Third-Party Risk Is Becoming a Primary Challenge to Further Reduce the Extended Enterprise Risk

Today organizations in all market segments increasingly rely on an assortment of third-party vendors, suppliers, and partners. We are all aware of the continued growth of the extended enterprise – companies relying on a network of third-party vendors to provide them with organizational services, products, and competitive advantage.

Over the past few years, the use of third-party vendors in supply chains has increased exponentially. Now many companies even outsource core business and operational functions to gain efficiencies and cost savings. In doing so, organizations can expose themselves to high-profile risks like never before. The biggest challenge going forward will be for organizations to provide the appropriate risk management oversight to these third parties – a problematic vendor can create severe financial, operational, and reputational risk.

Previously third-party risk has been a procurement issue. The process typically would be fairly straightforward: Procurement would identify potential savings from outsourcing; legal would then be involved to draw up a contract and management would approve and that would be it – few would be concerned with the vendor as long as they were fulfilling the contract and quality obligations.

As we all know, that outdated process is not appropriate in today’s compliance and regulatory driven, and security centric environment. The actions your vendor and suppliers take have consequences – not just legally but reputationally – even if a security incident or any adverse risk incident in a distant international region.

There are Evolving Trends That Drive Increased Third-Party Risk:

  • Regulators focusing on vendor risk: Regulators are increasing the pressure on organizations to better manage and evaluate their supply chain risk.
  • Increased adverse events related to vendors: Vendors are causing more disruption and risks are not being managed, adequately assessed, and monitored. Information security, privacy and anti-fraud management, financial risks are some examples.
  • Pressures from financial and economic volatility: Economic conditions means tighter margins and instability for vendors and suppliers causing increased risk of supplier disruption.

While the Threat Environment Is Constantly Evolving and New Threats Are on The Rise, Risks Typically Fall into One of Three Categories Based on How They Threaten to Impact Your Business:

  • Financial/reputational: Risk that a third-party vendor could damage your revenue or reputation. For example, a company’s reputation is exposed after a supplier provides them with contaminated food products that have been sold to consumers.
  • Legal and regulatory: Risk that a third party will impact your compliance with legislation or regulation violations. For example, if your vendor violates labor or environmental laws, the organization can still be found liable. Outsourcing does not mean the end of responsibility! 
  • Operational: Risk that a third party could disrupt your operations. For instance, a technology vendor is hacked leaving the company with a downed non-operational system to users.

Although those are the more common types of third-party vendor risks, in some cases, risks may overlap. A data breach, for example, is a regulatory threat, but can also be operational.

How Should Companies Operate in This Extended Third-Party Business Environment?

With better governance and a strong third-party vendor risk management program. Strong governance has clear benefits in reducing risk with increased transparency, better alignment to strategy, and consistent regulatory compliance.

Companies can reduce their overall third-party risk profile by integrating third-party risk technologies and operational processes to evaluate vendors with powerful due diligence analysis and continuous risk management monitoring throughout the organization.

Managing third-party vendor risk is an ongoing process. It is about prevention rather than responding to adverse incidents as they occur. There are tremendous benefits to be gained from embracing the extended enterprise, and today’s competitive business environment demands it. Organizations need to be proactive with their Third-Party Vendor Risk Management program strategy.

Company Contact Information:
Thomas J. Canova
Co-Founder, CMO
Modevity, LLC  610-251-0700

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