Effectively managing third-party risk provides organizations with several key advantages. By addressing vulnerabilities and maintaining oversight, businesses typically see:

• Improved security posture: TPRM ensures that third parties comply with security and cybersecurity protocols, reducing the likelihood of data breaches, unauthorized access, and other cyber risks.

• Enhanced operational efficiency: By identifying and addressing risks early, organizations can minimize disruptions to workflows, ensuring that critical operations operate (and continue operating) as expected.

• Regulatory compliance: TPRM helps organizations manage compliance with industry regulations by ensuring that third parties meet the necessary legal and contractual standards, reducing the risk of fines or other penalties.

• Strengthened customer trust: A strong TPRM program demonstrates an organization’s commitment to safeguarding customer data and upholding privacy, enhancing customer confidence in the business.

• Consistent vendor performance: In terms of observability, ongoing monitoring ensures that third parties deliver on their commitments and meet agreed-upon service levels, avoiding missed deadlines or subpar outputs.

• Minimized financial impact: By actively mitigating risks, TPRM reduces the likelihood of costly incidents, such as supply chain failures or legal disputes. This helps ensure that revenue can continue to flow.

• Faster recovery from disruptions: A well-managed TPRM program includes contingency plans that allow businesses to respond quickly and effectively to third party-related disruptions, minimizing downtime and losses.

The TPRM lifecycle is a structured process for managing third-party relationships. This lifecycle includes key stages that help organizations evaluate vendors, establish secure collaborations, and maintain oversight. These stages include: 

Stage 1: Identifying third parties 

The first step involves building a comprehensive inventory of all third parties your organization engages with, including potential new vendors. This includes consolidating existing data from internal systems like contract management tools, conducting departmental surveys, or leveraging self-service portals. These efforts help classify third parties based on the risks they may pose, such as data access, operational impact, or geographic vulnerabilities. 

Stage 2: Evaluating and selecting vendors 

During this stage, businesses assess potential vendors to determine suitability based on the organization’s needs. This often includes reviewing requests for proposals (RFPs) and comparing vendor capabilities against business requirements. Key considerations may include the vendor’s reliability, alignment with operational goals, and ability to comply with security or regulatory standards. 

Stage 3: Conducting risk assessments

Once a vendor is identified, a detailed risk assessment evaluates potential threats associated with the relationship. These assessments may use risk managementframeworks such as ISO, NIST, or industry-specific standards like HITRUST. Automated tools or third-party risk exchanges can streamline this resource-intensive process, helping organizations identify and address vulnerabilities efficiently. 

Stage 4: Mitigating identified risks 

After risks are assessed, mitigation strategies are implemented to reduce risks to acceptable levels. Risks are prioritized based on severity, and actions may include implementing controls, validating compliance measures, or requiring vendors to improve their security posture.

Stage 5: Establishing contracts and agreements

Contracts formalize the relationship between the organization and the vendor, detailing responsibilities and risk management requirements. Key contractual elements include confidentiality clauses, data protection agreements, service-level agreements (SLAs), and provisions for compliance with regulations. TPRM teams must carefully review these terms to ensure they are below organizational risk thresholds.

Stage 6: Reporting and maintaining records 

Organizations should document all vendor interactions, risk assessments, and mitigation efforts. Digital tools are often used to centralize and audit these records, providing insights for continuous improvement.

Stage 7: Monitoring vendor performance 

Ongoing monitoring ensures that vendor risks remain within established limits throughout the partnership. This includes tracking risk-changing events like regulatory updates, mergers, or data breaches. Regular assessments and real-time alerts help organizations adapt their strategies as needed to address new concerns. 

Stage 8: Offboarding and retiring vendors

The final stage involves safely terminating vendor relationships when they are no longer needed. This can include (but is not limited to) ensuring all organizational data is securely removed from the vendor’s systems, terminating access to sensitive resources, and documenting the offboarding process. A formal retirement process protects the organization from residual risks. 

Taking a step back, possibly the most essential aspect of TPRM is analyzing vendors and other partners before committing to any sort of professional relationship. Effective analysis makes it possible to identify early on whether a vendor or other type of partner might be likely to expose the company to risks. To do this, organizations can focus on the following areas: 

• Risk intelligence reports: Comprehensive risk intelligence reports provide insights across multiple risk domains, including security, financial stability, regulatory compliance, and reputational standing. These reports aggregate data from various sources, helping businesses make more well-rounded evaluations. 

• Security and financial ratings: Ratings built on standardized methodologies make it possible to assess a range of important risk elements. Security maturity, financial health, ESG metrics, and overall stability can all be quantified. And while there may be times when ratings fail to tell the whole story, they can still make it easier for businesses to identify the kinds of red flags that could indicate a risky partnership.  

• Questionnaires: Questionnaires allow businesses to collect detailed information directly from third parties about their security practices, compliance certifications, risk mitigation measures, etc. These tailored surveys offer insight into areas like data protection policies and breach history. 

• Negative news and sanctions screening: Not every issue will show up in ratings or questionnaires. A company with a history of legal violations, unethical practices, or poor customer experiences may slip under the radar unless you also monitor public media sources and sanction lists. This approach uncovers those third parties that could damage your business’ reputation by association. 

• Penetration testing: Penetration testing evaluates a vendor’s resilience against potential cyberattacks by simulating real-world hacking scenarios. This method helps identify vulnerabilities in systems, applications, or networks that third parties use, confirming that they meet established security standards. 

• Virtual evaluations: Virtual evaluations leverage video conferencing and remote tools to assess a vendor’s processes, technologies, and compliance efforts. This approach is ideal for initial screenings or when on-site visits are impractical. 

•  On-site evaluations: On-site assessments involve visiting the vendor's premises to gain firsthand insights into their security protocols, infrastructure, operational controls, and adherence to regulatory standards. These kinds of visits can reveal risk-management gaps that might not be evident from remote assessments or third-party documentation. 

To get the most out of TPRM, organizations should consider various best practices. These approaches help counter or mitigate many of the issues that may stand in the way of effective risk management: 

Prioritize your vendor inventory 

Not all third parties carry the same level of risk, so it’s crucial to classify them into tiers based on their potential impact. Classifying third parties into risk tiers—such as high (Tier 1), medium (Tier 2), and low (Tier 3)—provides clarity on how much oversight and assessment each vendor requires. Factors to consider include access to sensitive data, the criticality of services provided, and the potential impact of a failure. 

Leverage automation wherever possible

Automation takes much of the time and effort out of repetitive processes (such as onboarding, risk assessments, and performance reviews), enhancing efficiency and reducing the likelihood of human error. For example, automated workflows can assign tasks, calculate inherent risks, or trigger reassessments based on key events. These efficiencies help scale TPRM programs and ensure consistency across the organization. 

Do not limit risk management to cybersecurity 

While cybersecurity should never be overlooked, effective TPRM programs consider a broader spectrum of risks. A comprehensive approach ensures the organization is prepared for diverse challenges. 

Define organizational goals 

A successful TPRM program begins with clear goals aligned with the organization’s broader risk management framework. These goals should address specific risks posed by third parties and establish the acceptable level of risk the organization is willing to tolerate. This alignment promotes consistency across departments. 

Get buy-in from key stakeholders 

Stakeholder involvement is essential for an effective TPRM program. Engaging teams from procurement, compliance, IT, and operations ensures that all parties understand and support the organization’s risk management objectives. Early collaboration fosters a culture of accountability. 

Prioritize ongoing monitoring 

Third-party risk is dynamic, and continuous monitoring allows organizations to track changes in a vendor’s risk posture or operational performance in real time. Tools that provide real-time alerts or that are capable of tracking objective data ensure risks are being addressed proactively (rather than reactively). 

Below are some important considerations that need to be taken into account when choosing a third party. The answers will determine the level of risk they pose to the business:

• What type of data is being accessed? What type of access has been granted?
• Do they work with 4th parties that could pose delivery challenges?
• Are they in an unstable part of the world?
• Are they providing a critical product or service? If so, do we need to have an alternate vendor in place?
• What is their security history, what best practices do they have in place and execute on? (basic hygiene, patching SLAs, history of breaches, etc.)
• Do they have business continuity plans in place?
• Are they in compliance with the regulations your organization has identified?
• What is their financial situation? What is the contract value?

Organizations face multiple dimensions of risk when working with third parties, ranging from strategic misalignment to operational vulnerabilities. Understanding these categories is essential for assessing potential impacts and implementing appropriate controls. Below are the key areas of risk associated with third-party relationships: 

Strategic risk 

Strategy can be threatened when third parties and organizations are not aligned on decisions and objectives. Monitor third parties to make sure that strategic risk does not lead to a lack of compliance or eventual financial risk. 

Reputation risk 

The reputation of a company can also hinge on the reputation of a third party with whom they do business. If a third party has an issue with reputation or a data breach, it can lower customer trust in a business that works with the third party. 

Cybersecurity risk 

Cybersecurity risks arise when third parties interact with an organization’s data, systems, or networks. Vendors with poor security practices may expose sensitive information to unauthorized users, possibly leading to data breaches or attacks. Evaluate third-party cybersecurity measures, such as encryption, patching practices, and incident response plans, to ensure they align with your organization’s security standards 

Operational risk  

Operations may hinge on third-party applications and services, and there is always a risk that the third party can fall victim to a cyber attack or a lapse in service that can lead to operational interruptions. 

Transaction risk 

There can be issues with a product or service delivery from a third party, which can cause transactional issues within an organization. 

Compliance risk  

Standards are slowly beginning to incorporate third-party risk as a requirement for compliance, so risk tolerance for compliance should be extended to third parties as well. 

Information security risk 

Regardless of whatever form data may take, there is a degree of risk that arises from allowing a third party to interact with data, including risk from unauthorized access, disruption, modification, recording, inspection, or destruction of information.  

Financial risk 

It is important to work with financially viable third parties to avoid disruptions to the supply chain. Additionally, third parties who are in financial trouble may not be as focused on security measures, leaving themselves open to unnecessary risk. 

Managing vendor risks effectively requires a comprehensive approach that provides visibility into all third-party relationships, ensures due diligence, and standardizes risk mitigation practices. These principles help organizations build resilience and protect themselves from unnecessary disruptions or security breaches.  

• Total visibility into all third-party relationships  
• A formal, pre-contract assessment and due diligence  
• Use of standardized, risk-mitigating terms
• Risk-based monitoring and oversight  
• Formal off-boarding at the end of the relationship

Building a robust vendor management program involves integrating risk assessment into every stage of the vendor lifecycle. Organizations must combine technology, collaboration, and process improvements to identify, prioritize, and mitigate risks. Below are key strategies for implementing a risk-based program. 

• Digitize and integrate all aspects of the vendor management lifecycle. Assessing risk should be part of the early stages.  
• Consolidate vendor information and collaborate with third parties while maintaining an audit trail of all collaborations.  
• Gain and maintain an understanding and visibility of third-party risk and performance, including subsidiaries (or fourth parties). 
• Develop a granular assessment of where risk originates.  
• Create risk scores to compare, prioritize, and communicate risk.  
• Use machine learning and automation systems to accomplish more while reducing costs.  
• Create a resiliency plan and embed a plan into each aspect of the vendor management system.  
• Integrate with other applications (such as data feeds for cybersecurity and financial ratings, negative news, etc.) and third-party systems.  

Vendors, contractors, suppliers, and partners—they all represent the possibility of risk to your business. But they don’t have to. The right approach to third-party risk management can give you the insights you need to take risk out of the equation.   

Built on the award-winning ServiceNow AI Platform and powered by top-tier AI solutions, ServiceNow Third-Party Risk Management provides an end-to-end solution designed to streamline risk mitigation and ensure compliance across the third-party lifecycle. From onboarding and offboarding to ongoing monitoring, ServiceNow centralizes third-party data, automates workflows, enhances communication between stakeholders, and integrates TPRM fully into the heart of your business.   

See how ServiceNow takes the risk out of external partnerships—demo ServiceNow today!