Vendor Risk 101: What Every Organization Needs to Know About Managing Third-Party Risk

1.   What Is Third-Party Risk and Why It Matters

Third-party risk refers to the potential threats and uncertainties that arise from an organization’s use of external suppliers, vendors, or partners. Virtually every modern business relies on third parties for products or services, which means those suppliers

often have direct or indirect access to the organization’s information and systems. If a vendor has weak security or poor practices, it can directly lead to breaches, data loss, or operational disruptions for the hiring company. In fact, a 2024 study found 61% of companies experienced a data breach caused by a third-party supplier in the past year – a 49% increase from the prior year. This stark statistic underscores that third-party risk is not just a compliance checkbox but a core business issue. When a supplier fails (whether through a cyber incident, bankruptcy, or compliance lapse), the ripple effects

can include financial losses, legal penalties, reputational damage, and downtime for the acquirer organization. For executives and GRC practitioners, managing these risks is essential to protect the business and maintain trust in the extended enterprise ecosystem.

Your organization might outsource a function or partner with a vendor to gain efficiency or expertise, but you retain the ultimate responsibility for safeguarding your data and operations. This is why regulators and standards emphasize governance over supplier

relationships. Both the acquirer (client) and the supplier share responsibility for addressing security and compliance risks in the relationship. Ignoring third-party risk is no longer an option – high-profile supply chain attacks and vendor data breaches have shown that an organization’s security is only as strong as that of its weakest link.

2.   Types of Supplier Relationships (Per ISO/IEC 27036-1)

Not all suppliers are the same. ISO/IEC 27036-1:2021 defines several types of supplier relationships, each with distinct characteristics and risk implications:

1. Product Suppliers – These are third parties that provide tangible products or software components to your organization. For example, a manufacturer of hardware devices or a developer delivering software modules. In such relationships, the acquirer typically purchases products built to specification. The risks include flaws or vulnerabilities in the products and potential supplier access to the acquirer’s information during delivery or support. Failures to meet specifications or inadvertent leaks of sensitive data by the supplier can introduce security vulnerabilities. Acquiring organizations often mitigate these risks by controlling the supplier’s access to sensitive information and by demanding quality assurance (e.g. security testing or certifications) for the products.
2. Service Providers – These suppliers deliver a service to the acquirer, often operating processes or functions on the organization’s behalf. Common examples include IT outsourcing firms, cloud-based service providers, marketing agencies, payroll processors, or facilities management services. Service suppliers generally have significant access to the acquirer’s data or systems, especially in business process outsourcing scenarios. For instance, an IT support provider might handle a company’s entire IT infrastructure, or a call center might manage customer data – meaning a large portion of the company’s critical information is under the supplier’s control. Even vendors like janitorial or food services, which have limited IT access, pose some risk by being on premises (they could inadvertently see or access information). Because of these exposures, organizations must set rules on how service providers handle and protect data. Techniques include service level agreements (SLAs) defining security and availability expectations, and periodic audits or monitoring of the supplier’s performance and security measures.
3. ICT Supply Chain – An Information and Communication Technology (ICT) supply chain involves multiple linked suppliers providing components that make up an overall product or service. In other words, your direct supplier may itself have upstream suppliers, forming successive tiers of supply. For example, a software vendor might use open-source libraries or third-party data centers; a hardware manufacturer sources chips from various subcontractors. In an ICT supply chain, your organization is an acquirer relative to its immediate supplier, but that supplier in turn becomes a customer of its own suppliers, and so on. A key risk here is lack of visibility and control beyond the first tier. The end customer has limited control over the security practices of second-tier or third-tier suppliers. All parties in the chain “inherit” the information security risks of the components provided upstream. This interconnectedness makes it challenging to manage security across the whole chain. Weaknesses deep in the supply chain (e.g. a compromised software library or counterfeit hardware component) may not be apparent to the end organization, but can compromise the final product. Thus, ICT supply chain security calls for robust vendor assessments and requirements that cascade security controls throughout every layer of suppliers.
4. Cloud Computing Services – Cloud providers are a special category of supplier that deliver IT resources (infrastructure, platforms, or software) as a service. In cloud
5. relationships, the supplier is the cloud service provider and the acquirer is the cloud customer. Cloud services often have a multi-layered nature: for example, a SaaS application vendor might host on an IaaS cloud platform run by another provider, meaning multiple suppliers are involved in delivering the “cloud” service. The cloud environment is often shared (multi-tenant) among many customers, and the cloud provider may delegate some control to customers for configuration within the provided environment. The purpose of cloud computing is to offer scalable, on-demand services, but it also introduces risks like loss of direct control, data co-mingling with other tenants, and dependency on the cloud provider’s security. Essentially, a cloud customer is entrusting a great deal of their data and operations to the provider. Managing this type of relationship involves ensuring the cloud provider meets strong security criteria (often via certifications or audits), understanding the shared responsibility model (what security measures the provider covers vs. the customer must handle), and negotiating clear commitments for security, privacy, and availability in the cloud service agreement.

3.   Supplier Lifecycle and Risks at Each Stage

Figure- 1: Supplier Relationship Lifecycle

Managing vendor risk is not a one-time activity but a continuous process that spans the entire lifecycle of the supplier relationship, from planning to termination. Organizations should approach third-party engagements through defined lifecycle stages, each with

its own risk considerations and controls. A common breakdown (aligned with ISO/IEC 27036-2:2022) is: planning, selection, onboarding (agreement), ongoing management, and termination. At each phase, certain pitfalls and security issues are more prevalent:

1. Planning – In the initial stage, the organization identifies its needs for a third-party service or product and analyzes the risks of outsourcing that function. Key risks here include unclear requirements (which can lead to choosing an inappropriate or high-risk supplier) and lack of initial risk assessment. It’s crucial to define what data or systems the vendor will touch and the level of sensitivity. Early risk assessment helps determine what security requirements the supplier must meet. For example, engaging a vendor to process personal data invokes privacy and compliance risks that should be spotlighted from the start.
2. Selection – This is the phase of evaluating potential suppliers and picking one. The biggest risk in this stage is choosing a vendor that is incapable of meeting security or compliance expectations. To mitigate this, organizations perform due diligence: security questionnaires, assessments, reviewing certifications (like ISO 27001), financial stability checks, and reference checks. According to ISO guidance, acquirers should identify and document the types of suppliers and the sensitivity of information involved as part of evaluation. Inadequate vetting can introduce a vendor with hidden vulnerabilities or poor practices. Segmentation of suppliers by risk criticality is also useful – for instance, distinguishing a strategic, high-risk supplier from a low-risk commodity supplier helps decide how rigorous the selection process should be.
3. Onboarding & Agreement execution – Once a supplier is chosen, the relationship is formalized through contracts and agreements. This onboarding stage is where you set the rules of engagement. Risks at this stage stem from poorly defined contracts or unclear security expectations. It’s vital to include specific clauses addressing information security, confidentiality, incident reporting, audit rights, and compliance requirements (reflecting standards like ISO/IEC 27001:2022 Annex A controls). Both parties should agree on security controls and responsibilities – for example, who is responsible for protecting data, how often will the vendor’s security be verified, and what happens in the event of a breach. ISO/IEC 27036-2:2022 emphasizes establishing a supplier agreement process to make the relationship and its security measures explicit. Without a solid agreement, an organization may find it has no recourse when a vendor fails to meet security standards.
4. Ongoing Management – After onboarding, the relationship enters an operational phase. Here the mantra is “monitor and manage”. The risk is that over time, a vendor’s security posture can change or new threats can arise, yet the client might remain unaware if oversight is lax. To address this, organizations should continuously monitor vendor performance and compliance. This can include regular service reviews, audits or assessments, tracking of SLAs, and periodic risk re-evaluation. ISO 27001:2022 and ISO 27036 stress the importance of ongoing communication and monitoring throughout the supplier life cycle, not just at onboarding. For instance, if a cloud provider undergoes a major change (like a merger or a platform update), the acquirer should reassess the risks. Effective ongoing management also means having points of contact, governance structures (like quarterly business reviews), and incident handling processes with the vendor. Many organizations tier their vendors (by risk level or criticality) and apply oversight commensurate with the risk – e.g. key suppliers might get annual on-site audits, whereas low-risk suppliers get a lighter touch.
5. Termination – Eventually, a supplier relationship may end (due to contract expiration, switching vendors, or the service no longer needed). The offboarding stage carries risks of data leakage, business disruption, or contractual complications if not handled

properly. Secure termination procedures are essential: ensure that the vendor returns or securely destroys all sensitive data belonging to your organization, rescind their access to systems, and recover any company assets. There is also reputational risk if a termination is contentious; maintaining a professional relationship through the offboarding helps in getting the vendor’s cooperation in cleaning up access. ISO/IEC 27036-2 outlines a supplier relationship termination process to systematically address these tasks. Having an exit plan in the initial contract (e.g. requiring assistance during transition and data handover) can greatly reduce termination risks. After closure, it’s a good practice to conduct a post-closure review of the vendor’s performance and document any lessons learned for future engagements.

Throughout all these stages, documentation and accountability are important. A supplier risk management program should clearly assign owners for each stage (for example, procurement may lead the selection, IT/security the ongoing monitoring, legal the contract terms, etc.). By following a structured lifecycle approach, an organization can

continuously address information security risks in supplier relationships

throughout their life cycle, rather than taking a set-and-forget approach.

4.   Risk Categories and the Vendor Risk Management Process

Third-party risks come in many flavors. It’s helpful for executives and risk practitioners to think in terms of risk categories when evaluating vendor relationships. Common

categories of vendor risk include:

• Information Security Risk (Cyber Risk): The risk of data breaches, malware infections, or unauthorized access arising from the third party. For example, a vendor might suffer a cyber attack that exposes your customer data, or might mishandle credentials and allow an intruder into your network. This category often gets the most attention, especially with high-profile supply chain cyber attacks in recent years.
• Operational Risk: The risk of business disruption or operational failure due to a supplier. If a critical supplier goes down (e.g. a cloud service outage) or fails to deliver on time, your organization’s operations could grind to a halt. Similarly, a vendor’s lack of resilience or disaster recovery can translate into your downtime. Pandemic lockdowns and natural disasters have illustrated how a break in the supply chain can quickly become an operational crisis for the client organization.
• Compliance and Legal Risk: Third parties can introduce regulatory or legal compliance issues. For instance, if a vendor processing personal data on your behalf violates privacy laws (like GDPR or HIPAA), your company could be held liable for those violations. Likewise, using an unvetted supplier could lead to export control violations, corruption/bribery risks (per third-party behaviors), or breach of industry-specific regulations. Ensuring suppliers adhere to relevant laws and standards is part of your duty. This is why contracts and due diligence must cover compliance checkpoints.
• Financial and Strategic Risk: This includes the risk of a vendor being financially unstable or not financially viable over the long term. If a key supplier goes bankrupt or can’t sustain its operations, it poses a serious risk to your supply chain. Financial risk also covers cost overruns or hidden expenses a vendor might introduce. There’s also strategic risk if your organization becomes over-dependent on a single third party for a core business function – the classic “too many eggs in one basket” scenario.
• Reputational Risk: If a vendor fails spectacularly, it can tarnish your organization’s reputation by association. Data breaches at a third party often become headline news that embarrass the client company just as much as the vendor (since customers or regulators may not distinguish). Also, how a supplier treats your customers (in outsourcing scenarios) reflects on your brand. A poor-quality third-party service can lead to customer dissatisfaction and reputational harm.

These categories are not exhaustive, and they often overlap (a single incident can trigger multiple types of risk). Identifying which categories are relevant for each vendor

is part of the risk assessment process during onboarding. For example, a data center provider would primarily pose security, operational, and compliance risks; a consulting firm might pose more confidentiality and reputational risk.

To manage these various risks, organizations should implement a vendor risk management process that is integrated into the vendor lifecycle. According to ISO/IEC 27001:2022 and ISO/IEC 27036-2:2022, the process typically involves a few key steps:

1. Risk Identification: Determine what risks a potential or existing supplier could bring. This means reviewing the scope of the supplier’s services, the data they will handle, and the potential impact of something going wrong. For each vendor, ask: What’s the worst that could happen? Use questionnaires, interviews, and research to surface areas of concern (e.g. does the vendor rely on sub-contractors? have they had past breaches?).
2. Risk Assessment: Once risks are identified, assess their likelihood and impact. Many organizations use a tiering system or scorecard to rate vendor risks (e.g. high/medium/low). Inherent risk is considered (the risk before controls), and then residual risk after considering the vendor’s existing controls. For instance, a SaaS provider might be inherently high-risk for data privacy, but if it has strong encryption and ISO 27001 certification, the residual risk is lower. The assessment should be documented and approved by relevant stakeholders before onboarding the vendor.
3. Risk Mitigation & Contracts: Treat risks by implementing controls. Some controls are put in place by the acquirer (e.g. limiting the vendor’s access to only necessary systems, or encrypting data you share with them). Other controls you expect the vendor to have – and these should be written into contracts or agreements. ISO/IEC 27001:2022 Annex A control 5.19 and 5.20 specifically advise addressing information security in supplier agreements. This could include requirements for background checks on vendor staff, incident notification timelines, data handling procedures, compliance with standards, etc. The contract is a tool to enforce risk treatments: it mandates the supplier to meet certain security requirements and provides remedies (like the right to audit, or termination clauses) if they don’t. Additionally, some risks might be mitigated by insurance (like cyber insurance covering third-party incidents) or by having contingency plans (an alternate vendor ready).
4. Monitoring & Review: Managing risk is not a “one and done” task. Continuous monitoring of the vendor’s risk posture is necessary. This can involve regular check-ins, requiring periodic compliance attestations or security certifications from the vendor, vulnerability scans, or using third-party risk monitoring tools that alert you to news (e.g. data breach reports or financial trouble) about your suppliers. ISO guidance suggests re-examining supplier risks periodically and especially when changes occur – for example, if the vendor introduces a new subcontractor (fourth party) or undergoes a major system change, perform a fresh risk assessment. Many organizations align vendor risk reviews with contract renewal cycles or annually for critical suppliers. The monitoring process should also cover service delivery performance (are they meeting SLAs?) and any incidents. If a vendor repeatedly misses the mark, it might trigger a plan to mitigate that risk, such as augmenting their controls or even replacing the vendor.
5. Documentation and Improvement: Throughout the engagement, keep records of risk assessments, decisions, and actions. If an incident or near-miss occurs, incorporate those learnings. An effective vendor risk management process has feedback loops – outcomes from monitoring feed into adjustments in how you assess or mitigate risk next time. This aligns with the ISO principle of continuous improvement (Plan-Do-Check-Act) within the supplier risk context.

By covering these steps, an organization builds a systematic approach to third-party risk. Importantly, this process should be embedded into enterprise risk management and

procurement workflows, so that no new supplier is onboarded without going through risk checks, and existing suppliers are regularly reviewed. International standards and frameworks (like ISO 27001/27002 and the ISO 27036 series) provide guidelines to ensure nothing is missed – for example, requiring that information security controls are considered at the planning and selection stage, included in agreements, and monitored over time. Executives should ensure that their teams have a clear policy for supplier risk management that outlines these steps and assigns responsibilities. A well-managed third-party risk process not only protects the company but can also enhance trust with customers and partners by demonstrating that the organization rigorously secures its supply chain.

5.   Fourth-Party and Broader Supply Chain Risks

Managing third-party risk doesn’t stop at your direct vendors. Often, your vendor’s vendors (sometimes called fourth parties) can pose equally significant risks. In a layered supply chain, your organization might trust a vendor, but that vendor could rely on another subcontractor for part of their service, and so on. This creates a chain of dependencies where risks can propagate downstream. According to ISO/IEC 27036-1, an end customer typically has very limited or no control over information security requirements beyond their direct supplier. In other words, you might impose strict security on your vendor by contract, but you have no contractual privity with the vendor’s subcontractors further upstream, making it challenging to enforce or even know their security posture.

Figure 2 : Layered Supply Chain Relationships

A classic example is the SolarWinds incident, where a compromise in a fourth-party component (an upstream software library) led to breaches in hundreds of organizations down the chain. This kind of risk is inherent in multi-tier ICT supply chains.

Fourth-party risk matters because threat actors often target the weakest link deep in the supply chain. Your organization could be doing everything right, and your direct vendor might also be fairly secure, but a breach at a sub-supplier (who may have access to your

data or influence over the service) can still impact you. Moreover, concentration risk can hide in the supply chain: many of your vendors might coincidentally depend on the same critical third-party service behind the scenes (for example, a dominant cloud sub-processor), meaning a single upstream outage could impact many of your direct suppliers simultaneously.

6.   Managing Third-Party and Supply Chain Risks

Effectively managing vendor and supply chain risks requires a disciplined, end-to-end program that blends policy, process, people, and technology. Below is a blueprint for building and operating a mature Third-Party Risk Management (TPRM) practice.

1. Risk-Based Triage

• Classify vendors by criticality and data sensitivity (e.g., high, medium, low).
• Tailor due diligence and oversight: deep assessments for high-risk suppliers, lighter touch for low-risk ones.

1. Embed Security requirements into Contracts

• Use standard security addenda aligned with ISO 27001:2022 Annex A.15 controls and ISO 27036-2 requirements.
• Include clear clauses on data handling, encryption, breach notification timelines, audit rights, and exit/transition plans.

1. Continuous Lifecycle Management

• Integrate TPRM into procurement workflows rather than as a one-off ad-hoc process or requirement.
• Trigger re-assessments on material changes: technology upgrades, mergers, regulatory shifts.

1. Leverage Automation & Scoring

• Adopt risk platforms that automate questionnaire distribution, risk scoring, and evidence collection.
• Use external security ratings (e.g. SecurityScorecard, BitSight) and vulnerability scan integrations to detect emerging issues.

1. Supply Chain Transparency

• Require key suppliers to disclose their sub-suppliers (fourth parties) and mandate flow-down of your security requirements.
• Review Supplier’s operational artefacts and design artefacts for effective coverage of security controls.
• When possible, obtain independent audit reports (SOC 2, ISO 27001) from critical sub-suppliers.

Figure 3: Process for managing Third Party Risk

7.   How can organizations address fourth-party and broader supply chain risks?

Figure 4: Upstream Risk for Organizations

·

Map Your Critical Supply Chain

• Require each key vendor to disclose its top subcontractors and core technologies.
• Include contract clauses obligating vendors to notify you of any changes in their upstream supply chain.

·

Flow Down Security Requirements

• Embed your security controls (e.g. encryption, access restrictions) into vendor agreements.
• Mandate that vendors impose the same controls on their own suppliers, ensuring consistency end-to-end.

·

Secure Right-to-Audit or Assessment Rights

• Write into contracts the right to review or audit critical fourth parties (often via your direct vendor).
• Where on-site audits aren’t feasible, require independent attestations (SOC reports, ISO 27001 certificates) from those subcontractors.

· 

Leverage Industry Information Sharing

• Participate in supplier risk–exchange platforms or consortiums to pool assessments of common fourth parties.
• Use shared intelligence to spot emerging threats in the broader ecosystem.

·

Extend Threat Intelligence and Monitoring

• Subscribe to breach-alerts and reputation feeds covering both your direct vendors and their upstream suppliers.
• Automate alerts for news or vulnerabilities affecting any link in your layered supply chain.

·  

Adopt a Layered-Defense Mindset

• Treat fourth-party risk as an extension of your own: combine contractual mandates, independent certifications, and continuous monitoring.
• Reference ISO/IEC 27036-2 and 27036-3 (ICT supply-chain security guidance) alongside ISO 27001:2022’s flow-down controls to build a resilient, multi-tier defense.

8.   Final Thoughts/ TL;DR

Third-party risk is an unavoidable business reality: every vendor—with its own suppliers—can introduce security, operational, compliance, financial, and reputational threats.

By classifying vendors by criticality, embedding ISO 27001/27036-driven security clauses into contracts, and applying a structured lifecycle approach, organizations stay ahead of emerging gaps. Extending that rigor upstream - flowing down requirements, securing audit rights, and leveraging continuous threat intelligence- helps tame fourth-party risks.

A mature TPRM program weaves policy, process, people, and automation into a single fabric, turning vendor risk from a vulnerability into a strategic strength.