What Is the Difference Between a Vendor and a Third Party

In business operations, especially within compliance, procurement, and risk management fields, the terms vendor and third party are often used interchangeably. However, while they are closely related, they do not mean the same thing. Understanding the distinction is essential for effective governance, risk management, and building strong, transparent business relationships. This article will explain the difference between vendors and third parties, why it matters, and how organizations can manage both effectively. 

Defining the Terms 

What Is a Vendor? 

A vendor is a type of third party that directly sells goods or services to an organization. Vendors are directly involved in transactional exchanges, such as delivering products, providing software solutions, or supplying critical business services. Examples include: 

• A software provider offering an HR system 

• A manufacturer supplying office equipment 

• A freelance consultant delivering professional services 

Vendors are typically part of procurement processes and contractual agreements involving costs, deliverables, and service levels. 

What Is a Third Party? 

A third party is a broader term that includes any external entity interacting with an organization. This includes not only vendors but also partners, affiliates, consultants, contractors, service providers, and even regulatory bodies. Third parties may not always sell goods or services; instead, they may influence core operations, compliance, or reputation. 

Examples of third parties include: 

• Business partners in joint ventures 

• Marketing affiliates or resellers 

• External auditors or compliance assessors 

• Logistics or distribution partners 

Key Differences Between Vendor and Third Party 

Why the Difference Matters 

1. Risk Management 

Vendors and third parties carry different types of risks. Vendors typically bring operational risks such as delivery failure or financial loss. Third parties, on the other hand, may introduce strategic, reputational, or compliance risks, especially if they manage customer data or operate internationally. 

2. Compliance and Regulatory Requirements 

In industries like finance, healthcare, and technology, regulators demand transparency around third-party dependencies. Knowing who your vendors are versus other third parties helps in conducting proper due diligence, monitoring, and ensuring compliance with laws like GDPR, HIPAA, or SOC 2. 

3. Contract Management 

Vendor relationships usually involve service level agreements (SLAs), pricing terms, and delivery schedules. Third parties, particularly strategic partners or affiliates, may require partnership contracts, data-sharing agreements, or governance policies. 

Common Types of Third Parties 

Not all third parties fit into the role of a vendor. Here are the most common third-party types: 

1. Vendors 

Provide goods or services under commercial contracts. 

2. Service Providers 

Offer specialized services like IT support, payroll processing, or logistics. 

3. Partners and Affiliates 

Collaborate to expand market reach or co-brand products, without directly selling to your organization. 

4. Contractors and Consultants 

Offer expertise or temporary services, such as legal advice or project management. 

5. Regulatory and Compliance Entities 

External auditors or certifying bodies that don’t transact goods but influence compliance posture. 

How to Manage Vendors vs. Third Parties 

While vendors fall under the broader third-party umbrella, how you manage each group may differ based on their role and risk impact. 

1. Vendor Management 

Focuses on: 

• Procurement and sourcing 

• Contract negotiations and cost management 

• Performance metrics and SLA monitoring 

Tools like Vendor Management Systems (VMS) help track contracts, payments, and supplier performance. 

2. Third-Party Risk Management (TPRM) 

Goes further by covering: 

• Risk assessments (financial, cybersecurity, reputational) 

• Compliance monitoring and due diligence 

• Ongoing audits and data security evaluations 

Organizations often use Governance, Risk, and Compliance (GRC) platforms for comprehensive oversight. 

When a Vendor Becomes a High-Risk Third Party 

A vendor becomes a critical third party when they access sensitive data, support core operations, or operate in regulated areas. For example: 

• A cloud service provider storing customer data 

  
  

• A payment processor handling financial transactions 

  
  

• An HR software provider with employee records 

  
  

These entities require enhanced monitoring, cybersecurity assessments, and compliance checks. 

Best Practices for Managing Vendors and Third Parties 

✅ Classify Your External Relationships 

Identify whether an entity is a vendor, partner, or service provider to apply the right oversight framework. 

✅ Conduct Proper Due Diligence 

Analyze financial stability, reputation, security practices, and legal compliance before onboarding. 

✅ Implement Continuous Monitoring 

High-risk third parties should be reviewed periodically to ensure they meet contractual and regulatory expectations. 

✅ Use Technology and GRC Tools 

Automated platforms help manage documentation, assessments, renewals, and reporting all in one place. 

While all vendors are third parties, not all third parties are vendors. The distinction lies in their function and relationship with your organization. Vendors focus on delivering goods and services, whereas third parties may influence strategic, regulatory, or operational aspects without direct sales involvement. 

Understanding this difference is critical for robust risk management, procurement efficiency, and regulatory compliance. By clearly identifying each external entity’s role, businesses can better manage relationships, mitigate risks, and build stronger, more secure operations.