Managing Third-Party Risk: What Legal Teams Must Focus on in 2026

In August 2025, Jaguar Land Rover’s production lines went silent. A ransomware attack had paralyzed operations, ultimately costing £1.9 billion and disrupting 5,000 businesses across the company’s global supply chain. It was not a failure of JLR’s own security. The attack exploited a vulnerability in a third-party system, illustrating why managing third-party risk has become the defining challenge for legal departments in 2026.

The incident encapsulates the challenge facing legal departments today. The average enterprise now manages 286 vendors, up from 237 in 2024. But managing third-party risk has evolved far beyond tracking vendor contracts. It represents a fundamental shift in how organizations must approach risk, compliance and strategic oversight. For legal teams, this is now a board-level imperative that demands technological sophistication and cross-functional coordination that most departments were never designed to provide.

The data paints a stark picture. Fourth-party breaches now account for 4.5% of all breaches, creating cascading downstream failures. Yet only 10% of organizations conduct direct risk assessments of fourth parties. Supply chain compromises took 267 days to identify and contain in 2025, the longest detection window of any attack vector. When those incidents finally surface, legal teams have just four business days to determine materiality and file SEC disclosures. The gap between risk velocity and organizational response capacity continues to widen.

The Algorithmic Supply Chain Demands New Legal Frameworks

Legal departments now face what industry analysts call the algorithmic supply chain. As vendors increasingly embed AI models, APIs and machine learning pipelines into their services, traditional due diligence frameworks have become insufficient. These dependencies are rarely disclosed in contracts and often poorly understood even by the vendors themselves.

Managing third-party risk in this environment requires legal teams to develop entirely new contractual provisions. Regulators are moving quickly. Expectations now include documented AI inventories, risk classifications, third-party due diligence and model lifecycle controls. For legal departments, this translates into an urgent need for protocols specifically designed for AI-powered vendors.

The challenge extends beyond identifying which vendors use AI. Legal teams must now evaluate how those AI systems make decisions, what data they consume, whether they introduce algorithmic bias, and how they connect to other systems within the vendor’s own supply chain. This demands collaboration with technical teams, risk professionals and external assessors in ways that most legal departments have not previously structured their operations.

Recent breaches have illustrated how quickly AI-related vendor dependencies can create exposure. When attackers exploit sophisticated integration points between platforms, they bypass traditional security perimeters entirely. Contractual language must evolve to require vendors to disclose not just current AI usage but changes to their technology stack that could introduce new algorithmic dependencies.

Continuous Monitoring Replaces Annual Assessments

The era of annual vendor reviews has ended. Legal teams managing third-party risk must now operate in a continuous monitoring environment where risk shifts too quickly for static assessments to provide meaningful assurance.

The SEC’s cybersecurity disclosure rules exemplify this new reality. Companies must disclose material cybersecurity incidents within four business days of determining materiality, and these disclosure obligations extend to incidents occurring on systems used by, but not owned by, the company. Legal teams therefore require real-time visibility into vendor security postures and must establish clear communication protocols with third-party service providers to meet these compressed timeframes.

In June 2025, Qantas disclosed that a cyberattack on a third-party customer service platform had exposed data belonging to 5.7 million customers. The breach did not affect Qantas’s internal systems, yet the airline faced immediate regulatory scrutiny and reputational damage. For legal departments, the lesson is unambiguous: contractual audit rights and annual questionnaires cannot substitute for continuous visibility.

Continuous monitoring technologies have become essential infrastructure. These platforms aggregate external threat intelligence, security ratings, regulatory filings and other signals to provide ongoing risk assessments. However, technology alone cannot satisfy legal obligations. Lawyers must work with risk and compliance teams to establish clear escalation procedures, materiality thresholds and decision-making frameworks that can operate at the speed these tools demand. Managing third-party risk now means building organizations capable of processing vendor risk signals in real time and making legally defensible decisions under intense time pressure.

Regulatory Convergence Creates Compliance Complexity

Legal teams must now navigate not only cybersecurity disclosure rules but also emerging AI regulations, data privacy frameworks and sector-specific requirements that all touch on third-party relationships.

The EU AI Act, Colorado’s AI regulations taking effect in mid-2026, and California’s various AI-related statutes create a patchwork of requirements that legal teams must map against their vendor portfolios. For organizations with global operations, this means developing jurisdiction-specific playbooks while maintaining consistent baseline standards across the entire vendor ecosystem.

Financial services organizations face particularly acute regulatory pressure. FINRA’s 2026 regulatory oversight report highlights third-party risk as a priority examination area, with regulators expecting firms to conduct initial and ongoing due diligence on vendors supporting mission-critical systems and to maintain comprehensive inventories of data accessed by third parties. Legal teams in regulated industries must build audit-ready documentation that demonstrates sophisticated risk management, not merely checkbox compliance.

The regulatory environment shows no signs of simplifying. Managing third-party risk in 2026 means preparing for increasing documentation requirements, more prescriptive standards and heightened enforcement activity. This demands investment in legal technology, process automation and cross-functional governance structures that can scale alongside regulatory expectations.

When Goldman Sachs notified some clients in December 2025 that their data may have been exposed through a cybersecurity incident at law firm Fried Frank, it highlighted an uncomfortable reality. Even professional service providers operating under strict confidentiality obligations can become vectors for third-party risk. Legal teams must approach vendor oversight with skepticism about assurances and focus instead on verifiable controls.

Fourth-Party Risk Exposes Hidden Vulnerabilities

One of the most challenging aspects of managing third-party risk involves vendors the organization never directly contracts with. These fourth-party and nth-party relationships create exposures that traditional contract-based risk management cannot address.

59% of organizations now examine and assess their vendors’ third-party risk management practices to manage fourth-party risk. However, examination alone provides limited protection. Legal teams need contractual rights to audit vendor supply chains, clear requirements for vendors to disclose their critical dependencies, and provisions addressing how vendors will manage disruptions in their downstream relationships.

The SalesLoft breach in 2025 demonstrated the cascading nature of fourth-party risk. Threat actors exploited OAuth integrations within the sales engagement platform, gaining access to customer environments at scale. TransUnion disclosed exposure of data belonging to 4.4 million consumers in July 2025. Google, Workday, Farmers Insurance, Chanel and Qantas were also affected. Security analysts linked the campaign to ShinyHunters operating alongside Scattered Spider. The incident revealed how trusted SaaS integrations can become powerful attack vectors that bypass traditional perimeter defenses.

The legal framework for managing fourth-party risk remains underdeveloped. Standard vendor contracts rarely contemplate supply chain transparency beyond a single tier. Legal teams pioneering solutions are developing multi-tier due diligence requirements, information-sharing provisions and contractual cascade mechanisms that impose key obligations throughout the vendor’s supply chain. These contractual innovations require careful drafting to balance protection against operational feasibility and vendor acceptance.

Research indicates that only 39% of survey respondents believe their third parties’ data safeguards and security policies are sufficient to respond effectively to incidents. This gap between expectation and reality underscores the need for legal teams to develop robust contractual frameworks that give organizations rights to verify, monitor and respond when vendors fall short.

Technology Enablement Becomes a Legal Imperative

Legal teams cannot manage modern vendor risk portfolios using spreadsheets and email. The volume and complexity of third-party relationships, combined with the speed at which risk evolves, demands sophisticated technology platforms.

The average TPRM team grew to 8.5 people in 2025, yet 75% of organizations still operate with fewer than 10 people dedicated to this function. For legal departments managing third-party risk, this resource constraint means technology must handle volume while lawyers handle interpretation, governance and strategic decisions. AI-driven assessment tools, continuous monitoring platforms and automated workflow systems have moved from nice-to-have capabilities to essential infrastructure.

However, deploying technology for vendor oversight creates its own legal considerations. Legal teams must evaluate the data privacy implications of vendor risk platforms that collect and analyze information about third parties. They must ensure that automated risk scoring tools don’t create unintended discrimination or bias. And they must maintain human oversight of decisions that affect vendor relationships. The platforms themselves become third parties requiring their own due diligence.

46% of organizations now use AI in core TPRM functions like sourcing and planning, according to EY research, and its role in due diligence and contract monitoring continues to expand. Legal teams must therefore develop governance frameworks for how AI tools will be deployed in vendor management, what decisions they can autonomously make, and where human judgment remains essential.

Yet technology adoption remains uneven. 41% of organizations still rely on spreadsheets to assess third parties, and just 15% of those organizations feel prepared to respond to third-party incidents. The gap between leading practices and common reality presents both risk and opportunity for legal departments willing to invest in proper infrastructure.

Board Oversight Intensifies Strategic Pressure

Managing third-party risk has become a permanent board agenda item. Directors increasingly view supply chain resilience not as a technical concern but as a fundamental business risk that requires regular reporting and strategic oversight.

The SEC’s cybersecurity disclosure rules explicitly require companies to describe the board’s oversight of cybersecurity risks, including those stemming from third-party relationships. Legal teams must work with risk and compliance functions to develop board reporting frameworks that provide meaningful visibility into vendor exposure without overwhelming directors with operational detail.

Boards are asking chief security officers to include visibility into cyber risk in their supply chains and to share high-risk exposures. This creates both opportunity and pressure for legal teams. Directors looking for assurance on third-party risk increasingly expect legal departments to demonstrate strategic risk management and competitive positioning, not merely compliance checklists.

The board’s focus extends beyond cybersecurity to encompass operational resilience, regulatory compliance, ESG considerations and strategic dependencies. In April 2025, both Marks & Spencer and Co-op suffered significant cyberattacks. M&S experienced a ransomware attack via compromised credentials from Tata Consultancy Services that disrupted operations for weeks and cost an estimated £300 million. Co-op disclosed that its April 2025 breach affected 6.5 million members. While these were separate incidents, they exposed how coordinated attacks can target multiple organizations within the same sector simultaneously. Legal teams managing third-party risk must develop holistic frameworks that address the full spectrum of concerns directors face.

Incident Response Planning Requires Legal Leadership

When third-party incidents occur, legal teams face compressed timelines for assessing materiality, coordinating disclosure, managing regulatory inquiries and protecting privilege. The SEC’s four-day disclosure window leaves little room for deliberation.

These response plans must address several critical questions. How will the organization determine whether a vendor incident is material? What information will be required from the vendor, and how quickly can it be obtained? Which regulators must be notified, and under what timeframes? How will the organization preserve legal privilege while conducting investigations that may involve multiple parties? What contractual rights can be exercised against vendors whose failures triggered the incident?

In February 2024, the Change Healthcare ransomware attack exposed protected health and personal data belonging to approximately 190 million individuals, making it the largest healthcare data breach ever recorded. The hack disrupted claim processing nationwide, resulting in delayed prescriptions and payments to providers. UnitedHealth spent over $3.1 billion responding in 2024 and reimbursed providers more than $4.7 billion. Long-term litigation continues into 2026, and regulatory scrutiny under HIPAA remains intense. The incident demonstrated that vendor failures can create enterprise-threatening liability that extends far beyond the initial breach.

Legal teams should conduct regular tabletop exercises that test response playbooks against realistic scenarios. The exercises should involve cross-functional teams including legal, risk, compliance, IT and communications to identify gaps in coordination and decision-making authority. Documentation from these exercises can demonstrate to regulators and boards that the organization has sophisticated incident response capabilities.

Managing third-party risk also requires legal teams to develop clear protocols for when vendors refuse to provide information, when multiple parties bear responsibility for an incident, and when contractual indemnities may be triggered. These scenarios introduce complex questions about information rights, liability allocation and litigation strategy that demand advance planning rather than crisis-mode decision-making.

Data Rights Move to the Forefront

As regulators demand greater transparency about third-party risk management practices, legal teams must ensure they have contractual rights to obtain the information needed to satisfy those requirements. This extends beyond traditional audit rights to include access to security assessments, incident reports, sub-vendor information and operational metrics.

The challenge is compounded by the fact that vendors often resist broad information-sharing provisions, particularly when they serve multiple clients with competing interests. Legal teams managing third-party risk must develop negotiation strategies that balance the organization’s legitimate need for visibility against vendors’ concerns about confidentiality, competitive positioning and operational burden.

64% of third-party applications now access sensitive data without business justification, up from 51% in 2024. This troubling trend underscores the importance of legal teams establishing clear data access controls through contracts and technical safeguards. Provisions should specify what data vendors can access, for what purposes, under what security controls, and subject to what restrictions on further sharing or processing.

The TransUnion breach in July 2025 illustrated the consequences when data access controls fail. Attackers exploited a third-party application used for customer support, compromising data belonging to 4.4 million consumers. The breach involved Social Security numbers, names, dates of birth, and other sensitive information. Legal teams must ensure contracts require vendors to implement technical controls that enforce the data access limitations negotiated in agreements.

Legal departments must also address the information governance challenges created by TPRM platforms themselves. These systems aggregate sensitive information about vendors, including security assessments, financial data and incident reports. Legal teams must ensure this information is properly protected, appropriately shared with relevant stakeholders, and retained or destroyed in accordance with legal requirements.

Building a Sustainable TPRM Operating Model

Legal teams cannot manage third-party risk as an isolated function. Success requires integration with procurement, risk management, compliance, information security and business units. This demands new operating models that clarify roles, streamline workflows and enable scaled decision-making.

Leading organizations are moving toward hybrid TPRM models where centralized teams establish frameworks, standards and oversight while business units execute day-to-day vendor management within those guardrails. Legal teams must define the boundaries of this delegation carefully, ensuring that high-risk decisions and exceptions remain subject to legal review while routine assessments can proceed efficiently.

Technology enablement is essential to making these operating models work. Workflow automation tools can route vendor assessments to appropriate reviewers, escalate high-risk findings, track remediation commitments and generate reports for stakeholders. Legal teams should work with TPRM technology providers to ensure these platforms support the legal department’s specific needs around contract analysis, regulatory compliance tracking and incident management.

Organizations assess only 40% of vendors on average, mainly due to lack of resources. 70% of TPRM programs are understaffed. For legal teams managing third-party risk, this reality means prioritization becomes critical. Not every vendor presents equal risk, and legal resources must focus on relationships where failure would create material harm. Risk-based tiering models that allocate scrutiny based on data access, criticality and inherent vendor risk allow legal teams to deploy limited resources where they matter most.

Managing third-party risk also requires legal teams to develop clear metrics and key performance indicators. Boards and senior management increasingly expect data-driven reporting on vendor risk exposure, remediation progress and program maturity. Legal departments should establish metrics that demonstrate both compliance with regulatory requirements and value creation through effective risk management.

What Legal Teams Must Do Now

The organizations that will thrive are those that recognize managing third-party risk as a core competency requiring legal expertise, technological sophistication and cross-functional collaboration. Legal teams that build comprehensive TPRM capabilities position themselves as strategic partners in enterprise resilience rather than compliance gatekeepers.

The question is no longer whether vendor ecosystems will expand or regulatory expectations will intensify. Both trends are accelerating. The question is whether legal departments will build the capabilities needed to manage risk at the speed and scale these realities demand.

2025 saw supply chain vulnerabilities emerge as the second most prevalent attack vector, with incidents costing an average of $4.91 million to remediate. 15% of organizations identified a supply chain compromise as the source of a data breach, and those breaches took longer to identify and contain than any other type of incident. For legal teams, these statistics represent both warning and opportunity.

The path forward requires investment in technology platforms that provide continuous visibility, development of contractual frameworks that extend protection beyond direct vendor relationships, establishment of cross-functional governance structures that can operate at the speed risk evolves, and cultivation of expertise in emerging risk domains like AI governance and algorithmic accountability.

Vendor ecosystems will continue to expand. Regulatory expectations will continue to intensify. The legal teams that recognize managing third-party risk as strategic imperative rather than compliance exercise will separate themselves from those struggling to keep pace with a risk landscape that shows no signs of slowing.