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Vendor Risk Management vs. Third-Party Risk Management

Louis Strauss |

February 5, 2024

Vendor Risk Management vs. Third-Party Risk Management

Contents

Organizations today rely heavily on third-party suppliers, vendors, contractors, and more to conduct business operations. However, these relationships can expose companies to serious risks if not properly managed.

That is where VRM and TPRM programs come in.

Vendor Risk Management (VRM) assesses and monitors vendor-related risks across financial viability, data security, regulatory compliance, etc. It aims to minimize disruptions to operations or supply chains caused by vendor issues.

On the other hand, Third-Party Risk Management (TPRM) encompasses VRM but evaluates risks from other third parties like service providers, business partners, contractors, and franchisees. The risks assessed are also wider, covering financial, operational, compliance, security, and reputational risks.

While overlapping in purpose, their scopes and focuses make them distinct. Properly implementing both programs is crucial for organizational resilience and risk control.

 

 

5 key stages of vendor risk management

 

 

What is vendor risk management?

Vendor Risk Management (VRM) is crucial for modern business operations. The increasing reliance on external vendors to provide goods and services has amplified the importance of effectively managing the risks associated with these partnerships.

VRM is the process of identifying, assessing, monitoring, and mitigating risks from an organization's use of external vendors. These risks can vary, from compliance issues, operational disruptions, financial instability, cyber threats, and reputational damage.

VRM’s objective is to ensure that the vendor's impact on the organization aligns with its risk appetite and does not affect its strategic objectives or regulatory obligations. VRM involves several key stages:

  • Vendor selection: This initial phase involves due diligence to understand the vendor's capabilities, financial health, compliance with relevant laws and standards, and their cybersecurity posture. Tools such as risk assessment questionnaires are commonly employed here.
  • Contract management: Crafting contracts that clearly define service levels, compliance requirements, and risk management expectations is critical. That also includes setting up clear breach notification and remediation processes.
  • Continuous monitoring: Post-contract, continuous monitoring of the vendor’s performance, adherence to standards, and risk profile is essential. That often involves regular audits, reviews, and staying aware of the changes in the vendor’s business environment.
  • Risk mitigation and response: When risks are identified, a structured mitigation response is crucial. That can include modifying practices, enhancing security measures, or transitioning away from the vendor in extreme cases.
  • Offboarding: When a vendor relationship ends, ensuring the secure and compliant termination of services, including data handling and system access, is a vital step in the VRM process.

VRM is a continuous process that requires ongoing monitoring and adaptation as your business and vendor landscape changes. By understanding and implementing VRM effectively, you can strengthen your risk management approach, ensuring your business sways confidently and securely with its diverse partners.

Review vendor performance, update risk assessments, and refine risk mitigation strategies to maintain a secure and resilient business ecosystem.

 

 

5 key stages of third-party risk management

 

 

What is third-party risk management?

 

Third-party risk management (TPRM) is another pivotal strategy in modern business. It aims to safeguard organizations from potential risks posed by third parties.

TPRM is a comprehensive process that involves identifying, assessing, and controlling risks presented by third parties. These third parties can include suppliers, partners, contractors, affiliates, and any external entity working with an organization's ecosystem.

Unlike VRM, which focuses on managing the risks of vendors providing goods and services, TPRM covers a broader array of relationships and associated risks.

TPRM encompasses several crucial steps:

  • Risk identification: This involves understanding potential risk areas in third-party interactions. These risks can be multi-faceted, including cybersecurity threats, compliance issues, operational inefficiencies, legal liabilities, and reputational concerns.
  • Due diligence and assessment: Conducting thorough due diligence is vital before engaging with a third party. This assessment should cover the third party's financial stability, compliance with legal and regulatory requirements, cybersecurity measures, and overall reputation.
  • Contract negotiation and management: Clear and robust contracts are central to effective TPRM. These contracts should outline both parties' responsibilities, expectations, and obligations, particularly concerning data protection, confidentiality, and compliance with standards.
  • Ongoing monitoring: Continuous monitoring of third-party performance and risk status is crucial. That may include regular audits, performance reviews, and staying abreast of any changes in the third party's operational landscape that could affect risk.
  • Incident management and remediation: Establishing procedures for incident response and remediation in case of a risk materialization is critical. That involves predefined escalation paths, communication plans, and contingency strategies.

TPRM is an indispensable component of modern business strategy. It requires a proactive and comprehensive approach to managing the risks associated with an intricate network of external business relationships.

Remember, your business success depends on your actions and your digital ecosystem's collective resilience. Be mindful, identify potential threats, and build robust defenses that protect your business, partners, and customers.

 

How does a vendor and third party differ?

The terms "vendor" and "third party" are often used interchangeably, but in risk management, understanding their differences is crucial for effective mitigation strategies. Here's a breakdown of the key differences:

Vendor:

  • A direct provider of goods or services to your organization
  • Typically involved in core business operations or delivering essential products and services
  • Examples: IT providers, manufacturers, logistics firms, and software vendors

Third-party:

  • Any external entity your organization interacts with beyond direct vendors
  • Can encompass a wide range of relationships, including:
    • Professional services providers: Consultants, legal firms, marketing agencies, auditors
    • Supply chain partners: Subcontractors, distributors, transportation companies
    • Other entities: Joint venture partners, investors, and customer service providers

By clearly understanding the differences between vendors and third parties, you can implement effective risk management strategies tailored to each category, building a comprehensive and secure business ecosystem.

 

How do VRM and TPRM differ?

Both VRM and TPRM are pivotal in ensuring a secure and resilient ecosystem. While their goals overlap, they differ in scope, focus, and approach. Let's dive into the key distinctions:

Scope

VRM focuses on direct vendors supplying goods or services directly to your organization, including IT providers, manufacturers, logistics firms, and the like.

TPRM takes a holistic view, encompassing all external entities your organization interacts with, including consultants, legal firms, marketing agencies, subcontractors, and even customers and partners.

Focus

VRM emphasizes specific vendor assessments, evaluating their security posture, financial stability, operational efficiency, and adherence to contractual obligations.

TPRM looks into the broader implications of third-party relationships, analyzing potential risks beyond individual vendors, such as supply chain vulnerabilities, reputational damage, and regulatory non-compliance.

Approach

VRM employs a granular approach, using tailored assessments and mitigation strategies for each vendor based on their criticality and associated risks.

TPRM adopts a strategic approach, prioritizing high-impact relationships and implementing overarching risk management frameworks composed of all third parties.

Choosing the right approach

Picking which approach to take depends on your organization's size, industry, and risk tolerance. However, most companies benefit from a two-pronged strategy:

  • Implement a robust VRM program to manage risks associated with critical vendors. 
  • Overlay a TPRM framework to assess and mitigate risks across the broader third-party ecosystem.

Both VRM and TPRM are continuous processes. Continuously monitor vendors and relationships, update risk assessments, and adapt your strategies as your business and the threat landscape evolve. By understanding and leveraging the strengths of both VRM and TPRM, you can build a comprehensive and resilient risk management framework, safeguarding your business from the potential pitfalls of third-party relationships.

 

How does VRM fit into TPRM?

VRM and TPRM are two important components of your third-party risk landscape. Think of VRM as the solid foundation upon which TPRM builds. It provides a fragmented understanding of the risks associated with your direct vendors, who are typically the most critical and impactful third parties. VRM assessments delve deep into vendor security practices, financial stability, operational efficiency, and contractual obligations.

This detailed information forms the basis for prioritization and risk mitigation strategies within TPRM.

Then, TPRM builds upon the insights gained from VRM by taking a holistic view of all external entities your organization interacts with, including vendors, consultants, legal firms, marketing agencies, subcontractors, customers, and partners.

TPRM looks into broader risks beyond those directly associated with individual vendors, such as supply chain vulnerabilities, reputational damage, and regulatory non-compliance. This broader perspective allows for a more strategic and comprehensive risk management approach.

VRM and TPRM are not separate silos but rather interconnected and complementary. Information gathered through VRM assessments can be fed into TPRM frameworks to inform risk mapping, prioritization, and mitigation strategies.

Collaboration between VRM and TPRM teams is crucial for effective risk management. VRM teams can provide detailed vendor assessments. Meanwhile, TPRM teams can leverage this information to develop broader risk management strategies and ensure consistent risk management across the entire third-party ecosystem.

Benefits of integrated VRM and TPRM

  • Reduced risk: You minimize your organization's risk exposure by identifying and mitigating risks at individual vendor and broader third-party levels.
  • Improved efficiency: Integrating VRM and TPRM processes can streamline risk management efforts, avoiding duplication of efforts and ensuring consistent risk assessment methodologies.
  • Enhanced decision-making: With a comprehensive understanding of your third-party risk landscape, you can make informed decisions about vendor selection, contract negotiations, and risk mitigation strategies.
  • Stronger compliance: By proactively managing third-party risks, you can ensure compliance with relevant data privacy, security, and ethical regulations.

VRM and TPRM both require continuous monitoring, adaptation, and collaboration to keep your third-party risk management framework effective. By integrating VRM and TPRM effectively, you can build a robust and resilient third-party ecosystem, protecting your organization from hidden threats and ensuring a secure future.

 

Experts Guide to Vendor Risk Management

 

The path toward resilience

Managing risks associated with third parties is critical in today's interconnected business environment. Organizations regularly work with vendors, suppliers, contractors, and an array of external partners that all present potential risks if not assessed and monitored properly. Implementing robust programs to evaluate and mitigate these risks is no longer optional but a requirement across industries.

As we have explored, VRM focuses specifically on risks related to product and service providers that an organization depends on. It involves assessing factors like quality, security, viability, and performance.

TPRM encompasses vendor risks but has a much broader scope, looking at all external business relationships, including partners, outsourcers, contractors, suppliers, and other third-party connections.

The key is recognizing vendor risk management as one crucial component of an overarching third-party risk management program. While assessing vendor performance and security is critical, organizations must cast a wider net to identify and mitigate risks introduced through all external relationships.

That requires comprehensive assessments of all third parties, ongoing monitoring, audits, and due diligence across these relationships.

Equipping your organization with robust programs for managing vendor and third-party risks will enable proactive risk management. That allows organizations to capitalize on the benefits of external relationships while preventing potential downsides.

Understanding VRM and TPRM's unique goals and scope is the first step toward building a resilient organization.

 

How 6clicks can help

6clicks can guide you through the complexities of VRM and TPRM. We offer a scalable and adaptable solution to protect your organization from potential threats and ensure a secure and resilient future.

Remember: choosing the right partner is crucial for optimizing your risk management approach. With the right tools and strategies, you can transform your third-party relationships from potential pitfalls to trusted ones, driving success and growth.

Explore 6clicks and see if our features align with your organizational needs and risk profile.