What Is Third-Party Risk Management & Why It is Important?

By: Beaconer, Jul 12, 2023

What Is Third-Party Risk Management & Why It is Important?


In today’s interconnected business landscape, organizations often rely on third-party vendors, suppliers, and service providers to meet operational needs. While these partnerships bring numerous benefits, they also introduce potential risks. Third-party risk management (TPRM) is a crucial process that helps organizations identify, assess, and mitigate the risks associated with their relationships with external parties. According to a study, 98% of organizations worldwide are connected to at least one third-party vendor that experienced a security breach in the past two years.

In this blog post, we will explore what third-party risk management entails and why it is essential for businesses in the modern era.

What Is Third-Party Risk Management?

Third-party risk management involves the systematic approach of identifying, assessing, and mitigating the risks that arise from an organization’s interactions with external entities. These entities can include suppliers, contractors, cloud service providers, consultants, and any other entity that conducts business with or on behalf of the organization. TPRM evaluates and manages potential cybersecurity risks associated with these external parties’ activities, systems, processes, and data.

Some Common Risks Associated With Third-Party Relationships Include:

Compliance Risks

Third-party vendors may fail to comply with laws, regulations, or industry standards, resulting in legal or reputational damage to the organization.

Security Risks

Third-party vendors may have access to sensitive or confidential information, systems, or networks and may not have adequate security controls to protect against cyber threats or data breaches.

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Operational Risks

Third-party vendors may experience disruptions or failures that impact the organization’s operations, supply chain, or customer service.

Financial Risks

Third-party vendors may experience financial difficulties or bankruptcy, leading to disruptions in the organization’s supply chain or the loss of vital business relationships. The global average cost of a data breach in the financial industry is estimated to be $6 million.

Reputational risks: Third-party vendors may engage in unethical or illegal activities, damaging the organization’s reputation and brand image.

Strategic Risks

Third-party vendors may need to align with the organization’s strategic objectives or have conflicting interests, leading to misaligned expectations and poor performance.

These risks can significantly negatively impact an organization’s operations, reputation, and financial stability. Effective third-party risk management is critical to mitigating these risks and ensuring that third-party relationships are aligned with the organization’s strategic objectives and values.

The Importance of Third-Party Risk Management

The Importance of Third-Party Risk Management

Protecting Reputation and Brand Image

A third party’s actions or failures can significantly impact an organization’s reputation and brand image. Data breaches, security incidents, unethical practices, or regulatory non-compliance by a third party can tarnish the organization’s reputation, leading to financial losses and loss of customer trust. By implementing effective TPRM practices, organizations can reduce the likelihood of such incidents and protect their reputation.

Mitigating Operational Disruptions

Third-party failures or disruptions can have a cascading effect on an organization’s operations. Whether it’s a critical supplier failing to deliver essential components or a cloud service provider experiencing prolonged downtime, these incidents can result in significant operational disruptions and financial losses. Through TPRM, organizations can proactively identify potential vulnerabilities and ensure appropriate contingency plans are in place to mitigate the impact of third-party disruptions.

Minimizing Regulatory and Compliance Risks

Organizations operate within complex regulatory requirements and compliance obligations. When engaging with third parties, organizations extend their risk and compliance responsibilities to these external entities. Failure to ensure that third parties adhere to the necessary regulations and compliance standards can lead to severe legal and financial consequences for the organization. TPRM helps organizations assess the risks associated with vendors, implement appropriate controls, and monitor ongoing adherence to regulatory requirements.

Safeguarding Data and Intellectual Property

Third parties often have access to sensitive data, intellectual property, trade secrets, and other proprietary information. Inadequate data protection measures or mishandling of intellectual property by a third party can result in data breaches, leaks, or intellectual property theft, leading to financial and reputational damage for the organization. TPRM facilitates the evaluation of third-party security controls, data handling practices, and contractual agreements to protect valuable assets.

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Enhancing Overall Risk Management

Comprehensive risk management requires organizations to consider risks beyond immediate operations. Third-party relationships introduce a new dimension of risk that organizations must address to maintain robust risk management practices. By integrating TPRM into their overall risk management framework, organizations can gain a holistic view of their risk landscape, improve risk mitigation strategies, and enhance resilience against emerging threats.

A Practical Third-party Risk Management Function Includes:

Continuous Monitoring

Regularly assess third-party vendors to ensure that they comply with the contract terms and that any new risks are promptly identified and addressed.

Incident Response Planning

Planning and preparation for potential incidents or breaches involving third-party vendors to ensure a quick and effective response.

Training And Awareness

Training and educating employees on the importance of third-party risk management and their role in identifying and reporting potential risks.

Performance Metrics

Establish performance metrics to track the third-party risk management program’s effectiveness and identify improvement areas.

Executive Oversight

Regular reporting to senior management and the board of directors on the status of third-party risks and the risk management program’s effectiveness.

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Wrapping Up

Prioritizing third-party risk management is not just good practice; it is necessary for organizations aiming to thrive and succeed in today’s dynamic business environment. By investing in TPRM, businesses can fortify their operations, protect their reputation, and ensure long-term success in an interconnected, risk-prone world.

Beaconer provides managed service using its cloud-native artificial intelligence platform and is changing the Cyber security game. With our powerful AI tool, Information Hub, and instantaneous intelligence, we provide comprehensive and swift third-party risk management solutions, ensuring that their vendor’s risk posture does not negatively impact organizations.

Author Bio

Nagaraj Kuppuswamy

Nagaraj Kuppuswamy is the Co-founder and CEO of Beaconer, an esteemed enterprise specializing in managed third-party risk using the cloud native AI based solution. With an extensive portfolio of accolades and industry certifications, Nagaraj stands out as a seasoned expert, boasting over 16 years of dedicated involvement in the field of Cybersecurity. Throughout the course of their career, he has predominantly focused on elevating the realm of third-party risk assessment.


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