What Is the Difference Between a Vendor and Third Party?

You’ve likely heard the terms third party, supplier, vendor and service provider, but what do they mean? When it comes to third-party risk management, which of these entities need to be managed? Let’s break down each of these terms into simple definitions.

Vendor vs Third-Party Vendor vs Fourth-Party Vendor: What are the Differences?

A good place to start is understanding which party is which. Your organization is the first party and your customer or client is the second party. Any other entity supporting the transaction between the first and second parties is a third party, and those that support your third party are known as your fourth parties.

So, are the terms third party, vendor, supplier and service provider interchangeable? For most organizations today, the answer is generally yes. However, there are nuanced differences between some of these terms. Let's explore them.

• A vendor is an entity that purchases goods or services from a manufacturer or distributor and resells them to the customer or the end-user.
• A supplier is an entity that makes goods available to another business and is typically part of a business-to-business relationship.
• A service provider is an entity that makes services available to another entity or business and can have a business-to-business or a business-to-customer relationship.
• A third party is any business entity that has a relationship with your organization to provide products or services directly to you or your customers on your behalf. Third party is an acceptable umbrella term for a vendor, supplier, provider, etc.

In general, vendors and suppliers provide goods and services directly to your organization to support your operations. In contrast, service providers and third-party vendors provide goods and services to your customers on behalf of your organization. Let’s review some examples.

A fourth party or subcontractor is an entity that has a direct contractual relationship with your vendor or third party, but NOT with your organization. Critical fourth parties will be identified in your third party’s SSAE 18 report.

No matter what terminology your organization uses, any entity that provides products or services to you or your customers (on behalf of your organization) should be in scope for third-party risk management. Usually, any company or entity providing goods or services directly to your customers poses an increased risk to your organization and, therefore, deserves increased scrutiny. It may help to learn a few examples of each entity type.

What About Fourth Parties and Nth Parties?

Like your organization, your third parties utilize other entities to help them deliver products and services to their customers. When assisting your third party to deliver products and services to your organization, those entities become your fourth parties. This chain of accountability continues onward to fifth parties, sixth parties, etc. However, anything beyond a fourth party is generally called an nth party.

It's essential to be aware of your fourth and even nth parties, particularly those supporting your critical products and services to your organization. After all, you can outsource a product or service, but you can't outsource the risk. Remember, if there is a negative impact on your customer, you can be held accountable for something your vendor's vendor does.

To make sure that the chain of the fourth party and Nth party risk is managed appropriately, practice the following duties:

1. Require your critical and high-risk third parties to disclose their critical fourth or nth parties and inform you of any fourth-party risk or performance issues.
2. Review your critical and high-risk third parties' third-party risk management practices as part of due diligence and regular risk reviews.
3. Ensure you include a right to audit clause in your contracts.

In conclusion, your organization may utilize any number of third parties (as well as their fourth parties, etc.) to run your operations and provide products and services to your customers. No matter how your organization refers to these external entities, the terminology is not as important as managing the risks associated with those relationships.