What is Third-Party Risk Management (TPRM)?

In today’s digital and global economy, businesses are increasingly relying on external vendors, partners, and service providers to support their operations. While these third-party relationships can offer significant benefits, they also introduce a wide range of risks that can have a severe impact on an organization’s security, compliance, and reputation. This is where Third-Party Risk Management (TPRM) comes into the picture. 

For Managed Service Providers (MSPs) and Managed Security Service Providers (MSSPs), maintaining a robust TPRM strategy and processes, is vital to safeguard against data breaches, compliance violations, and other security threats – which may pose significant repercussions for them as a business, and for their clients.

Understanding Third-Party Risk Management (TPRM)

Third-Party Risk Management (TPRM) is a strategic approach that helps businesses assess, monitor, and mitigate the risks posed by third-party relationships – external entities that an organization engages with.  These external parties—such as suppliers, contractors, vendors, or service providers can introduce a variety of risks that may jeopardize an organization’s security posture.

As organizations become more reliant on third parties, effective TPRM practices are necessary to protect their assets, ensure business continuity, and maintain trust with their clients.

For MSPs and MSSPs, third-party relationships are integral to delivering their services. However, these relationships can expose them to several risks, further emphasizing the importance of TPRM for this type of business.

• Operational risks: Poor performance or a service disruption from a third party can impact the MSP/MSSP’s ability to deliver services reliably to clients – It can be due to financial instability, natural disasters, or other reasons and can lead to operational disruptions that affect the MSP/MSSP’s ability to provide uninterrupted service to clients.
• Compliance risks: Third-party vendors may not adhere to the same security standards or regulatory requirements as the MSP/MSSP, resulting in potential non-compliance. For example, external vendors handling sensitive data may not follow the appropriate privacy policies, leading to violations of laws such as GDPR or CCPA. These risks can result in hefty fines, legal liabilities, and damage to client trust.
• Reputational risks: A third party experiencing a data breach or security incident can harm the MSP/MSSP’s reputation by association, even if the provider was not directly responsible for the breach.
• Financial risks: The failure of a third-party vendor can have financial repercussions, whether it’s through unexpected costs, lost revenue, or penalties due to compliance failures.
• Cybersecurity risks: This encompasses risks posed by third-party vendors who may not have sufficient security measures in place, leading to potential data breaches, ransomware attacks, or system vulnerabilities that can affect the MSP/MSSP and their clients.
• Intellectual Property Risks: Third-party vendors that develop software or provide technical services may inadvertently expose sensitive intellectual property (IP). If these vendors do not have robust safeguards in place, the organization’s proprietary information could be compromised.

Given these risks, MSPs and MSSPs must implement a well-rounded TPRM framework to assess and manage the potential threats posed by third-party engagements. This proactive approach ensures the protection of sensitive client data, helps maintain regulatory compliance, and mitigates the likelihood of service disruptions or security breaches.

The Third-Party Risk Management Lifecycle

A comprehensive Third-Party Risk Management (TPRM) process consists of several critical stages that work together to ensure continuous risk assessment, mitigation, and monitoring. These stages comprise the third-party risk management lifecycle and provide a structured approach to managing third-party risk, allowing Managed Service Providers (MSPs) and Managed Security Service Providers (MSSPs) to safeguard their operations, maintain compliance, and protect client data.

1. Risk identification

The first step in the TPRM lifecycle is identifying the potential risks associated with each third-party relationship. This involves reviewing the third party’s operations, security practices, financial stability, and regulatory compliance history. For MSPs and MSSPs, this means evaluating how each vendor handles sensitive data, their security protocols, and their ability to meet the organization’s service-level agreements (SLAs).

2. Risk assessment

Once risks are identified, the next step is to assess their severity and likelihood. The organization evaluates the probability of each risk occurring and the potential impact it could have on business operations. This step is critical for MSPs and MSSPs to prioritize which third parties pose the most significant threats and to determine the level of required scrutiny and mitigation efforts.

3. Due diligence and evaluation

Before formalizing a partnership, a deeper evaluation is necessary to conduct thorough due diligence. This step goes beyond assessing risks and looks at the financial health, security certifications, compliance status, and overall reliability of the third party. Due diligence often involves a comprehensive audit, questionnaires, or even interviews with key stakeholders to assess the vendor’s capacity to meet security and compliance requirements.

4. Contractual risk management

Once due diligence has been completed and the third-party vendor is deemed suitable, it’s time to establish clear contractual obligations. The contract should outline the security requirements, compliance responsibilities, and breach notification protocols. This step ensures that both parties have a shared understanding of expectations, and it provides a legal framework for holding the vendor accountable if risks materialize.

5. Onboarding and integration

Once a vendor has been evaluated and the contract is in place, the next step is onboarding and integration. This process ensures the third party aligns with the organization’s security and compliance policies and procedures. During onboarding, MSPs and MSSPs must communicate their cybersecurity standards to the third-party vendor and ensure that appropriate access controls, security measures, and reporting protocols are established.

6. Performance evaluation and risk reporting

Regular performance evaluations are necessary to assess whether the third party is meeting agreed-upon service levels, security protocols, and compliance standards. This step often involves tracking Key Performance Indicators (KPIs) related to service uptime, security posture, risk mitigation, and compliance adherence. Performance reviews allow MSPs and MSSPs to spot potential vulnerabilities early and take action before issues escalate.

7. Continuous monitoring

Third-party risk management doesn’t stop once mitigation strategies are in place. Continuous monitoring is essential to ensure that third parties continue to meet security standards, adhere to compliance requirements, and are not exposed to new or emerging risks. This stage involves ongoing surveillance through automated tools, regular audits, and performance tracking to identify potential threats or vulnerabilities as they arise.

8. Ongoing Risk Reassessment

The risk landscape is constantly evolving, and third-party vendors may change their practices, security posture, or financial stability over time. Ongoing reassessment ensures that third-party risks are evaluated regularly, taking into account new threats, business changes, or regulatory developments that may impact the partnership.

9. Incident response and crisis management

Even with the best due diligence and mitigation strategies, incidents can still occur. This step outlines the processes that should be followed in the event of a third-party breach or failure. It involves creating a shared incident response plan that outlines steps to notify stakeholders, contain damage, and mitigate the risk. Both the MSP/MSSP and the third-party must have a plan in place to swiftly and effectively handle breaches, system failures, or other crises.

10. Termination and offboarding

If a third-party vendor relationship needs to be terminated,due to performance issues, security breaches, or strategic shifts, an organized offboarding process is crucial. This involves ensuring that all data, proprietary information, and systems access are securely revoked and that all security protocols are followed during the transition. This step helps minimize the risks of data breaches or unauthorized access after the vendor has been disengaged.

Best Practices for Effective TPRM

To effectively manage and mitigate third-party risks and potential security threats, it is recommended that MSPs and MSSPs adopt the following third-party risk management best practices to enhance their TPRM strategies and processes.

1. Establish a risk-based approach

Prioritize third-party vendors based on the level of risk they introduce to your organization. By categorizing vendors according to their criticality to your operations and the potential impact on your security and compliance posture, you can allocate resources more effectively. This approach ensures that high-risk vendors are assessed and monitored more frequently, while lower-risk vendors receive appropriate but less intensive oversight. For example, an MSSP might treat cloud infrastructure providers, who manage client data, as high-risk vendors and subject them to rigorous security audits, while a non-critical software vendor could receive less frequent assessments.

2. Integrate TPRM into enterprise risk management

TPRM should be integrated into your overall Enterprise Risk Management (ERM) strategy. By aligning third-party risk efforts with the organization’s broader risk management framework, MSPs and MSSPs ensure that all risks – whether internal or external, are cohesively and consistently managed.

3. Leverage technology for automation

Automated tools can dramatically improve the efficiency and accuracy of risk assessments, monitoring, and reporting. By leveraging AI-driven platforms, MSPs and MSSPs can continuously assess third-party security postures, track compliance with industry standards, and identify vulnerabilities in real-time. Automation reduces manual workload, enhances consistency, and provides a scalable solution for managing third-party risks across a growing portfolio of vendors.

4. Foster open communication and collaboration

Establish strong communication channels with your third-party vendors to ensure that security and compliance expectations are clear. Collaboration is key in setting and maintaining mutually beneficial partnerships that are built on trust and transparency. Regularly scheduled check-ins and updates between MSPs/MSSPs and third-party vendors can help identify and address risks early. Such meetings may cover potential vulnerabilities, industry threats, or changes in compliance regulations that might impact both parties.

5. Conduct regular training and awareness programs

Ensure that employees and third-party vendors are well-educated about the potential risks they face and their role in mitigating them. Regular training programs on security protocols, data privacy laws, and threat detection will help create a proactive culture of risk management. This practice empowers both internal teams and external partners to identify and address vulnerabilities before they become major issues. Many MSPs and MSSPs require their vendors to undergo annual security awareness training, educating them on emerging threats like phishing and ransomware and how they can help mitigate these risks.

6. Implement vendor risk management frameworks

Use well-established frameworks to guide your third-party risk management efforts. Adopting industry-standard frameworks like NIST, ISO 27001, or the Cybersecurity Framework (CSF) can provide structure and consistency to the process, helping organizations assess and manage vendor risk in a standardized manner. ISO 27001, for example, can be used as a benchmark to evaluate whether a third-party vendor’s security practices meet the required standards for information security management.

7. Continuously monitor third-party performance

Continuous monitoring is essential to identify new risks that may emerge over time. Rather than relying on annual audits or periodic assessments, real-time monitoring tools can provide ongoing oversight of third-party security performance. This proactive approach ensures that risks are detected and addressed as soon as they arise, reducing the potential for incidents. As an example, some MSPs and MSSPs use automated threat intelligence tools to monitor the cybersecurity posture of third-party cloud service providers, ensuring they remain compliant with the latest regulations and maintain robust security controls.

8. Build a third-party risk register

Maintain a detailed risk register that tracks each third-party vendor’s risk level, ongoing assessments, tracking the status of security audits, remediation and mitigation efforts, and any incidents related to the vendor. This centralized record serves as a comprehensive resource that allows for quick decision-making and easy reference when evaluating future third-party engagements.

9. Develop a clear incident response plan with third parties

We said it above and we say it again. It’s crucial to create an incident response plan that outlines how to handle third-party breaches or failures. This should include agreed-upon procedures for communication, breach detection and notification, data recovery, containment and remediation. A clear and well-communicated incident response plan helps minimize damage when a third-party-related security event occurs. 

10. Perform post-incident reviews

After any security incident involving a third-party vendor, conduct a post-incident review to evaluate what went wrong, how risks were handled, and what improvements can be made. Post-incident reviews help identify weaknesses in the TPRM process and gaps in the vendor’s security protocols. Such reviews will also provide actionable insights to prevent similar issues in the future.

11. Implement a vendor offboarding process

Again, in full alignment with the TPRM lifecycle, get ready for the day when the relationship will end and prepare a formal offboarding process – revoking access to systems, securely transferring data, ensuring that any proprietary information or sensitive client data is returned or deleted from the vendor’s systems and that the vendor no longer has access to the MSSP’s network.

Real-World Examples of TPRM

In this section I will share several TPRM case studies, real world third party risk management examples that illustrate the importance of robust TPRM practices.

1. The Kaseya ransomware attack

In 2021, a ransomware attack targeted Kaseya, an IT management company that provides services to MSPs. The attackers exploited a vulnerability in Kaseya’s VSA software, which is used by MSPs to manage IT services for small and medium-sized businesses (SMBs). The attack impacted about 1,000 organizations globally, including some of Kaseya’s MSP customers, who then passed the ransomware onto their own clients. This breach demonstrates how relying on a third-party vendor who provided critical IT management tools resulted in widespread disruption and financial loss – a single vulnerability in a third-party vendor that affected a wide network of businesses.

2. AT&T Data Breach

In January 2023, AT&T experienced a data breach involving a cloud vendor. The breach exposed data from 2015 to 2017, affecting approximately 8.9 million customers. The compromised information included account details such as the number of lines on an account, bill balance, and rate plan information. However, sensitive data like credit card information, Social Security Numbers, and account passwords were not exposed. AT&T agreed to pay $13 million to settle the investigation and committed to enhancing its data governance practices to prevent future breaches.

3. Snowflake Data Breach

In May 2024, it was revealed that a hacker had accessed data from multiple companies using Snowflake’s cloud storage services. Companies affected included Ticketmaster, AT&T, Santander Bank, and others. The breach involved the use of compromised login credentials to steal significant volumes of data. The incident once again highlighted vulnerabilities in third-party vendor systems and the potential impact on organizations relying on them.

4. Medicare Data Breach

Between May 27 and May 31, 2023, a data breach involving Medicare exposed the personal information of nearly 1 million beneficiaries. Hackers exploited a vulnerability in MOVEit, a secure file transfer software designed to facilitate the secure transfer of large files and sensitive data between organizations that was used for handling medical claims. The breach compromised names, Social Security numbers, hospital account numbers, and insurance claim information of almost a million individuals.

5. The Target Data Breach

In December 2013, right in the middle of the holiday season, retail giant Target suffered one of the most infamous data breaches in history when hackers gained access to the company’s network through a third-party vendor that managed Target’s heating, ventilation, and air conditioning (HVAC) systems. The breach exposed the personal and financial data of over 40 million customers, costing the company millions in fines, settlements, and reputational damage. This breach serves as a powerful reminder of the risks associated with third-party vendors, particularly those with inadequate security measures in place.

6. The SolarWinds Cyber Attack

In 2020, the SolarWinds cyber attack was one of the most sophisticated and high-profile supply chain attacks ever recorded. Hackers gained access to SolarWinds’ Orion software, a system used by thousands of organizations, including government agencies, financial institutions, and large corporations. The attackers inserted malicious code into a software update, which was then distributed to SolarWinds’ clients. This allowed the hackers to monitor and steal sensitive data from multiple high-profile organizations for months before the breach was discovered.

How Cynomi Enhances Third-Party Risk Management

As the risks posed by third-party vendors continue to grow, it is essential for organizations of all kinds to have effective strategies and tools in place to manage these risks.

Used by service providers to manage their clients’ risks, compliance and cybersecurity, Cynomi’s platform can be used to support third-party risk management with capabilities including:

• Automated Risk Assessments: Cynomi’s AI-driven algorithms help assess third-party vendors’ security posture and associated risk levels, ensuring that assessments are both fast and accurate.
• Customizable Frameworks: Cynomi’s customizable frameworks enable the alignment of vendor risk assessments with internal security needs.
• Step-by-Step Guidance: Combining AI with seasoned CISO knowledge, Cynomi guides users through the risk management process, delivering insights in an easy-to-digest manner.
• Task Management: Cynomi helps MSPs manage their plans and prioritize and monitor tasks –  based on risk, importance and impact, allowing a streamlined efficient third-party risk management.