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Who Is Considered a Third Party or Vendor?

3 min read
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A third-party vendor is a company or entity with whom you have a written agreement to provide a product or service on behalf of your organization to your customer or upon whom you rely on a product or service to maintain daily operations.

A more general term for third party is vendor. A third party is your organization’s direct vendor as you have a contract directly with them.

Examples of Third Parties

Here are a few examples of who is considered a third party:

  • Software as a Service (SaaS) providers
  • Outsourced data center
  • Consultants
  • Healthcare provider

Some of these examples could be considered BOTH a vendor and a third party, depending on how the services are used. For instance, your organization likely has a direct contact with one or more SaaS providers. These providers may also service your customers directly on your behalf. They would technically be categorized as your third-party vendor, as well as the more broadly defined term vendor. 

It's easy to see why there's often confusion surrounding these terms, because the lines are often blurred. Not all organizations (in fact, most organizations), don't really differentiate between the two in a meaningful or substantial way, and that's okay. The important element to remember is that your TPRM or VRM program is responsible for managing and mitigating the risk itself. It's essential to closely inspect and monitor the organizations who present risk to your organization, regardless of what you call them. You can think of this general idea as "knowing your vendor."

How to Know Your Third Party/Vendor

Not only should you understand the meaning of a third party, but you should also “know your vendor”. What exactly does this mean? Essentially, it means that your organization should review the vendor's operations and their competence in providing prospective services and meeting their contractual obligations. This is especially true if the relationship falls under any regulatory umbrellas. It's important to verify that your vendors don't pose unnecessary risk to your organization.

3 Best Practices for Getting to Know Your Third-Party Vendors

Here are three best practices to ensure you know your vendors:

  1. Perform due diligence during the vendor vetting phase. In addition to your organization’s standard due diligence requirements that are performed on each vendor relationship, be sure to conduct a background check, OFAC checks, request the Articles of Incorporation/business license, review their financials and do a Secretary of State check, just to name a few. Of course, the extensiveness of your due diligence should be relative to any risks associated with the engagement.

  2. Establish ongoing monitoring. Continue to perform due diligence as the relationship progresses. Ongoing monitoring is often the forgotten step in third-party risk management.  Many organizations will heavily vet a vendor prior to signing a contract, then assume that heavy vetting will protect them indefinitely. In reality, there are often regular changes to an organizations' control environment from year to year. Anything from leadership changes, internal software enhancements, data center migrations, could all significantly impact how well a vendor is securing your information and maintaining contractual commitments. It's important to not skip this step and set yourself up to understand vendors' inherent and residual risks as they may change. 

    Signs of new risks may include:
    • A decline in financial condition
    • Proper security controls are no longer in place
    • The third party is receiving many complaints from your organization’s very own customers due to poor service levels
    • The vendor isn’t meeting service level requirements
  1. Check the news. Not surprisingly, the web can be a great resource for your ongoing monitoring efforts. Be sure to schedule web searches on your critical and high-risk vendors. You’ll be surprised to find that you can quickly learn a lot about your third party with a simple news search.

The meaning of third party/vendor isn’t one that is overly complex or difficult to understand. However, when you look beyond the surface level definition, you’ll find that there's so much more to it. It’s an important concept and knowing your third party/vendor is crucial to the success of an organization’s vendor management program.  

Once you've identified your vendors, be sure to learn who your identified critical vendors are. Download the infographic.

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