Understanding Third-Party Risk: The Most Common Risk Categories
From food suppliers to software providers and manufacturers, organizations depend on third parties to operate. Choosing the right third parties to work with can give your team a competitive edge, while choosing the wrong ones can lead to negative consequences. To reduce the likelihood of these consequences, organizations must understand the risks that every third party poses.
To do so, many organizations track risks by category, all of which should be evaluated to determine if the risk exceeds your organization’s risk appetite, and if so, these risks should be mitigated.
This begs the question, what types of risks do third parties pose? We’ve defined the top categories we’ve seen used in practice below:
- Definition: The risk that an organization’s brand reputation will be negatively impacted should an incident occur involving a third-party.
- Example: A supplier you work with is partaking in unethical behavior, such as modern-day slavery or bribery. This is discovered by an investigative journalist and your organization’s name appears in a news headline.
- Definition: The risk of conducting business in a specific region or country.
- Example: The outsourced call center you utilize is located in a country where massive protests have led to labor shortages and employee strikes.
- Definition: The risk that a change in government could upend your third party’s ability to deliver their products or services.
- Example: A new government is formed that intends to increase taxes on a product, or sanctions on a country, that could drive up costs.
- Definition: The risk that your organization’s strategic goals do not align with the third parties’.
- Example: A product you rely on was acquired by a company that intends to cease development and deprecate the product in the next six months.
- Definition: The risk that a third party could damage an organization’s revenue.
- Example: Due to improper health protocols, a major food processing plant must recall product, affecting your grocery stores bottom line.
- Definition: The risk that a third party fails to meet the needs from a service or product delivery perspective and ultimately disrupts and organization’s operations.
- Example: The software you use to track product distribution goes offline causing all warehouse operations to halt.
- Definition: The risk that an organization’s data is lost or security is compromised due to deficiencies in a third party’s cybersecurity controls.
- Example: The vendor you use to manage your software development project is hacked, leading to the disclosure of sensitive intellectual property.
- Definition: The risk that the personal data an organization shares with a third party will be accessed without authorization.
- Example: The vendor that stores your customers’ credit card data is hacked, revealing sensitive information about your clientele.
- Definition: The risk that a third party will impact an organization’s compliance with legislation or regulations.
- Example: Website visitors’ cookie data is accidentally shared with third parties, leading to a regulatory enforcement action.
- Business Continuity
- Definition: The risk of a third parties’ failure to continue business operations as usual in the event of a natural or man-made disaster.
- Example: The third-party manufacturer you rely on has to shutter operations due to a health or safety issue, resulting in the need to switch manufacturers.
As you can see, there’s a variety of risks that third parties pose, but this is just the beginning. To streamline all types of third-party risks across an organization, businesses should develop a scalable third-party risk management program.