Third-party risk management (TPRM) refers to the process by which an organisation identifies, assesses, monitors and mitigates risks that arise from its relationships with external parties such as vendors, suppliers, contractors or service providers. These third parties often have access to data, systems or business processes that make them potential risk vectors for cyber incidents, compliance breaches, operational disruption or reputational damage.
For stakeholders in procurement, compliance, IT and business leadership, TPRM means expanding the lens from “What risk do we have internally?” to “What risk do our external partners bring into our value chain?” Traditional vendor management often focused on cost, performance and contract terms. TPRM broadens that to cover legal/regulatory, cyber-security, operational resilience, ethical/sustainability and supply-chain risks.
Why TPRM Matters for Every Stakeholder in 2025
How does TPRM benefit my company?
At its core, a strong TPRM program helps protect against financial loss, regulatory penalty, supply-chain interruption, data breach and reputational damage. For executives and business stakeholders, it means greater confidence that outsourced or external relationships are not weak links.
In 2025 the stakes are higher:
Organisations are increasingly dependent on third-party technologies, including AI tools, cloud services and specialised vendors — introducing more complexity and risk.
Regulatory scrutiny is intensifying: for example FINRA-reporting emphasises that third-party vendor outages and cyber-attacks are key vulnerabilities for the financial industry.
Vendor-caused cyber-incidents are becoming more frequent: one recent update found that nearly half of breaches in fintech firms had third-party origins.
TPRM is no longer a compliance checkbox – it is integral to business continuity, operational resilience and strategic agility.
For procurement teams, TPRM means not only negotiating cost and quality but embedding risk controls. For compliance and legal, it means oversight of vendor contracts, data privacy, regulatory requirements and audit trails. For IT/security, it means integrating vendor risk into the cyber-security posture and monitoring vendor access, behaviour and breach exposure.
Best Practices: Setting Up a TPRM Program
So you might ask: What are TPRM best practices for business? Here are foundational steps:
Define your scope and governance. Determine what “third party” means in your context (vendors, suppliers, subcontractors, partners). Assign accountability (e.g., risk owner, vendor manager). Establish oversight from senior leadership and integrate vendor risk into enterprise risk management.
Build your vendor inventory and risk ranking. Create a comprehensive list of all third-party relationships, including 2nd-tier and beyond (nth-party). Then tier them by criticality based on factors such as access to sensitive data, regulatory impact, operational dependence, or concentration risk.
Conduct due diligence and assess inherent risk. Use questionnaires, certifications, audits and evidence of vendor controls. Ensure you are asking vendor-specific risk questions (how is AI used, how is data processed, security protocols, business-continuity planning).
Implement controls, contracts and monitoring. Define controls based on vendor risk tier (e.g., periodic reviews, scoring, performance metrics). Ensure contracts embed key clauses: breach notification, audit rights, data-handling, continuity, exit strategies.
Continuous monitoring and review. Move beyond one-time assessment. Use technology, automation and data feeds to monitor vendor risk in real time (cyber incidents, changes in vendor profile, new regulations).
Embed program in business processes and culture. The TPRM program must be understood across IT, procurement, operations, legal and business units. Regular training, dashboards for executives, and clear communication about vendor risk landscape support alignment.
Measure and improve. Define key metrics (number of high-risk vendors, time to onboard, number of vendor incidents, residual risk score) and feed these into continuous improvement. Risk maturity models are gaining traction.
How to assess vendor risk 2025: the steps above reflect modern expectations. Note also that for 2025 you should ensure your vendor risk assessment includes coverage for AI-usage, supply chain/geopolitical risks and regulatory/compliance changes.
Emerging Risks and Solutions (AI, Compliance, Cybersecurity)
The TPRM landscape is evolving fast and stakeholders should be prepared for these trends:
AI-driven risk assessment and vendor innovation. AI is no longer just a tech buzzword, it is central to TPRM. Organisations are using machine-learning to generate risk scores, compare vendor responses with evidence and monitor anomalies in vendor behaviour.
At the same time vendors themselves may incorporate AI, raising questions around data training, model risk, bias and explainability.
Expanded regulatory requirements and business-continuity focus. Regulations such as the EU’s Digital Operational Resilience Act (DORA) and increasing scrutiny over vendor concentration, outsourcing and supply-chain resilience mean that vendor risk is now a board-level topic.
Cybersecurity and supply-chain attack vectors. Third-party vendors are a prime target for cyber-attacks. A breach in a vendor can cascade into clients. Monitoring vendor cyber hygiene, incident response plans, access controls and third-party access is critical.
Visibility beyond direct vendors – nth-party risk. Many organisations are now looking beyond their direct vendors to the subcontractors or sub-vendors their vendors rely upon. This “risk-in-the-chain” is increasingly material.
Ethical, ESG and sustainability risk tied to vendors. Business stakeholders are increasingly asking: what is our vendor’s carbon footprint? Are they compliant with Labour standards? Vendor risk extends to sustainability, ethics and governance.
Organisations that invest in modern TPRM solutions, integrate automation, analytics and cross-functional alignment will be better positioned to stay ahead of these risks.
How to Assess and Monitor Third-Party Vendors
Here are practical steps for vendor assessment and monitoring:
Initial screening: Before engagement, run a high-level risk questionnaire to determine the vendor’s criticality, data access, industry sector and controls.
Inherent risk assessment: For each vendor, score based on factors such as access to sensitive data, system connectivity, regulatory exposure, service criticality, geographic and concentration risk.
Control assessment: Review vendor’s controls including cyber-security frameworks, incident response, continuity plans, compliance certifications (ISO 27001, SOC 2, etc).
Contractual risk transfer and oversight: Ensure your contract mandates appropriate vendor behaviour (breach notification, audit rights, subcontractor oversight, exit rights, SLA penalties).
Tiered monitoring: For high-critical vendors, establish continuous monitoring dashboards (cyber-incident feeds, vendor financial health, media mentions, regulatory actions). For lower-risk tiers, periodic assessments may suffice.
Vendor performance and audit reviews: Track vendor performance against agreed KPIs, audit findings, control failures or incidents.
Escalation and remediation process: When a vendor presents a new risk (cyber-incident, regulatory change, service disruption), ensure a clear internal process to escalate to senior management, decide on mitigation (e.g., increase oversight, reduce scope, exit vendor).
Reporting to stakeholders: Provide dashboards and risk-reports to business leadership, procurement, security and compliance teams so they understand vendor risk exposure, trends and action-plans.
Tip for 2025: Incorporate AI-based vendor risk scoring and seek vendor platforms that provide real-time monitoring and automation to avoid reliance on manual spreadsheet-centric models.
Common Mistakes and Ways to Avoid Them
What pitfalls should business stakeholders watch out for?
Treating TPRM as a checkbox activity. If you only perform annual questionnaires and never monitor in-between, you risk missing emerging issues. Update your approach to continuous monitoring.
Onboarding vendors without adequate risk tiering. If you treat all vendors the same regardless of criticality, you waste resources and possibly fail to focus on the highest risks. Avoid inconsistent inherent risk assessments.
Lack of cross-functional ownership. If procurement, IT, security and compliance each operate in silos, no one has full visibility. Define clear roles and governance.
Neglecting vendor access and concentration risk. Many incidents occur because a vendor has wide access or the vendor ecosystem is concentrated (one vendor supports many clients). Make sure you assess concentration, access permissions and subcontractor layers.
Ignoring emerging risks such as AI or subcontractors (nth-parties). As vendor ecosystems become more complex, failing to assess AI usage, data training, subcontractor risk or regulatory spillover can leave you exposed.
Over-reliance on outdated tools/manual reviews. If your TPRM is still spreadsheet-based and manual, you may not scale and will struggle with speed and accuracy. Invest in platforms and automation.
Weak contract language and audit rights. Even the best vendor relationship needs contractual protections. If you lack breach notification clauses, audit rights, exit rights or continuity obligations you limit your recourse when things go wrong.
Conclusion
For 2025 and beyond, third-party risk management is not optional. It is a strategic imperative that intersects procurement, IT, security, legal and business operations. A well-designed TPRM program enables organisations to confidently engage external partners, mitigate vendor risk, respond to regulation, maintain operational resilience and protect their reputation.
By treating vendor risk as part of your enterprise risk portfolio, aligning governance across stakeholders, applying modern technology and analytics, and constantly monitoring your vendor ecosystem, your organisation will be far better positioned. Remember: vendor risk is your risk.
