Securing your supply chain and managing third-party risk

Jun 13, 2024

Risk-free supply chain

The moment your organisation initiates a partnership with a third party, it becomes exposed to various risks. The key lies in recognising the risks associated with each third-party relationship and implementing suitable safeguards accordingly.

What are third-party risks?

Third-party risks arise when an organisation enlists the services of an external entity to provide products or services on its behalf. They can encompass contractors, partners, service providers, suppliers, vendors etc. Despite an organisation having its own security standards, there is no assurance that third parties adhere to the same measures. So as each third party gains access to internal company systems or sensitive data, the organisation becomes increasingly vulnerable to potential risks and threats.

The types of third-party risk

As utilisation of third parties continues to rise, the risks to organisations also increase. The type of risk exposure varies for each organisation, depending on the nature of the third-party service being provided.

If your organisation enlists the help of a third party to offer online customer support services and this third party does not have updated business continuity or recovery plans in place, they will be unable to fulfil contractual obligations in the event of data breaches, cyberattacks, outages, natural disasters, or other unforeseen circumstances.

There are differing types of operational, financial, and reputational risks for your organisation. Common third-party risks to be aware of are:

1. Cybersecurity or InfoSec risk: 

This risk arises when an organisation’s data is vulnerable to breaches, compromises, exposure, or loss due to deficiencies in a third party’s security controls. This risk increases when service providers have access to an organisation’s internal systems or sensitive data. It is crucial to conduct thorough due diligence and continuously monitor third-party security measures.

2. Operational risk: 

Operational risk occurs when a third party fails to deliver the expected product or service, causing disruptions in regular operations. Regardless of the cause of failure, such as cyberattacks, natural disasters, or human error, it is important to address this risk in the contract or service-level agreement. Also consider having a backup vendor as part of their own business continuity plan.

3. Financial risk:

Financial risk potentially negatively impact an organisation’s finances due to the financial instability of a third party. If a third party lacks sufficient funding or resources, it may deliver substandard services and products, leading to dissatisfied customers and decreased sales. Financial risks also include fines, compensation, or remediation costs incurred by the organisation. It is crucial to identify the third parties that have the greatest influence on your financial performance and regularly assess their operations through audits.

4. Compliance and legal risk: 

Compliance and legal risk arises when organisations are required to adhere to specific regulations (such as GDPR or HIPAA) but engage with third parties that may not comply with the standards. If the organisation fails to demonstrate regulatory compliance or experiences a cyberattack or data breach, it becomes accountable for any violations. To mitigate risk, it is advisable to request relevant certifications from third parties before establishing a relationship and incorporate compliance requirements into the contractual agreement.

5. Strategic risk:

Strategic risk occurs when a third party hinders an organisation from achieving its strategic objectives. This risk varies depending on the objective, but it can be minimised through improved alignment and communication with the third party. It is essential to establish the objectives of both parties and define key metrics used to monitor performance.

6. Geopolitical risk:

Geopolitical risk arises from the location of a vendor or the location where a service is carried out. This risk is increasingly significant due to the continuous evolution of legal and regulatory standards in different countries. It is often challenging to predict the economic or political stability of another country. To minimise geopolitical risk, assess the number of regulations that are applicable to the specific third party. Also consider the historical and macro factors of the area. Analyse recent political shifts and supply chain disruptions.

7. Reputational risk:

Reputational risk arises when a third party has the potential to harm the reputation of your organisation. This occurs through publicised data breaches, lawsuits, or negative public opinions regarding the practices of the company. Customers tend to associate any news related to third parties with your organisation. It is impossible to anticipate every possible risk to your reputation, however conducting comprehensive assessments and due diligence on third parties can assist safeguard your organisation’s reputation.

Keeping your supply chain secure

Not only are there risks with your third parties, but there are similar risks from their third parties, known as fourth parties or subcontractors, that can potentially disrupt your organisation.

It is crucial to consider the entire chain of partners involved. While you may have 500 partners you do business with, each could have thousands of their own business connections. A recent survey has shown that the financial impact of incidents related to third-party or subcontractor risks has doubled in the past five years.

Only 20% of organisations effectively monitor their subcontractors. This can be attributed to various factors, such as organisations lacking information about their subcontractors and the associated risks, limited resources, and the assumption that their third parties are already monitoring subcontractors.

By enhancing visibility throughout the entire supply chain, an organisation can better understand and effectively manage critical subcontractor risks.

 

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