Vendor Risk Management vs Third Party Risk Management vs Enterprise Risk Management: What’s the Difference?

While Vendor Risk Management (VRM) and Third-Party Risk Management (TPRM) are often used interchangeably, they’re not always the same thing. And what about Enterprise Risk Management (ERM)?

Risk management is extremely important in information security, especially when third parties are concerned. According to Deloitte’s Extended Enterprise Risk Management (EERM) TPRM global 2020 survey, 84% of respondents said their organization had experienced a third-party incident in the last three years.

Vendors and other third parties are often a point of concern for organizations worried about risk because third parties tend to exacerbate the cost of a data breach, raising it by more than $370,000, according to the Ponemon Institute. While the average cost of a data breach is $3.92 million, the cost of a data breach caused by a third party is amplified.

This can be extra concerning because you don’t have direct control over the measures your third parties take to ensure their own (and your) cybersecurity. That’s where various risk management programs come into play.

What is Vendor Risk Management?

Vendor Risk Management, or VRM, is the process of vetting your vendors, suppliers, and service providers to ensure they do not pose 

 substantial risk to your organization, such as the threat of a data breach or  potential for a disruption to your business. 

Vendor risk management is specific to the third parties you leverage products and services from — your vendors and suppliers. Vendors can include any third party you regularly leverage, from the companies who provide parts to a manufacturer to cloud storage providers or other Software as a Service (SaaS) providers.

What is Enterprise Risk Management?

Enterprise Risk Management, or ERM, is the process of identifying and addressing any potential risks or threats to an organization. 

According to Deloitte, it’s a growing field; 45% have increased investment in ERM because of growing pressure from regulators, and 52% of organizations say that ERM is becoming a broader concept that includes contract management, performance management, and financial management.

Rather than simply buying cybersecurity insurance to cover all risks, ERM is plan-based; an organization that has implemented ERM has assessed the risks and responded in one of a variety of ways:

• Tolerance of a risk
• Avoidance or termination of a risk
• Risk transfer via insurance
• Mitigation of risk through internal control procedures or other risk prevention activities

Once plans are made, they are often shared among stakeholders.

Like most risk management techniques, ERM requires leadership to examine the negative aspects of risk. However, it also asks decision-makers to find the competitive advantage within risk, seeking opportunities that might arise from risk management.

What is Third-Party Risk Management?

While VRM is specific to vendors, Third-Party Risk Management (TPRM) is the process of vetting all your third parties. Most organizations do business with a number of third parties, and those third parties fill many roles. Some are vendors, but others fall into different categories, such as partners, contractors, and consultants.

Therefore, TPRM  is the process of assessing, monitoring, and mitigating risks posed by all entities outside an organization, including third-party vendors, business partners, contractors, and suppliers. These third-party relationships may have access to critical data, interact with sensitive systems, or directly impact your business operations. 

TPRM is an umbrella term that covers VRM as well as other kinds of third-party risk management, such as Supplier Risk Management, IT vendor risk, anti-bribery/anti-corruption (ABAC) compliance, and contract risk management.

A robust TPRM program allows organizations to effectively manage these risks and protect against financial loss, compliance breaches, and reputational harm. Third-party risk management is also conducted to assess each third party’s ongoing behavior and monitor the risk they may pose to your organization.

Key Elements of Third-Party Risk Management

Let’s take a look at some of the key features that make up a comprehensive TPRM program. 

1. Risk Profile Development: Develop a risk profile for each vendor based on factors like data sensitivity, risk exposure, and potential operational impact.
2. Risk Assessment: Conduct regular risk assessments to identify potential vulnerabilities and set an appropriate risk level for each vendor.
3. Continuous Monitoring: Implement continuous or ongoing monitoring to identify changes in a third party’s security posture and confirm that it remains compliant with your internal policies and regulatory requirements.

Why is Third-Party Risk Management Important?

Third-party cyber risks are on the rise as attackers tend to exploit the weakest link. When an organization’s defenses are robust, attackers often turn to third-party providers with less secure protections. Studies show that 29% of data breaches are linked to third-party vendors, emphasizing the need for stronger third-party risk management.

However, many organizations still depend on outdated approaches like self-assessment questionnaires and compliance certifications. These methods can create a misleading sense of security since they offer only static, point-in-time evaluations.

Third-party risk management is essential because it helps organizations minimize potential threats that could impact their business continuity, financial risk, and regulatory compliance. With an effective TPRM program, organizations can address risks proactively and maintain strong business relationships with their vendors and suppliers.

Lessons from Third-Party Risk Incidents

The ransomware attack on CDK Global was more than a minor disruption—it shut down operations for 15,000 automotive dealerships. This single vendor’s security lapse didn’t just halt their own activities; it sent shockwaves through the entire supply chain. This incident highlights what can happen when companies depend on third parties but neglect active risk management. Although CDK was the initial victim, the consequences spread widely, showing that one vulnerable link can endanger an entire system.

Similarly, in 2023, a zero-day vulnerability in the MOVEit file transfer software allowed attackers to exploit an unseen flaw, leading to major data breaches across many organizations. This incident revealed a sobering reality: your most significant risk might not be in your network but in the software of third-party vendors. One overlooked vulnerability became a massive breach impacting multiple companies.

These incidents serve as stark reminders: third-party risk management can’t end with onboarding. Continuous monitoring and immediate response capabilities are now essential; without them, organizations are left vulnerable, simply waiting for the next cyber threat to strike.

The Importance of Third-Party Risk Management in Today’s Business Landscape

As organizations manage complex third-party networks, TPRM helps mitigate risks that can disrupt operations, impact revenue, or cause compliance failures.

1. Protection Against Cybersecurity Risks: Vendors can become weak links in the cybersecurity chain, making them prime targets for data breaches. A third-party data breach can compromise sensitive information and damage a company’s reputation.
2. Regulatory Compliance: Many industries, especially financial services, healthcare, and energy, are subject to stringent regulatory requirements, requiring organizations to demonstrate thorough third-party risk management processes.
3. Mitigating Financial and Operational Risks: Third-party failures can disrupt business processes and business goals. Effective TPRM helps organizations mitigate these operational risks and protect their financial stability.

Types of Risks Addressed by Third-Party Risk Management

An effective third-party risk management program targets critical risk areas – such as cybersecurity, compliance, and financial stability – that can arise from an organization’s network of partners, suppliers, and vendors.

• Cybersecurity Risks: Threats to an organization’s data security due to third-party vulnerabilities.
• Compliance Risk: Risks arising from non-compliance with industry standards and regulatory requirements.
• Financial Risk: Financial losses resulting from vendor disruptions or data breaches.
• Reputational Risks: Damage to the company’s reputation due to third-party incidents.
• Strategic Risks: Risks that directly impact an organization’s business goals and long-term strategy.

What is the Third-Party Risk Management Lifecycle?

The TPRM lifecycle consists of several stages that ensure a consistent and structured approach to assessing, monitoring, and managing third-party risks.

1. Risk Identification and Vendor Onboarding

The third-party risk management lifecycle begins with risk identification during the vendor onboarding phase. Organizations assess each vendor’s risk profile to identify potential cybersecurity, operational, and compliance risks. This stage includes gathering data on the vendor’s security practices, financial stability, and compliance history.

2. Risk Assessment and Due Diligence

During this phase, organizations conduct a third-party risk assessment to evaluate the inherent risk associated with each vendor. The assessment considers factors such as the vendor’s access to sensitive data, potential impact on business operations, and risk exposure. This diligence process ensures that only vendors with an acceptable risk posture are approved.

3. Risk Mitigation and Contract Management

Risk mitigation involves implementing security measures to reduce the level of risk posed by each third-party provider. This may include setting internal policies, contractual clauses for security standards, or requiring third-party vendors to adhere to industry best practices. Clear guidelines help to guarantee that third-party providers understand and comply with compliance requirements.

4. Ongoing Monitoring and Continuous Review

After onboarding, organizations engage in ongoing monitoring to keep track of changes in a third party’s security posture and any emerging risks. Continuous monitoring involves tracking risk scores, assessing changes in risk levels, and identifying any incidents that may impact the vendor’s reliability. Many organizations use third-party risk management software to automate and streamline this process.

5. Risk Reporting and Incident Management

When an incident occurs, organizations should be prepared with an incident management plan. Risk reporting processes are essential to inform relevant stakeholders about any security incidents or compliance issues involving a third-party vendor. A well-defined incident management process helps organizations respond quickly and mitigate potential damages.

6. Offboarding and Contract Termination

When a vendor relationship ends, organizations should have a clear offboarding process to ensure that access to sensitive data is revoked and that any contractual obligations are fulfilled. Offboarding reduces the likelihood of residual risk and ensures that former vendors no longer have access to critical systems or data.

Who is Responsible for Third-Party Risk Management?

Ownership of TPRM typically falls under multiple departments, each playing a role in the third-party risk management process. Primary stakeholders often include:

• Risk Management and Compliance Teams: These teams oversee the TPRM framework, ensuring alignment with compliance requirements and regulatory requirements.
• IT and Security Teams: Responsible for assessing and monitoring the cybersecurity practices of third-party providers, including performing risk assessments and establishing incident response protocols.
• Procurement and Vendor Management Teams: Often responsible for the initial onboarding, contract management, and coordination of third-party risk management activities.

While these departments each contribute to TPRM, many organizations also establish a dedicated TPRM team to coordinate and streamline efforts across the organization.

Key Advantages of Third-Party Risk Management Programs ?

Third-party risk management software offers several benefits, particularly for organizations that manage large vendor networks or require complex risk assessments. By automating and centralizing key aspects of TPRM, organizations can strengthen their security posture and reduce risk exposure.

Key Benefits of TPRM  Programs

Using dedicated third-party risk management software offers organizations a proactive approach to managing third-party risks, providing continuous insights that go beyond traditional, static assessments.

1. Enhanced Risk Assessment Capabilities: TPRM software simplifies risk assessments and provides organizations with a clear view of each vendor’s risk level, allowing for better-informed decisions.
2. Continuous Monitoring and Real-Time Insights: Automated tools enable continuous monitoring of third-party providers, giving security teams real-time visibility into changes in a vendor’s risk profile or security posture.
3. Automated Compliance Management: By using TPRM software, organizations are better able to meet compliance requirements by tracking vendor performance, adhering to regulatory standards, and generating compliance reports.
4. Risk Scores for Data-Driven Decisions: Software solutions often include risk scores that quantify each vendor’s level of risk, enabling organizations to prioritize critical vendors and allocate resources effectively.
5. Improved Incident Response and Reporting: Many TPRM platforms include incident management features that help organizations respond swiftly to security breaches, natural disasters, and other incidents that affect third-party providers.

Best Practices for Effective Third-Party Risk Management

Implementing best practices helps organizations build a resilient TPRM program that addresses inherent risks and safeguards their business interests. Key best practices include:

1. Establish a Formal TPRM Program: Create a documented framework for third-party risk management activities, including policies, procedures, and risk assessment criteria.
2. Prioritize Critical Vendors: Allocate more resources and monitoring to critical vendors with significant risk exposure to your organization’s business processes.
3. Set Risk Appetite and Risk Tolerance Levels: Define your organization’s risk appetite and acceptable level of risk to guide decision-making and vendor selection.
4. Utilize Continuous Monitoring: Implement automated tools to continuously monitor each vendor’s risk profile and security posture, identifying potential issues before they escalate.
5. Conduct Regular Risk Assessments: Reassess vendors periodically to account for changes in risk levels, especially for vendors with a high inherent risk.
6. Foster Strong Business Relationships: Develop collaborative relationships with vendors, promoting transparency, shared responsibility, and alignment with business goals.

Third-Party Risk Management with SecurityScorecard

Risk is inevitable, but effective management is possible. Adopting an intelligent solution that automates parts of the workflow can be highly beneficial in cutting down on the administrative workload involved in overseeing third-party relationships.

Whether you want to oversee everything yourself or need dedicated expert support, SecurityScorecard gives you the flexibility to choose how you match your risk management needs:

MAX Managed Service: Ideal for organizations looking for expert assistance, MAX provides round-the-clock monitoring and direct support from SecurityScorecard’s cybersecurity team. With MAX, you get proactive guidance on detecting, responding to, and mitigating risks as they emerge, reducing your team’s workload while delivering real-time security insights.

Self-Managed Program: For those who prefer direct control, the SecurityScorecard platform equips you with powerful tools and insights to manage third-party risks independently. You can monitor live security ratings, continuously track vendor risks, and collaborate with vendors to improve their security practices. This option is perfect for teams ready to handle risk management in-house with full access to the platform’s capabilities.

With SecurityScorecard, you have control over your level of involvement. Choose the MAX team for dedicated expert support or manage everything internally with the standard platform. Whichever path you take, you’ll have the tools needed to stay proactive against third-party risks and safeguard your organization.