Relying on third-party vendors is common for many organizations; not only does it save them time and money, but vendors bring in benefits and products. However, bringing in a third-party vendor has a cost; the vendors have access to critical systems and customers’ data. There are different potential risks that can occur with third-party vendors that can affect your organization.
There are many different risks that vendors can pose to your organization, and we have outlined the seven that are most common.
Cybersecurity Risk
This is a risk companies need to take very seriously. When data and confidential information are exchanged with third-party vendors, that data and information become vulnerable to misuse and exploitation—this is where the risk occurs. There is an increasing number of cyberattacks, malware, and data breaches, from people who want to hold your files or business hostage. This risk can affect any industry, from large financial institutions to small community banks. This danger has become even more of an issue since many businesses have moved to remote work and started relying on unsecured access to servers and video conferences.
When these third parties lack strong cybersecurity measures or compliance, the consequences of a breach can affect your business.
Environmental, Social, and Governance (ESG) Risks
ESG risks can occur when vendors don’t follow laws and policies your organization has put into place regarding the environmental impact, the use of resources, sustainability initiatives, and the treatment of those in their employment. If vendors fail to properly follow these ESG protocols, your organization may be the one to face the consequences.
Compliance Risk
This is the risk where a third-party vendor may violate a law or regulation that they are contractually obligated to follow. All vendors must remain in compliance with laws, regulations, and rules passed down by the bodies that regulate and affect your company and industry, or policies set forth by your institution. Failure to meet the compliance standards set forth can result in enforcement actions and harsh fines for your organization; the risk of the vendors is the risk of the organization.
Reputation Risk
This risk affects your organization directly. Reputation is the public’s perception of your company, and it is vital to maintain a positive reputation.
However, third-party vendors can harm your company’s reputation by:
- Disclosing customer information
- Violating laws and regulations
- Not delivering on products
- Poor customer service
- A drop in quality of service or products
- Inappropriate behavior in the workplace
- Security breaches
Operational Risk
Operational risk ties into internal processes, people, and systems that can fail or are inadequate. It’s a risk that can also occur because of external events. Your organization’s operations are intertwined with third-party operations, so if they go down, your company will also feel the effects. You need to have a plan in place in case something like this happens so your business can continue to operate in the event one of your vendors shuts down.
Financial Risk
Financial risk is a negative financial impact on your organization because of the relationship with a vendor, and this results from them not being able to meet requirements set forth by your business. For vendors, there are two forms of financial risks you need to look out for; high costs and lost revenue.
Excessive costs can lead to excess debt and ultimately hinder company growth. Audit your vendors and make sure their spending is in line with what you have agreed to in your contract.
Loss of revenue costs your organization money. Implement a third-party system that tracks sales activity to monitor them.
Transaction Risk
This form of risk can occur when vendors fail to deliver promised services or products. If you are continuously having this problem with the vendor and it is affecting your organization, then it’s time you assess the long-term relationship with the vendor to see if retaining them is worth it.
Managing Vendor Risks
There are several ways to handle risks once they are identified.
- Avoid the risk and any activity that may present it.
- Implement controls and test them to see if they can reduce the occurrence or likelihood of the risk.
- The financial impact of the risk can be transferred through insurance policies or indemnification language in contracts.
- Sometimes it isn’t possible to eliminate every risk. Sometimes the benefits outweigh the risk.
There are also third-party risk management companies that can help.
Do your due diligence. Perform risk assessments to understand the risks a potential vendor may pose to your company. Are the risks worth the potential benefits?