Businesses today are now relying more on external services, vendors, and technology critical for day-to-day operations. But with every external addition comes inherent risk — how do you build new capabilities without increasing your organization’s vulnerability to external threats?
Enter third party risk management (TPRM), vendor risk management (VRM), and enterprise risk management (ERM). While these may feel like a management word salad, each approach is specifically designed to address potential risks and protect your business from harm.
A 2023 survey of IT and security professionals showed that 57% of organizations had a third-party breach or incident in the last 2 years. Of those incidents, over half came from a software vendor. While the landscape of software opportunities expands at exponential pace, so does its risk.
On the subject of third parties, let's begin with the most commonly referenced risk management approach: TPRM.
What is third party risk management?
Third party risk management (TPRM) plays a vital role in safeguarding organizations from potential threats and vulnerabilities posed by external entities.
TPRM involves thorough due diligence on these external entities before engaging in any business relationship. Factors considered include their security practices, compliance with relevant regulations, reputation in the industry, and the financial stability of the third party.
Third party risk management framework
TPRM is both a specific area of risk management and comprehensive, covering vendor risk management and other external party risks (supplier risk, IT vendor risk, contract risk, etc.). It extends beyond the initial due diligence phase as a continuous practice of monitoring and overseeing external relationships with third parties.
These third parties may include:
- Vendors (third party vendor management)
- Suppliers (third party supplier management)
- Partners
- Contractors
- Service providers
From an overall risk management perspective, TPRM is the middle tier between vendor risk management (most specific) and enterprise risk management (most broad). Following third party risk management best practices is part of a whole enterprise risk management strategy. So where does vendor risk management come into play?
What is vendor risk management?
Vendor risk management, also known as third party vendor management or enterprise vendor risk management, looks at the potential impact of vendor-related risks on business operations, reputation, and customer satisfaction. It is an underlying function of third party risk management specific to vendors, service providers (SaaS), and suppliers.
Vendor risk management framework
The most referenced aspect in vendor risk management is due diligence. This can include reviewing vendor financial statements (like in TPRM), conducting background checks on key personnel, and assessing the vendor's reputation in the industry.
Effective VRM practices include evaluating:
- Vendor capabilities
- Financial stability
- Data security protocols
- Compliance with contractual obligations
- Delivery of products/services on time and within budget
By thoroughly vetting potential vendors, organizations can reduce the likelihood of disruptions or security breaches caused by unreliable or untrustworthy partners. This idea carries over into enterprise risk management as the most broad form of risk management strategy.
What is enterprise risk management?
Enterprise risk management (ERM) is the holistic strategy for identifying and managing risks across the entire organization. Both internal and external sources of risk are considered with the goal of minimizing impact on the company’s strategic objectives.
Enterprise risk management framework
ERM involves a cohesive analysis of your organization's risk appetite, risk tolerance, and risk response strategies, including:
- Financial risks
- Operational risks
- Technology risks
- Legal and regulatory risks
- Reputational risks
- Strategic risks
One key aspect of ERM is the establishment of risk management policies and procedures that outline the roles and responsibilities of different stakeholders within the organization. These policies help in creating a risk-aware culture where employees at all levels understand the importance of risk management and actively participate in the process.
From a cybersecurity lens, enterprise risk management is in high demand — a 2023 survey from IBM showed the identification time for a breach was 204 days, costing an average of $4.45 million per breach. By implementing comprehensive ERM, organizations can anticipate and proactively address potential risks before they escalate into significant issues.
What are the similarities and differences between TPRM, VRM, and ERM?
Third party risk management, vendor risk management, and enterprise risk management work together as a comprehensive pyramid of security:
- ERM: Base of the risk pyramid, all-encompassing
- TPRM: Middle of the risk pyramid, focused on all external parties
- VRM: Top of the risk pyramid, specific to vendors and suppliers
![Pyramid of Enterprise Risk Management (bottom of pyramid), with Third Party Risk Management (middle of pyramid), and Vendor Risk Management (top of pyramid)](https://cdn.prod.website-files.com/654d48e43ed3ff3779c3a2ea/667497639b9613111575d805_VRM%20vs.%20TPRM%20vs.%20ERM.png)
Differences between TPRM, VRM, and ERM
Since TPRM and VRM are inherently focused on external threats, ERM is often referenced when talking about internal functions. But remember, ERM encompasses both internal and external threats as a holistic strategic approach, unlike TPRM and VRM.
Depth in focus is the key difference between risk management approaches. Each level of risk management requires a dedicated strategy, plus a set of frameworks and methodologies to best handle its unique challenges — TPRM requires detailed assessments of all third-party risks, while ERM would become convoluted with such detail at the entire scale of your organization.
Finally, TPRM, VRM, ERM call for different stakeholders, altering who is involved to what degree:
- TPRM: Collaboration between your organization and all third parties
- VRM: Communication directly with vendors
- ERM: Involves all internal departments and functions
Despite the differences between risk management focused on the entire enterprise, third parties, or vendors, each structure carries plenty of overlap.
Similarities between TPRM, VRM, and ERM
All three approaches consider risks from well-rounded operational, financial, and reputational perspectives. While TPRM and VRM are concerned with external entities and ERM frames risk more holistically, each strategy requires depth in due diligence, no matter how narrow or broad the focus.
Each type risk management also involves a degree of assessment first — understanding the likelihood and severity of risks (whether external or internal) to prioritize mitigation efforts.
If assessment is the front-end of risk management, monitoring and reporting are the back-end. All risk management strategies require ongoing reporting structures and iteration — TPRM, VRM, and ERM aren’t static documents, but living strategies.
Risk management framework features & components
Many types of risk management follow a strategy for managing the risks of the business or organization. In the realm of risk management, it is not enough to simply quantify the risks — understanding the interconnected nature helps prioritize your risk response strategy. This process usually includes:
- Risk identification
- Risk assessment
- Risk mitigation
- Reporting and monitoring
- Governance
- Risk identification
All three management philosophies require a thorough understanding of potential risks that could impact the organization, whether internal or external.
Risk assessment
Putting TPRM, VRM, and ERM into practice involves evaluating the likelihood and potential consequences of identified risks with third parties, vendors, and internal teams.
Risk mitigation
The outcome of each is to minimize or eliminate risks through the implementation of appropriate controls and safeguards.
Reporting and monitoring
Quantifying risk ensures risk levels can be observed and maintained at optimal levels. Depending on your organization’s vertical and calculated risk tolerance, reporting frequencies may vary from daily, weekly, or monthly.
Governance
A framework only works as well as its implementation. Risk management frameworks must have a process of solution creation, adoption, and consistency. Teams must understand their responsibilities and invest in the frameworks.
How to improve risk management
It’s no news flash — your organization must take proactive steps to identify, assess, and manage risks associated with third-party relationships, vendors, and the overall enterprise. By understanding how TPRM, VRM, and ERM each have their distinct focus and purpose, though, your organization can better tailor its approach to risk management procedures:
- Dial in the best practices for each risk management strategy.
- Apply them in the context of your organization’s specific needs.
- Address existing vulnerabilities and opportunities.
- Identify stakeholders for each segment of risk management.
- Implement a risk management improvement plan.
From here, you can publish company protocols for enterprise risk management, third party risk management, and vendor risk management. These will not only protect against potential threats, but position you for sustainable growth and success in your security posture.
We recommend starting with third party risk management — all of our organizations rely on technology and data sharing, but our management philosophies for third party relationships are still playing catch up. Check out our third party risk management guide to get up to speed on TPRM protocols.
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