A Guide to Third Party Risk Management (TPRM) Best Practices

Third-party risk management (TPRM) has emerged as a strategic necessity for many organisations, particularly in highly regulated industries. 

Gartner reports that 84% of businesses reported operational disruptions due to third-party risk "misses", while 33% faced regulatory action as a result of a third-party risk management issue.

Due to their increasing reliance on vendors and growing regulatory attention to operational resilience, organisations must adopt proactive, structured approaches to TPRM to address those issues.

This article provides risk management professionals, compliance officers and business leaders with a guide for implementing best practices for TPRM that safeguard their organisations effectively.

Understanding third-party risks

Effective management of any type of risk requires a solid understanding of its nature, causes, likelihood of occurrence, and potential impact. Mismanagement of third-party risks by an organisation can lead to severe consequences such as compliance breaches, financial losses and reputational damage.

Key categories of third-party risks include:

• Cybersecurity: Among the highest risks organisations face today, cyber incidents involving third-party vendors are a major concern. These incidents typically include data breaches, phishing attacks, or ransomware that exploits vulnerabilities within vendor technology ecosystems.
• Operational: Disruptions from vendor failures are one of the leading causes of organisational business continuity crises, resulting in productivity loss, increased costs, and reputational harm.
• Regulatory Compliance: With the growing complexity of regulatory environments, vendor non-compliance with standards like DORA, GDPR, HIPAA, or financial regulations can trigger fines for affected organisations, and damage to their credibility
• Reputational: Negative associations from vendor misconduct or operational failures can have long-term detrimental impacts on brand trust and market position for users of those vendors.

Awareness of why and how these risks can occur provides a baseline for understanding how they might be avoided, prevented, minimised or mitigated.

Best practices for Third-party risk Management

Managing third-party risk is more critical than ever, with businesses relying on an increasing number of external vendors, suppliers, and partners.

Without the right controls in place, these relationships can expose your organisation to operational, financial, and compliance risks.

Follow the best practices below to safeguard your business while maximising the value of your external partnerships. 

1. Establish a TPRM Framework

To be effective, a TPRM framework must provide clarity of risk through systematic risk assessment, consistency of mitigation, and adaptability to the changing environment throughout the vendor relationship lifecycle.

Essential framework elements include:

• Governance and Policy Framework: Clearly defined roles, responsibilities and oversight mechanisms. Documented policies outlining objectives, standards, compliance expectations, and level of organisational risk tolerance to guide decisions about risk acceptance and mitigation.
• Identification and Inventory of Third Parties: Comprehensive cataloguing and classification of third-party relationships. Tiering vendors based on their criticality to the organisation and the level of risk they present.
• Initial Risk Assessment and Due Diligence: Initial evaluation of vendor risk profiles including security, financial, operational, compliance, reputational, geopolitical, etc. Thorough due diligence in alignment with vendor criticality, services provided, data sensitivity and regulatory requirements.
• Risk Likelihood and Impact Assessment: Determining the probability of specific risks occurring. Evaluating potential impacts of risk realisation on operations, finances, reputation and regulatory compliance. Using methodologies such as risk matrices, scoring models, or quantitative and qualitative analyses to prioritise risk.
• Risk Mitigation and Controls: Establishing contractual requirements, SLAs and performance metrics. Implementing mitigating measures such as cybersecurity controls, business continuity planning, contingency plans and insurance coverage.
• Continuous Monitoring and Reporting: Maintaining awareness through continuous monitoring involves regularly reviewing third-party risks based on each vendor’s assessed risk level. Reviews should also occur in response to organisational or vendor-related business or technological changes, regulatory shifts, significant vendor performance issues, or emerging external threats that alter risk exposure levels.
• Incident Response and Remediation: Adhering to clearly defined escalation procedures for responding to incidents involving third parties. Complying with structured remediation plans with follow-up actions, reporting and documentation.
• Termination and Exit Strategies: Following defined processes for exiting third-party relationships, including data retrieval and deletion, performance of any ongoing obligations, or activation of transition plans to alternative suppliers or internal operations
• Auditing and Independent Assurance: Conducting regular internal and/or external audits of the third-party risk management process. Performing assurance activities to validate compliance with TPRM frameworks, standards and regulations.

These framework elements provide a structured approach for managing third-party risk throughout the entire vendor lifecycle. 

2. Conduct Due Diligence and Continuous Monitoring

Detailed initial due diligence on new vendors paired with ongoing monitoring is essential for robust TPRM.

Due diligence processes:

• Audit and Inspection: Perform regular physical or remote audits of vendors' operational standards, data security and compliance practices.
• Reference Checks: Obtain insights from current and former vendor clients to assess reliability, transparency, and performance history.
• Risk Profiling: Evaluate vendors’ historical performance, financial stability, cybersecurity measures and compliance records.
• Vendor Screening: Conduct in-depth evaluations assessing financial stability, cybersecurity maturity, compliance records, and operational capabilities.

These processes ensure thorough vetting of vendor reliability, operational standards, cybersecurity, and compliance before engagement.

By conducting audits, performing reference checks, profiling vendor risks, and thorough vendor screenings, organisations mitigate potential vulnerabilities from the outset of the vendor relationship.

Continuous monitoring strategies:

• Automated Alerts: Use real-time monitoring solutions to detect and respond promptly to shifts in vendor risk exposure.
• Performance Tracking: Continuously monitor vendors against clearly defined KPIs and contractual obligations to ensure compliance and operational effectiveness.
• Regular Risk Reviews: Conduct periodic reassessments of vendor risk profiles to capture emerging threats.

These strategies enable organisations to proactively manage and adapt to evolving vendor risks. Their use helps to ensure sustained oversight and timely response to changes in vendor risk profiles, maintaining operational resilience and regulatory compliance.

3. Leverage Vendor and Contract Lifecycle Management (VCLM) Software

Managing third-party risks effectively requires more than periodic assessments and static reports.

Without the right technology, risk processes become fragmented, reactive, and prone to oversight - leaving organisations exposed to financial, operational, and regulatory failures.

• AI Data Extraction:  AI-powered tools analyse contract metadata, vendor performance metrics, compliance records, and external risk intelligence to identify potential risks before they escalate.

• Market Intelligence for Risk Monitoring: External risks can shift rapidly, making it critical to integrate real-time risk intelligence into vendor management. Market intelligence tools provide insights into financial health, legal disputes, regulatory breaches, and cybersecurity threats - ensuring organisations base risk decisions on both internal and external data. 

• Automated Risk Assessments & Mitigation Workflows: Technology-driven risk modules automate vendor evaluations, ensuring a structured and repeatable approach to onboarding, due diligence, and ongoing monitoring. Pre-configured workflows can automatically trigger mitigation actions such as escalating high-risk vendors for additional scrutiny or pausing contract renewals if compliance gaps are identified.
• Continuous Compliance Monitoring: Risk exposure doesn’t end at onboarding. Automated compliance tracking links vendor risk profiles to contractual obligations, regulatory requirements, and performance data. Any changes, such as expired certifications, missed SLAs, or new regulatory concerns, trigger alerts and required actions, ensuring continuous oversight and audit readiness.

By embedding these advanced risk management capabilities into vendor and contract processes, organisations can move beyond reactive risk management, ensuring resilience, compliance, and strategic decision-making.

4. Vendor Risk Scenario Planning and Stress Testing

As supply chains grow more interconnected and regulatory scrutiny increases, organisations must prepare for high-impact, low-frequency events. These include major vendor failures, geopolitical instability, or cyberattacks that could severely disrupt operations.

By simulating worst-case scenarios, organisations can assess potential vulnerabilities, test response plans, and refine contingency strategies.

• Identify Critical Vendors & Services: Map out dependencies on third parties providing essential services, technology, or data access to determine where failures could cause the greatest disruption.
• Develop Risk Scenarios: Define plausible yet high-impact failure scenarios, such as a key supplier going bankrupt, a regulatory compliance failure, or a ransomware attack shutting down vendor systems.
• Conduct Stress Testing: Simulate vendor failures to evaluate how existing risk controls, business continuity plans, and response mechanisms perform under pressure.
• Gap Analysis & Action Plans: Identify weaknesses in risk mitigation strategies and establish preemptive controls, such as contractual fail-safes, alternate vendors, or stricter cybersecurity measures.
• Regulatory Compliance Alignment – Align scenario planning with regulatory expectations, such as DORA’s operational resilience mandates or financial services stress-testing requirements.

By embedding vendor risk scenario planning into a TPRM strategy, organisations can move beyond reactive risk mitigation to a more proactive, resilience-driven approach. This ensures that even in extreme disruption scenarios, business continuity and compliance obligations remain intact.

5. Prioritise Contractual Risk Management and Enforceable Vendor Obligations

While risk assessments, monitoring, and scenario planning are crucial, organisations must also ensure that risk mitigation measures are contractually binding - otherwise, vendors may not be held accountable when risks materialise.

Even with strong due diligence and monitoring, risk exposure remains if vendor contracts lack enforceable provisions for security, compliance, and business continuity. In regulated industries, inadequate vendor agreements can lead to non-compliance penalties, operational disruptions, and financial losses.

Focus on:

• Risk-Based Contract Structuring: Ensure vendor contracts include tailored risk mitigation clauses based on the vendor’s risk tier, industry regulations, and operational impact.
• Regulatory & Compliance Clauses: Mandate adherence to GDPR, DORA, HIPAA, ISO 27001, or other relevant frameworks, with clear penalties for non-compliance.
• Business Continuity & Exit Plans: Require vendors to maintain disaster recovery and continuity plans and include structured exit strategies to prevent disruption in case of termination.
• Cybersecurity & Data Protection: Include specific cybersecurity standards, such as encryption requirements, incident reporting timeframes, and liability clauses for data breaches.
• Performance SLAs & Penalties: Define service level agreements (SLAs) with enforceable penalties for missed targets, ensuring vendors remain accountable for risk-related failures.

By integrating contractual risk management into TPRM, organisations reduce risk exposure, strengthen compliance, and improve vendor accountability. This ensures risk mitigation efforts are not just recommended practices, but legally enforceable obligations.

Wrap Up

Effective TPRM in 2025 demands a structured, compliance-focused and technology-driven approach to proactively manage continually changing third-party risks.Organisations must rigorously implement detailed frameworks, thorough vendor assessments, technological advancements and continuous compliance monitoring.Gatekeeper’s advanced Vendor and Contract Lifecycle Management software further bolsters these processes, delivering significant advantages in helping organisations to achieve risk mitigation, operational effectiveness and regulatory alignment from
their vendors.To see how Gatekeeper can support your compliance journey, book your demo today.

fAQ: Common Questions on Third-party Risk Management

What is Third-Party Risk Management (TPRM)?
TPRM is the process of identifying, assessing, and mitigating risks associated with external vendors, suppliers, and service providers that an organisation relies on.

Why is TPRM important?

TPRM is crucial as organisations increasingly depend on third parties for critical business functions. Poorly managed vendor risks can lead to regulatory penalties, operational disruptions, cybersecurity breaches, and reputational damage.

What are the key risks associated with third parties?

The primary risks include cybersecurity breaches, operational failures, regulatory non-compliance, reputational damage, financial instability, and supply chain disruptions.

How can organisations effectively assess third-party risks?
By conducting initial due diligence, classifying vendors based on criticality, implementing ongoing monitoring processes, and integrating automated risk assessments into procurement workflows.

What role does technology play in TPRM?
Technology enhances TPRM through AI-powered risk identification, continuous compliance monitoring, automated due diligence workflows, and real-time market intelligence integration.

How often should vendor risk assessments be conducted?
Assessments should occur at onboarding, periodically (annually or biannually based on risk level), and whenever a significant change occurs in vendor operations, regulations, or security landscapes.

What are the regulatory considerations for TPRM?
Regulations such as GDPR, DORA, HIPAA, and financial compliance mandates require organisations to ensure vendor security, privacy, and operational resilience.