Third Party Risk Management: 6-Step Lifecycle and Best Practices

What Is Third-Party Risk Management (TPRM)?

Third-party risk management (TPRM) is the structured process of identifying, assessing, and mitigating risks (such as cybersecurity breaches, data leaks, and operational failures) posed by external vendors, suppliers, and partners. It is essential for protecting organizational reputation, financial stability, and regulatory compliance throughout the vendor lifecycle, from onboarding to offboarding.

Organizations must  identify, assess, and control risks introduced by engaging external entities or vendors. These third parties can include service providers, suppliers, contractors, and business partners that deliver products or perform services on behalf of the organization. Managing these relationships helps prevent disruptions, data breaches, compliance failures, and other risks that arise from dependencies outside direct organizational control.

This is part of a series of articles about data security

Why Managing Third-Party Risk Is Critical 

There are several types of risks associated with third parties that organizations must consider and address.

Operational Risks

Third-party relationships can introduce operational risks, such as supply chain disruptions, service outages, or reduced product quality. If a critical vendor experiences a failure, the cascading impact can halt business operations, delay project deliveries, or degrade customer service. These risks often stem from reliance on a vendor’s resources, limited transparency into internal processes, or insufficient contingency planning.

Operational failures caused by third-party dependencies can be difficult to predict and recover from. Unlike in-house operations, organizations often have limited visibility into a vendor’s business continuity strategies, workforce stability, or incident preparedness. To limit such risks, businesses need to assess third-party performance, implement contingency plans, and confirm that vendors maintain mitigation strategies aligned with organizational priorities.

Cybersecurity and Data Privacy

Partnering with third parties increases the risk of cybersecurity incidents and data privacy breaches. Vendors with network access or responsibility for handling sensitive information can become attack vectors, even if internal defenses are strong. Compromises at a vendor may allow threat actors to infiltrate infrastructure, steal proprietary data, or deploy ransomware that halts business processes.

Data privacy obligations further complicate this landscape, with laws such as GDPR and CCPA holding organizations accountable for breaches caused by third-party processors. Failure to manage vendor access controls, encryption, and compliance practices can result in regulatory fines, legal action, or reputational damage. Organizations must extend security requirements, audits, and monitoring to external business relationships.

Compliance and Legal Risks

Organizations face legal and regulatory obligations related to third-party relationships. Regulators expect companies to assess, document, and manage vendor risks, particularly when personal data or critical infrastructure is involved. Poor oversight can result in non-compliance with mandates such as HIPAA for healthcare, PCI DSS for payment processing, or SOX for financial reporting.

Legal risks also arise from contract disputes when roles, responsibilities, or security expectations are unclear. Inadequate due diligence or vague contractual language may expose an organization to liability if a vendor mishandles sensitive information or violates applicable laws. Clear terms, regular reviews, and documented oversight of third-party compliance reduce exposure to legal penalties and regulatory sanctions.

Financial and Reputational Risks

Financial losses driven by third-party failures can include costs from system outages, penalties from compliance violations, or operational inefficiencies. For organizations relying on just-in-time supply chains or single-source vendors, a third-party incident can cause unplanned expenses, revenue losses, and performance impacts. Recovery often involves remediation, vendor replacement, or reputational repair.

Beyond immediate financial losses, reputational harm may persist after a third-party incident is resolved. Public disclosure of data breaches, product flaws, or service interruptions linked to vendors can erode customer trust and affect shareholder value. Organizations are judged on their prevention and oversight processes as well as their response to incidents. 

Related content: Read our guide to data protection

How Does BYOD and the Rise of Unmanaged Devices Impact Third Party Risk Management?

The increasing use of bring-your-own-device (BYOD) policies and unmanaged devices by third parties significantly complicates risk management. These devices often fall outside the organization’s direct control, yet may access sensitive data or internal systems. Without proper safeguards, they introduce vulnerabilities such as unpatched software, weak authentication, or lack of endpoint protection, increasing exposure to malware, data leakage, and unauthorized access. Vendors using personal laptops, tablets, or smartphones can unknowingly bypass corporate security controls, creating blind spots in the organization’s risk posture.

To address these risks, TPRM programs must expand their scope to include endpoint security considerations during vendor onboarding and monitoring. This may involve traditional device management paradigms like mobile device management (MDM) or endpoint detection and response (EDR), but is increasingly transitioning to device-agnostic approaches like secure enclaves, which create a strong isolation between work and personal data on unmanaged devices. 

As the boundary between internal and external systems becomes more porous, third-party oversight must account for unmanaged endpoints as active components of the threat landscape.

TPRM Framework and Lifecycle 

1. Governance and Policy Setup

TPRM begins with governance and policy foundations. Organizations assign roles and responsibilities for third-party risk oversight, often through a cross-functional team that includes procurement, compliance, IT, and business leaders. This team develops and enforces policies that define risk thresholds, required security controls, due diligence processes, and expectations for vendor behavior.

Policy setup includes documentation and periodic review of the TPRM framework. Leadership involvement supports integration of TPRM into organizational planning, with oversight and escalation mechanisms for high-risk issues. Policies should reflect the organization’s risk appetite and regulatory obligations, ensuring consistency in third-party assessments, approvals, and monitoring.

2. Inventory and Scoping

Accurate inventory and scoping are core components of a TPRM program. Organizations maintain a register of third-party relationships that details service type, business owner, data handled, and system access. This inventory supports categorization of vendors by criticality, data sensitivity, and risk exposure, enabling prioritization of assessments and resources.

During scoping, organizations define which third parties fall within the TPRM framework. Not all vendors present the same level of risk, so the process distinguishes between those with significant business impact or sensitive data access and those with limited exposure. Focused scoping reduces unnecessary evaluations and directs effort toward entities with the greatest potential impact on operations or compliance.

3. Risk Assessment and Due Diligence

Risk assessment and due diligence are used to evaluate third-party suitability before contracts are signed. Organizations identify and measure risks presented by each vendor, assessing factors such as operational stability, cybersecurity posture, compliance history, and financial condition. Questionnaires, control checklists, and external intelligence inform these assessments.

Due diligence may include interviews, on-site audits, and testing of security or process controls. The objective is to confirm that vendors can meet contractual obligations and regulatory requirements. Consistent due diligence processes support informed decisions and help avoid onboarding vendors that introduce unacceptable risk.

4. Contracting and Controls Integration

Contracting formalizes third-party relationships and embeds risk controls. Contracts define roles, data handling requirements, performance metrics, information security standards, reporting obligations, and liability for breaches or non-compliance. Agreements should include enforceable terms aligned with the vendor’s risk profile and regulatory context.

Controls integration accompanies contracting. Security and privacy obligations, such as encryption, monitoring, audit rights, and incident response protocols, are documented in the agreement. Periodic review of contractual controls, aligned with changes in risk and regulation, maintains accountability over time.

5. Continuous Monitoring

After onboarding and contracting, continuous monitoring is used to detect emerging risks during the vendor relationship. This includes periodic reassessments, alerts for relevant events, performance tracking, and review of cybersecurity or compliance status. Automated tools can support early identification of control weaknesses, incidents, or regulatory actions affecting a vendor.

Monitoring requires defined thresholds for acceptable risk, regular evidence from vendors, and escalation processes for concerns. A structured monitoring program supports timely response to threats and helps maintain risk exposure within defined limits throughout the third-party lifecycle.

6. Offboarding and Transitions

Offboarding and transitions require structured handling within TPRM programs. When a vendor relationship ends, organizations ensure that data is returned or deleted, system access is revoked, and confidentiality obligations are maintained. This phase addresses residual risks and limits unauthorized access after termination.

Transition planning during offboarding or vendor replacement addresses continuity of service and transfer of assets, knowledge, or responsibilities. Poorly executed separation processes can create operational gaps, compliance issues, or security weaknesses. Documented offboarding procedures and checklists support controlled third-party transitions.

Best Practices for Effective Third-Party Risk Management 

Here are some of the ways that organizations best manage third-party risks.

1. Integrate BYOD Security Controls into Third-Party Risk Assessments

Vendors and contractors may use personal devices to access organizational data, increasing the risk of data leakage, unauthorized access, or malware exposure. Including BYOD-specific questions and controls, such as device management requirements, encryption, and authentication protocols, within assessments supports evaluation during onboarding.

Ongoing oversight of BYOD practices should be part of the vendor relationship. Reviews verify adherence to mobile security standards and incident reporting requirements. Implementing BYOD security controls can strengthen third-party security oversight.

2. Establish a Risk-Based Tiering Model Tied to Business Impact

Not all third parties present the same level of risk, so organizations often adopt a risk-based tiering model. Vendors are categorized based on service criticality, data access, or business impact, allowing TPRM teams to allocate review frequency and depth accordingly. Higher-risk vendors receive more frequent reviews, detailed assessments, and contractual controls, while lower-tier vendors follow reduced processes aligned to their risk profile.

Tiering models support compliance management and allocation of monitoring resources. Structured segmentation helps demonstrate to regulators and auditors that risk management activities are proportionate to business impact.

3. Standardize Due Diligence with Evidence-Based Validation

Standardized due diligence processes support consistent vendor evaluations. Organizations define standards, checklists, and data requirements for third-party assessments across business units. Requiring evidence-based validation, such as SOC 2 reports, penetration test results, and compliance certifications, allows verification of vendor claims without reliance on self-attestation.

Standardization supports onboarding efficiency, identification of control gaps, and integration with monitoring tools. Evidence-based due diligence also supports regulatory review, audit trails, and incident investigation through documented controls and validation.

4. Automate Continuous Monitoring with Event-Driven Triggers

Manual periodic reassessment of third-party risks does not account for rapidly changing threat conditions. TPRM programs use automation and event-driven triggers to support ongoing monitoring. Integrations with threat intelligence feeds, breach notification services, and performance dashboards allow detection of changes in vendor status, compliance posture, or incident exposure.

Automation supports timely escalation, investigation, or suspension of vendor access when required. Event-driven monitoring helps maintain current risk awareness and address issues before they develop into larger incidents.

5. Embed Security and Privacy Clauses Early in Procurement

Embedding security and privacy requirements at the start of procurement clarifies expectations. Including standardized clauses in RFPs, questionnaires, and draft contracts outlines required controls, such as encryption, incident reporting, and data destruction, for all vendors. This limits late-stage negotiation issues and screens out vendors unwilling to meet requirements.

Early inclusion of these clauses aligns procurement with IT and compliance functions. Defining requirements at the outset reduces gaps in controls and supports consistent contract enforcement.

6. Test Incident Response and Exit Plans with Critical Vendors

Incident response and exit strategies must be validated with critical vendors through regular joint testing. Desktop exercises, simulated breaches, and recovery drills verify whether vendors can communicate effectively, follow processes, and support organizational continuity if an incident occurs. Testing also highlights gaps in data handling, reporting timeliness, or escalation protocols that may otherwise go unnoticed until a real crisis emerges.

Such testing helps update documentation and assign clear roles, reducing confusion during actual incidents or offboarding transitions. It demonstrates robust oversight to auditors and regulators, and fosters closer collaboration with key suppliers. Regular tests ensure that both sides understand expectations and are equipped to respond to disruptive scenarios.

Venn: Addressing Third-Party Risks on Unmanaged Devices

Venn provides a modern approach to third-party risk management by isolating company access and data within a company-controlled secure enclave on any unmanaged or personal laptop. Instead of attempting to lock down the entire laptop (which is unrealistic for freelancers, offshore teams, or short-term engagements), Venn isolates and protects company data in a governed workspace marked clearly by Blue Border™, where work applications run locally.

Key Features include:

• Seamless MFA integration: Works with Okta, Azure, and Duo for smooth, secure authentication
• Encrypted workspace: Protects all data and applications with robust encryption
• Context-aware access controls: Enforces policies based on user, device, and environment
• Comprehensive session logging: Tracks all activity with full audit visibility
• Unified Zero Trust solution: Combines endpoint protection, remote access, and Zero Trust security
• Faster, scalable alternative: Optimized performance compared with legacy VPNs and VDI

Schedule a demo of Blue Border™