Overview
In today’s interconnected business world, where third-party vendors, suppliers, and service providers play pivotal roles, the importance of Third-Party Risk Management (TPRM) cannot be overstated. A single weak link can trigger a cascade of consequences, threatening not just profits but also the very reputation of a business.
This blog explores why TPRM has become a non-negotiable aspect of modern business strategy. We examine the unique risks faced by different industries, uncover the latest trends in TPRM, and provide actionable insights to help you safeguard your organization against potential disruptions. If your business relies on third parties—and in today’s world, almost all do—this is one read you can’t afford to miss.
What is Third-Party Risk Management?
Third-party risk management (TPRM) refers to the systematic process of identifying, assessing, and mitigating risks associated with third-party relationships. These third parties can include vendors, suppliers, contractors, or service providers that an organization relies on for various aspects of its operations. The goal of TPRM is to ensure that these external parties do not introduce risks that could impact the organization’s operational efficiency, data security, regulatory compliance, or reputation.
The TPRM market was valued at USD 6.1 billion in 2023 and is projected to grow at a compound annual growth rate (CAGR) of over 15% from 2024 to 2032. This growth highlights the increasing recognition of the importance of managing risks related to outsourcing and third-party engagements. TPRM encompasses a range of activities, including risk assessment, monitoring, and mitigation, to protect organizations from potential threats posed by their external partners.
Industry-Specific Risks and Challenges
The scope and requirements of a TPRM program can vary widely depending on the industry, regulatory environment, and specific organizational needs. Here’s a closer look at how different sectors is affected by third-party risks:
Financial Services (BFSI)
The BFSI sector is highly regulated and faces significant risks due to the sensitive nature of financial data. In 2023, this sector accounted for approximately 26% of the TPRM market. Financial institutions are particularly vulnerable to risks related to fraud, regulatory non-compliance, and cybersecurity threats.
Advanced analytics and AI-powered solutions are extensively used to manage credit risks, and market risks, and to prevent fraudulent activities.
For instance, banks and financial institutions often rely on third-party service providers for transaction processing, data management, and cybersecurity.
A breach or failure by a third-party vendor can lead to significant financial losses and regulatory penalties. Therefore, BFSI organizations invest heavily in TPRM solutions to ensure compliance with stringent regulations and to safeguard against financial and reputational damage.
Healthcare
The healthcare sector, which handles highly sensitive patient information, is a prime target for cyberattacks and data breaches, making effective Third-Party Risk Management (TPRM) essential for ensuring data integrity and HIPAA compliance. In 2023, the industry saw a record 725 data breaches, exposing over 133 million records, surpassing previous highs and reflecting a 14-year upward trend.
Hacking and ransomware are the primary causes, with hacking alone accounting for 79.7% of breaches in 2023 and a 239% increase in related incidents since early 2018. Notably, 2023 included 26 breaches involving over 1 million records each and 4 affecting more than 8 million records each.
Breaches involving third-party vendors can severely disrupt operations and result in legal consequences, highlighting the critical need for robust TPRM practices. With over 5,887 large data breaches reported from 2009 to 2023 and an average of 1.99 breaches per day in 2023, the urgency for enhanced security measures is clear.
Manufacturing
Manufacturers often rely on a network of suppliers for raw materials, components, and logistics, and third-party risks can significantly impact production schedules, quality control, and supply chain continuity. Disruptions caused by supplier failures or quality issues can have a cascading effect on the entire supply chain, leading to operational inefficiencies and financial losses. For instance, if a key supplier fails to deliver critical components on time, it can halt production and delay product delivery to customers.
This vulnerability is particularly acute in the face of increasing cyber threats. The manufacturing sector has become the most targeted industry for cyberattacks, accounting for 25.7% of incidents, with ransomware involved in 71% of these attacks. The cost of cyberattacks on manufacturing is rising dramatically, increasing by 125% annually. In February 2024, a cyberattack forced a German battery manufacturer to halt production at five plants for over two weeks, illustrating the severe impact on operations.
Effective Third-Party Risk Management (TPRM) is crucial for manufacturers to assess the reliability and performance of their suppliers, ensuring potential risks are identified and mitigated before they affect operations. By integrating better cybersecurity practices and addressing both technical and strategic challenges, manufacturers can better protect their supply chains from disruptions and maintain operational continuity.
Retail and E-Commerce
Retail and e-commerce businesses depend on various third-party partners, including payment processors, logistics providers, and cloud service vendors. Third-party risks in this sector can affect transaction security, customer data protection, and supply chain operations. For instance, a breach of a payment processing service can lead to financial losses and damage to customer trust.
Retailers and e-commerce platforms must ensure that their third-party vendors adhere to robust security standards and comply with data protection regulations. Implementing effective TPRM practices helps mitigate risks associated with payment fraud, data breaches, and supply chain disruptions.
Energy and Utilities
The energy and utilities sector are critical for national infrastructure and rely on third-party contractors for operations, maintenance, and supply chain management. Risks in this sector can significantly impact operational efficiency, regulatory compliance, and environmental safety. For example, 93% of organizations experienced two or more identity-related breaches in the past year, highlighting the potential for severe security risks. Additionally, bot attacks nearly doubled in 2023, increasing the threat to critical infrastructure.
Effective Third-Party Risk Management (TPRM) practices are essential in this sector. They involve assessing the reliability and safety standards of third-party contractors, especially in light of the 34% of organizations that lack cloud cybersecurity skills, which underscores the need for robust security measures. Ensuring compliance with regulatory requirements helps mitigate risks related to operational disruptions and environmental impacts, which can be exacerbated by cybersecurity vulnerabilities such as those leading to data breaches or ransomware attacks.
Recent Developments and Innovations in TPRM
The TPRM landscape is evolving rapidly with advancements in technology. Recent innovations include the integration of artificial intelligence (AI), machine learning (ML), and Internet of Things (IoT) technologies into risk management solutions. These technologies enhance the ability to detect and respond to risks in real time, providing organizations with a proactive approach to managing third-party risks.
AI and ML technologies are transforming TPRM by enabling organizations to analyze large volumes of data and detect anomalies that may indicate potential risks. For example, AI can be used to monitor third-party vendors’ cybersecurity practices, assess compliance with regulations, and predict potential risks based on historical data. This proactive approach helps organizations mitigate risks before they materialize.
In June 2024, FIS introduced its Climate Risk Financial Modeler, a SaaS solution designed to help clients assess, mitigate, and disclose risks related to climate change. This modeler combines client data with third-party climate data to provide a comprehensive risk assessment, enhancing risk management practices across various industries.
The adoption of TPRM solutions varies by region and sector, driven by factors such as digital transformation, regulatory requirements, and the frequency of cyberattacks. North America, Europe, and Asia-Pacific are key regions where TPRM market growth is significant.
North America
North America dominated the global TPRM market with a major share of over 36% in 2023. The region’s rapid digitalization and the increasing frequency of sophisticated cyberattacks contribute to the growing demand for TPRM solutions.
Businesses in the U.S. and Canada are investing in digital transformation programs, which often involve collaborating with external partners. This heightened reliance on third parties drives the need for effective risk management solutions to address vulnerabilities associated with these digital ecosystems.
Europe
In Europe, stricter data protection laws, such as the General Data Protection Regulation (GDPR), have driven the adoption of TPRM solutions. The GDPR mandates businesses to enhance their third-party risk management practices to ensure compliance with data protection regulations. Industries such as banking, healthcare, and manufacturing are particularly focused on risk mitigation due to their reliance on third-party contractors and service providers.
Asia-Pacific
The Asia-Pacific region has seen significant growth in the TPRM market due to the expansion of digital transformation projects and increasing cyber risks. Organizations in this region are embracing advanced technologies, such as AI and ML, to strengthen their resilience against emerging threats. The growing emphasis on cybersecurity and data protection is driving the adoption of TPRM solutions across various industries.
Impact of Supply Chain Attacks
Supply chain attacks have become a significant concern for organizations worldwide. In 2024, the frequency of software supply chain attacks surged, with sectors such as aerospace, healthcare, and manufacturing experiencing substantial impacts. These attacks exploit trusted access to customer environments, leading to costly downstream effects and severe consequences for affected organizations.
Key statistics reveal that 91% of organizations experienced software supply chain attacks in the past year. Common attack methods include exploits of vulnerabilities in third-party code, misconfigured cloud services, and vulnerabilities in open-source software. With attacks occurring at least once every two days, organizations must adopt a defense-in-depth strategy based on zero trust and secure coding practices to mitigate risks effectively.
Software supply chain attacks are becoming more frequent, significantly affecting various industries, with U.S. companies and IT providers being major targets. Industries like aerospace, healthcare, and manufacturing are especially vulnerable due to their dependence on third-party vendors and critical infrastructure.
To manage these risks, a proactive approach that includes defense-in-depth strategies, zero trust principles, and secure coding is crucial. Advances in technology, such as AI, ML, and IoT, are improving risk assessment and mitigation by offering real-time insights and predictive capabilities. Regionally, North America, Europe, and Asia-Pacific are leading in adopting Third-Party Risk Management (TPRM) solutions, driven by digital transformation, regulatory demands, and heightened cyber threats.
Conclusion
Third-party risk management is a critical aspect of modern business operations, particularly in an era of increasing reliance on external partners and digital transformation. As organizations navigate the complexities of today’s interconnected business landscape, implementing effective TPRM practices is essential for managing risks and ensuring operational resilience.
Cyble’s threat intelligence data provides valuable insights into the frequency and impact of supply chain attacks.
According to Cyble, there have been 90 reported cybercriminal claims of successful supply chain attacks between February 2024 and mid-August 2024. IT providers have been the most frequent targets, suffering the highest number of breaches.
By understanding industry-specific risks, leveraging advanced technologies, and staying informed about emerging threats, businesses can enhance their TPRM strategies and safeguard their operations from potential disruptions.
Sources:
https://www.gminsights.com/industry-analysis/third-party-risk-management-market
https://www.securitymagazine.com/articles/100402-91-of-organizations-faced-a-software-supply-chain-attack-last-year
https://www.statista.com/statistics/1375129/supply-chain-attacks-customers-affected-global/#:~:text=In%202024%2C%20approximately%20183%20thousand,impacted%20by%20supply%20chain%20attacks.
