework is a set of guidelines and processes designed to help companies assess, monitor, and manage the risks associated with third parties. While we will focus on the cyber risks that third-parties pose, the framework can and should be applied to financial, operational, reputational, geo-political and other risks your organization is concerned with. These third parties can include vendors, suppliers, contractors, subsidiary organizations, or any external partner that a company relies on for goods or services.

Third-Party Risk Management Framework

The purpose of a TPRM framework is to protect the organization from potential risks that arise when working with external entities. These risks can range from financial instability to data breaches or compliance issues. A well-designed framework helps identify these risks early and provides a structured way to address them.

Key elements of a TPRM framework typically include:

  • Third-party Inventory and Prioritization: Know what third parties you do business with and what services they provide. You’ll find some are more critical to your business operations than others.
  • Risk Identification: This involves identifying the types of risks that might arise from working with a third party. This could be related to data security, financial health, or legal compliance.

 

  • Risk Assessment: Once risks are identified, the next step is to evaluate their potential impact and likelihood. This helps prioritize which risks need the most attention. Depending on the third-party, this could be a generic questionnaire or something more tailored like a PCI DSS questionnaire if it’s related to payment cards as an example, or other industry or government specific control assessments.
  • Mitigation Strategies: After assessing the risks, organizations develop strategies to reduce or manage them. This could involve addressing the risks in contracts, through SLAs for risk identification and remediation during the course of services in the contract term, software bill of materials (SBOM) inventory, conducting audits, and monitoring the third party’s performance.
  • Ongoing Monitoring: A good TPRM framework doesn’t stop once a third-party relationship is established. Continuous monitoring ensures that any emerging risks are identified and managed promptly. As quickly as technology changes, in FortifyData’s experience we are seeing clients monitor vendor’s external attack surface on a continuous basis as another set of eyes for vulnerabilities (a trust AND verify approach) and it helps meet their risk tolerance objectives.

 

As you will see with the graphic, TPRM is a robust program that depends on a few layers to manage third parties – 1. Policies, People, Technology, Governance, 2. Risk Management and 3. Internal Audit

In short, a TPRM framework helps companies build trust with their third parties while safeguarding against potential disruptions. It is a key component of any company’s risk management strategy.

Importance of a Third-Party Risk Management Framework

A TPRM framework is essential for several reasons. As businesses increasingly rely on external partners, the risks associated with these relationships can grow significantly. Here are some key reasons why having a robust TPRM framework is important:

1. Enhanced Security Posture

A well-designed TPRM framework helps organizations identify and address vulnerabilities in their supply chain. By assessing the security practices of third parties, companies can reduce the chances of data breaches and cyberattacks. This proactive approach strengthens the overall security of the organization.

2. Regulatory Compliance

Many industries face strict regulations regarding data protection and privacy. A TPRM framework helps organizations comply with these regulations by ensuring that third parties meet required security standards. Non-compliance can lead to hefty fines and legal issues, making a TPRM framework crucial for risk management.

3. Protection of Reputation and Assets

Data breaches and other incidents involving third parties can damage an organization’s reputation. Customers expect companies to protect their personal information. A strong TPRM framework helps maintain customer trust by demonstrating that the organization takes third-party risks seriously.

4. Improved Decision-Making

With a clear understanding of third-party risks, organizations can make informed decisions about which vendors to work with. A TPRM framework provides valuable insights that help businesses choose partners who align with their risk tolerance and business goals.

5. Cost Savings

Investing in a TPRM framework can lead to significant cost savings in the long run. Companies can avoid the high costs associated with incident response, legal fees, and reputational damage by preventing data breaches and compliance issues.

Adopting a framework for third-party risk management can also help answer the question that we hear from some organizations “I can’t do anything about vulnerabilities at a vendor!” With or without a third-party risk management framework, it is our opinion (captured in this recent podcast episode) that there is always something you can do to reduce third-party risk.

A third-party risk management framework can protect a company’s assets and ensure better compliance. By implementing such a framework, businesses can also deal with the complexities of third-party relationships more efficiently and safeguard their operations against potential threats.

Example of a Third-Party Risk Management Framework

There are several widely recognized frameworks that guide how companies can manage third-party risk some of which may be required by the industry an organization is in. These frameworks provide detailed requirements and best practices for identifying, assessing, and mitigating risks associated with third-party relationships. FortifyData’s third-party risk management platform has many of these frameworks embedded to help automated the process as much as possible. Here are a few examples:

 

NIST Cybersecurity Framework (CSF)

The NIST CSF provides a flexible approach for managing cybersecurity risks. It includes guidelines on how to identify, protect, detect, respond, and recover from cybersecurity threats that may involve third parties. The framework emphasizes the importance of risk assessments and continuous monitoring of third-party vendors to ensure security standards are met.

 

Gramm-Leach-Bliley Act (GLBA)

The GLBA 314.4.(f)(3) mandates financial institutions to ensure the confidentiality and security of customer data. For third-party vendors, the act requires organizations to assess the risk of these external partners, ensuring they follow strict data protection measures. A key part of the framework involves creating contracts that outline security responsibilities.

 

New York Department of Financial Services (NY DFS)

The NY DFS cybersecurity regulations provide specific guidelines for financial institutions to manage third-party risks. These regulations include requirements for risk assessments, regular monitoring, and ensuring third-party vendors comply with cybersecurity standards. Organizations must establish clear agreements with third parties on their cybersecurity practices.

 

Digital Operational Resilience Act (DORA) and NIS2 Directive

The European Union’s DORA and NIS2 directives focus on the resilience of critical sectors, such as finance and energy, against disruptions. These regulations emphasize third-party risk management by requiring organizations to assess and manage risks posed by external providers of critical services, including outsourcing arrangements and IT systems. Read how FortifyData helps European financial institutions and their third parties address the DORA requirements.

 

These frameworks help companies establish a systematic and detailed approach to managing third-party risks to make sure both regulatory compliance and operational resilience.

Source: FortifyData DORA Compliance Questionnaire with Question Auto-Validation.

Developing an Effective Third-Party Risk Management Strategy

Creating a strong TPRM strategy is important for protecting your business from external threats. Here is how to develop an effective strategy that works for your organization:

 

Governance and Ownership

The foundation of any effective TPRM strategy is strong governance. It is essential to assign clear roles and responsibilities for managing third-party risks. Designate a risk management team that oversees the entire process. This team should ensure that all steps— from risk identification to continuous monitoring— are managed consistently and proactively.

 

Risk Assessment Frameworks

Adopting a formal risk assessment framework ensures your TPRM efforts are structured and comprehensive. Frameworks like NIST (National Institute of Standards and Technology) and ISO 31000 are trusted standards for evaluating risks. These frameworks guide organizations in identifying, prioritizing, and mitigating third-party risks based on severity and potential impact. Leveraging these industry-recognized frameworks helps you approach risk management in a consistent and effective way.

 

Contractual Protections

Contracts with third parties should be more than just agreements—they should serve as a risk management tool. Clearly define each party’s responsibilities, expectations, and risk-sharing agreements. Make sure that third-party agreements outline data protection measures, compliance obligations, and penalties for non-compliance. Well-drafted contracts ensure that risks are minimized and provide a legal recourse if things go wrong.

 

Technology Integration

To streamline third-party risk management, integrate the right technology tools. Many companies use risk management software to automate assessments, track compliance, and monitor vendor performance. These platforms provide valuable insights and alerts, ensuring that your business stays ahead of potential risks. By using technology, you can reduce manual efforts, improve accuracy, and maintain continuous oversight over third-party relationships.

Challenges in Third-Party Risk Management

While third-party risk management is vital, businesses face several challenges that can complicate the process. Recognizing these challenges allows businesses to implement better risk management practices and protect their interests.

third-party icon for threat exposure management

1. Complexity of Vendor Ecosystems:

Many organizations today work with multiple layers of vendors, making it difficult to track risks across the entire supply chain. Often, your third-party relationships can have their own sub-contractors, creating a web of potential risks. This level of third-party risk becomes 4th party or Nth party risk management. To address this, businesses must implement a comprehensive risk management approach that includes assessing risks not just with direct vendors but also with their suppliers and partners.

rbvm icon for threat exposure management FortifyData

2. Data Privacy and Security Risks:

Data privacy and security are top priorities for both businesses and customers. Third-party vendors often handle sensitive data, raising the risk of data breaches. A report from the Ponemon Institute found that 59% of businesses experienced a data breach caused by a third-party vendor. To mitigate this, ensure your third parties adhere to industry-standard security practices and have the necessary certifications (e.g., ISO 27001). Regular audits and security assessments are also essential to minimize data security risks.

3. Compliance with Regulations:

As regulatory requirements continue to evolve, especially with laws like GDPR and CCPA, businesses face the challenge of ensuring that their third parties are compliant as well. Failing to meet regulatory standards can result in heavy fines and damage to your reputation. It's crucial to stay informed about changing regulations and incorporate them into your third-party risk management process. Regular reviews and updates to your compliance policies ensure that you stay on top of these challenges and avoid penalties.

Third-Party Risk Assessment Process

Conducting a thorough third-party risk assessment can help with managing the risks associated with external partners – whether existing business partners or evaluating new contractors via RFP or solicitation as part of your due diligence. This process helps companies identify vulnerabilities and determine how to mitigate them. Here are the key steps involved in a typical third-party risk assessment process:

 

Step 1: Initial Screening

Begin by gathering basic information about the third party. This includes understanding their business model, services provided, and the type of data they will access. Conduct an initial screening to identify any red flags, such as previous security incidents or regulatory violations.

 

Step 2: Risk Categorization

Next, categorize the third party based on the level of risk they pose to your organization. This can be done using a simple risk matrix that considers factors like the type of data involved, the criticality of the services provided, and the potential impact of a security breach. Common categories include low, medium, and high risk.

 

Step 3: Detailed Assessment

For higher-risk vendors, conduct a more detailed assessment. This may involve sending out questionnaires that cover various aspects of their security practices. Questions should address areas such as data protection measures, incident response plans, and compliance with relevant regulations. FortifyData also has a capability called Questionnaire Auto-validation. Since FortifyData conducts automated assessments, if a technical control is found to contradict a recipient response to an applicable technology control question, our questionnaire module will flag that for discprepancy review.

 

Step 4: On-Site Audits (if necessary)

In some cases, it may be necessary to conduct on-site audits of high-risk vendors. This allows you to verify their security practices firsthand and assess their facilities and processes. On-site audits can provide valuable insights that questionnaires may not capture.

 

Step 5: Review and Analyze Findings

Once you have gathered all relevant information, review and analyze your findings. Identify any gaps in the vendor’s security practices and assess whether they meet your organization’s requirements. This analysis will help you determine if you can proceed with the partnership or if additional measures are needed.

Step 6: Develop Mitigation Strategies

If risks are identified during the assessment, develop strategies to mitigate them. This could involve requiring the vendor to implement specific security controls, increasing monitoring frequency, or even reconsidering the partnership altogether. Clearly document these strategies for future reference.

FortifyData-Third-party-Risk-Management-Vendor-Portfolio-Continuous-Monitoring-Dashboard
Source: FortifyData Third-party Risk Management Vendor Portfolio Continuous Monitoring Dashboard

What is the Difference Between TPRM and GRC?

While Third-Party Risk Management (TPRM) and Governance, Risk, and Compliance (GRC) both deal with risk, they focus on different aspects of organizational risk management with TPRM being a subset of a GRC program. Understanding the difference can help businesses better manage their overall risk landscape.

Here is a simple comparison table highlighting the differences between TPRM and GRC:

AspectThird-Party Risk Management (TPRM)Governance, Risk, and Compliance (GRC)
Focus Managing risks from third-party vendors, suppliers, or contractors.Managing overall organizational risks, including internal and external.
Scope Narrow, focused on external partners and their risks.Broad, covering all types of risks across the organization.
ObjectiveMitigating third-party risks that could harm the organization.Ensuring legal, regulatory, and internal compliance while managing risks.
Tools & ProcessesRisk assessments, vendor audits, performance monitoring tools.Comprehensive tools for aligning risk management with business goals.
IntegrationPart of a GRC framework, focused on external risks.Encompasses all areas of risk management, including TPRM.

Fortify Your Business with FortifyData’s Risk Management Solutions!

Third-party risks are a significant concern for businesses today, and managing these risks effectively is essential for maintaining security, compliance, and operational stability. FortifyData is an automated Cyber GRC platform helping organizations manage cyber risk and GRC related processes and responsibilities for enterprise and third-party risk management.

 

With FortifyData’s third-party risk management module, you can:

  • Gain deep insights into the potential risks posed by third-party vendors, from data security threats to regulatory compliance gaps.
  • Adopt real-time risk assessments and actionable data to prioritize risks and implement effective mitigation strategies.
  • Keep track of third-party performance and security on an ongoing basis to ensure they meet your standards and regulatory requirements.
  • Make informed, data-backed decisions when selecting, managing, or terminating third-party relationships.

 

Ready to take control of your third-party risks? Request a demo with FortifyData today and fortify your business against future threats.

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