How to Mitigate Third-Party Risk

This stage is about applying the right controls to the right suppliers - not overburdening every supplier, but responding proportionately based on actual third-party risk exposure. 

A strong third-party risk management framework ensures you can reduce the likelihood and impact of risks without slowing down procurement or damaging supplier relationships.  

For regulated sectors like financial services, pensions, and insurance, effective mitigation is essential for operational resilience, compliance with frameworks like DORA, and maintaining customer trust. 

Here’s how to approach third-party risk mitigation with confidence. 

1. Strengthen Contracts With Built-In Safeguards  

Your supplier contracts are the first and most controllable line of defence. They help define expectations, assign responsibilities, and outline what happens when things go wrong. 

Mitigation tactics include: 

• Service Level Agreements (SLAs): Ensure measurable standards for delivery, performance, and compliance. 

• Fallback and exit clauses: Outline clear steps for disengagement or switchovers. 

• Penalty mechanisms: Deter poor performance or non-compliance. 

• Data protection terms: Reflect regulatory obligations like GDPR, FCA or PRA requirements, and DORA for ICT providers. 

Why it matters: 
Well-structured contracts reduce ambiguity, streamline enforcement, and demonstrate to regulators that third-party risk is actively managed via a third-party risk management framework - a critical expectation in financial services.

2. Use Third Party Risk Transfer Mechanisms 

Where third-party risks can’t be eliminated, they can often be transferred - shifting financial exposure or accountability away from your organisation. 

Common mechanisms include: 

• Insurance requirements: e.g. cyber liability, professional indemnity, or business interruption cover. 

• Parent company guarantees or performance bonds: To ensure continuity if a supplier fails. 

• Subcontractor flow-down clauses: To ensure your expectations pass down the chain - supporting fourth-party visibility. 

Why it matters: 
Transferring certain third-party risks doesn’t just protect your bottom line - it also builds confidence with internal stakeholders, boards, and regulators. 

3. Diversify And Dual-Source Critical Services

Avoid putting all your eggs in one supplier basket. Over-reliance on a single vendor can become a single point of failure - especially in areas like payments, cloud infrastructure, or customer-facing services. 

Mitigation actions: 

• Dual-sourcing: Contract two providers for high-risk or high-volume services. 

• Pre-qualify backup suppliers: So they can step in quickly if needed. 

• Geographical diversity: Especially for suppliers affected by local regulations, unrest, or natural hazards. 

Why it matters: 
Diversification strengthens your operational resilience - a growing expectation for financial institutions under DORA and other resilience frameworks. 

4. Build Buffers With Inventory And Contingency Planning

In some sectors, a simple third-party risk mitigation tactic is to absorb disruption through inventory, capacity, or process design. 

Example mitigations: 

• Stockpiling critical materials where supplier delays are a known risk. 

• Time buffers in onboarding or service transitions. 

• Contingency playbooks for urgent switchovers or manual workarounds. 

Why it matters: 
If disruption is unavoidable, buffers allow your business to maintain continuity while mitigation plans take effect. 

5. Invest In Supplier Development

Sometimes the best way to mitigate third-party risk is to work with your suppliers to reduce it. 

Development tactics: 

• Training and support: Help suppliers meet security or compliance expectations. 

• Feedback loops: Share audit findings and performance insights to drive improvement. 

• Joint improvement plans: Collaborate on long-term risk reduction - particularly with strategic suppliers. 

Why it matters: 
In high-trust industries like financial services, long-term supplier relationships can become risk-reducing assets - but only if they’re nurtured. 

Key Takeaways 

Third-party risk mitigation is about reducing exposure without slowing business down. With the right strategy, you can: 

• Build operational resilience across your supply chain 

• Reduce compliance gaps and regulatory risk 

• Allocate mitigation efforts where they’ll have the most impact 

• Strengthen supplier partnerships through transparency and development 

By embedding these controls into your third-party risk management framework, you don’t just protect your organisation - you build a more agile and accountable supply ecosystem.