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What Are the Steps of Third-Party Risk Management?

5 min read
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Like every business process, third-party risk management (TPRM) is built on steps. When organizations use a consistent approach to managing third-party risk, processes are more effective and efficient. 

It ensures every third party undergoes the same process during onboarding, ongoing monitoring, and offboarding. Let’s explore the steps of third-party risk management and how to apply them. 

What Are the Steps of Third-Party Risk Management? 

A proven lifecycle approach streamlines the process of identifying, assessing, managing, and mitigating third-party risks. By leveraging insights gathered during each step, organizations can make well-informed decisions that guide subsequent actions. This systematic approach strengthens risk management and boosts organizational resilience. 

Here are the 10 steps of third-party risk management:

  1. Plan for the third-party relationship – Right from the beginning, your organization must prepare for the third-party relationship. Begin by understanding why you want to outsource the product or service and the potential risks. Then define roles and responsibilities. Designate an owner to oversee the relationship and complete tasks. Now is also the time to establish an exit strategy in case the third party fails or you end the partnership. 
  2. Perform a risk assessment – Identify third-party risks with an inherent risk assessment. An inherent risk assessment evaluates the risks that naturally exist in the vendor’s product or service without considering controls (i.e. the measures, policies, or procedures in place to mitigate risk). Risks include financial risks such as bankruptcy or fraud, operational risks like service disruptions or data breaches, and compliance risks like failure to meet regulatory requirements, among others.  

    Related: 10 Types of Vendor Risks to Monitor  
  3. Conduct due diligence – The next step is due diligence. This is the process of investigating a third party's business practices and standing and the effectiveness of its controls. The level and type of due diligence depends on the third party's risk level and criticality. The higher the risk, the more robust and intensive due diligence. Due diligence sometimes requires a third party to complete a questionnaire with information about the products or services and risk management practices and controls. Request documentation as evidence of those controls like SOC reports, policies and procedures, business continuity and disaster recovery plans, and audited financial statements. 

    Related: Vendor Due Diligence Checklist 
  4. Negotiate the third-party contract – You’re now ready to negotiate the contract. As the final step in the onboarding process, a well-crafted contract is your shield against risks and unforeseen issues. Include provisions that address regulatory compliance, cybersecurity measures, breach notification protocols, the right to audit, and service level agreements (SLAs). 
  5. Re-assess risk periodically – Once the third party is onboarded, the relationship moves to the ongoing stage. Periodically review the relationship to uncover if anything has changed. Be on the lookout for new or emerging risks. Review the inherent risk assessment and update it if necessary. The third party should review the risk questionnaire, even if there are no changes in the types or amounts of risks. 
  6. Perform periodic due diligence – Due diligence isn't meant to be a one-time activity – a third party's risk and controls change, evolve, or fail. Regularly collect and review due diligence, as some documents, such as independent third-party audits and insurance certificates, expire. Frequency of due diligence is determined by the third party's inherent risk rating. 
  7. Monitor risk and performance – Ongoing risk and performance management ensures third-party risks are well-controlled and the quality of the third party's products and services meets your expectations. Refer to the service level agreement (SLA) in the third-party contract to manage performance. Document and track issues until resolved. Critical and high-risk third parties require performance reviews at least once per quarter. To continuously monitor third-party risks, use risk intelligence services to stay informed about news, regulatory updates, and changes in risk profiles. 

    Related Content: Prioritize Continuous Vendor Risk Monitoring 
  8. Renew the third-party contract – Contract management helps track each contract, so you have enough time to consider, renegotiate, or terminate it. Third-party contract renewals should be planned well in advance. Otherwise, you may be at risk of a rushed process, less negotiating power, or an automatic renewal at a higher price.  
  9. Formally terminate the relationship – Manage third-party risk from the beginning to the end of the relationship. If you're ending a third-party relationship, formally notify the third party that the contract won't be renewed, or that the relationship will end prematurely. Review the contract for any termination provisions and requirements.  
  10. Execute the exit plan – When it’s time to end the relationship, rely on the exit strategy created during the planning stage of third-party risk management. The exit plan provides a documented approach for implementing that strategy. It’s a roadmap to guide your organization through the offboarding process. Include information about the third party, the contract, data transfer, key stakeholders, and risks with the product or service. Clearly define the duties and responsibilities of both parties when the contract ends.  
  11. Close final TPRM tasks – Once the third party's exit plan is complete, there are a few final steps to close the relationship formally. This includes reviewing and paying any final invoices, filing and archiving relevant third-party information, and updating the third party's status in all systems.  

    Related: How to Offboard Vendors Successfully 

Follow the steps for third-party risk management in the proper order to build a comprehensive and consistent strategy for managing third-party risks. These steps are not only regulatory requirements for certain industries – they are best practices designed to protect your organization. Use this framework as a roadmap for your third-party risk management program, ensuring activities are conducted in the right sequence and at the right times. 

How can you implement and execute an effective vendor risk management program? Follow tips and best practices in this mini handbook.  


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