How Do You Manage Third-Party Risk?

In regulated sectors like financial services, banking, and insurance, third-party relationships underpin almost every critical process. But without a structured approach, supplier vulnerabilities can quickly become your vulnerabilities. 

This guide outlines a scalable, repeatable five-step process for managing supplier and third-party risk effectively - helping you build resilience, act early, and maintain confidence with stakeholders. 

Step 1: Identify What’s In Scope 

You can’t manage third-party risk if you don’t know where to look. In industries like banking, insurance, and pensions, high-value contracts and critical services often carry regulatory implications. Defining which suppliers handle regulated data, provide critical infrastructure, or affect customer-facing services is essential for avoiding compliance breaches. 

Set thresholds based on factors like: 

• Spend value or contract size 

• Type of services provided 

• Access to sensitive data or customer interactions 

• Regulatory exposure or operational criticality 

This focus ensures you concentrate on the suppliers that matter most, without wasting resources on low-risk relationships. 

This step is foundational to building a third-party risk management framework that reflects both regulatory expectations and internal risk appetite. 

Step 2: Segment Suppliers By Service And Exposure    

Not all suppliers represent the same level of third-party risk. After identifying who’s in scope, segment suppliers based on what they deliver and how they interact with your business. 

Key segmentation factors include: 

• Type of exposure - e.g. data handling, payment processing, logistics. 

• Business impact - their role in delivering critical services or meeting compliance obligations. 

• External drivers - regulatory oversight, Sustainability reporting, or geopolitical risk. 

For financial institutions, segmentation is particularly important for identifying vendors with direct customer contact or access to regulated data.  

Effective segmentation allows your third-party risk management framework to align due diligence with real exposure - rather than applying the same checks into a one-size-fits-all model. 

Step 3: Design A Risk-Aligned Assessment Framework 

Once suppliers are segmented, create a structured third-party risk assessment framework to evaluate them consistently.

Focus on risk categories most relevant to financial services, such as: 

• Financial stability and creditworthiness. 

• Operational reliability and continuity. 

• Cybersecurity and data protection (e.g. GDPR, DORA). 

• Sustainability performance and regulatory compliance. 

• Resilience of critical infrastructure. 

Build standardised scoring rubrics and define clear evidence requirements. Combine: 

• Supplier-provided data (e.g. questionnaires, certifications, audit reports). 

• Buyer-held data (e.g. spend history, contract terms, performance records). 

Platforms like FSQS streamline this process by giving buyers access to a pre-validated supplier community, removing duplicated requests and ensuring suppliers meet industry expectations before engagement. 

Step 4: Assess Supplier Risks Consistently 

With your third-party risk management framework in place, evaluate each supplier across the risk categories you’ve defined.

Use a likelihood and impact matrix to score risks objectively, making assessments consistent and defensible. 

This is where TPRM becomes operational - transforming third-party risk theory into measurable actions and controls. 

From Assessment to Action: Scoring, Tiering, and Mitigation  

Composite scoring combines multiple third-party risk factors into a single weighted score, giving you a clear view of supplier exposure while still allowing you to drill into individual factors when needed. 

Benefits of scoring and tiering suppliers: 

• Prioritisation – Focus resources on high-risk suppliers first. 

• Efficiency – Avoid over-assessing low-risk suppliers and reduce duplicated effort. 

• Transparency – Make risk decisions evidence-based and defensible for audits and regulators. 

Once suppliers are tiered, tailor your mitigation strategies accordingly: 

• Contractual protections – Add fallback clauses, SLAs, and penalty mechanisms. 

• Diversification – Avoid over-reliance on single suppliers by developing alternatives. 

• Risk transfer – Use insurance or third-party guarantees to reduce exposure. 

• Supplier development – Partner with strategic suppliers to improve performance and resilience. 

This approach transforms scoring from an administrative exercise into an actionable process that directly strengthens your supply chain. 

Step 5: Monitor Third-Party Risks Continuously 

Monitoring is an ongoing pillar of effective third-party risk management. Without it, emerging threats often go undetected until it’s too late. 

Third-party risk doesn’t end at onboarding - it evolves. For financial institutions, ongoing monitoring is critical to maintain regulatory confidence and operational continuity. 

Set up continuous monitoring to track: 

• Performance metrics - delivery times, service quality, and audit results. 

• Compliance status - ensuring suppliers meet sector regulations like FCA, PRA, and DORA. 

• Emerging threats - including cybersecurity vulnerabilities or sustainability non-compliance. 

• Supplier relationships - build transparency so issues are flagged before they escalate. 

For organisations managing hundreds or thousands of suppliers, FSQS centralises monitoring, providing real-time visibility, reducing duplicated assessments, and surfacing third-party risks earlier. 

Key Takeaways  

If you’re asking, what is third party risk management, it’s more than a compliance checkbox - it’s a critical business capability for managing supplier and partner risk at scale. 

Third-party risk management (TPRM) is most effective when it’s strategic, structured, and scalable.

By following this five-step process, you can: 

• Focus resources where risk is highest. 

• Strengthen operational resilience. 

• Maintain confidence with regulators and stakeholders. 

• Accelerate supplier onboarding and procurement cycles. 

Platforms like FSQS support a strategic TPRM framework by providing a single, validated supplier database, improving risk visibility, and enabling procurement and compliance teams to make evidence-based decisions with confidence.