Most businesses today rely to some degree on third parties to help carry out their necessary business functions. Depending on the industry your enterprise is in, a third-party entity might augment your staff or purchase raw materials to manufacture the products or create the services that your customers require.
Whatever third parties you rely on, the days of having an implicit level of trust are over, largely due to the impacts of the COVID-19 pandemic. Today you need to vet prospective third parties just as carefully as you do prospective employees. In this article, we will describe some of the most common third-party risks to be aware of.
Several Types of Third-Party Risks
When one hears the term “third-party risk,” what often comes to mind are Cybersecurity threats from a third party transmitted down to your business. But there are other third-party risks that can be just as lethal to your business. Some of the most common risks are as follows:
- Brand risk: This is also commonly referred to as Reputational Risk. It occurs when your third-party entity receives any sort of negative attention, in the media or in trade communications. Think of this risk as “guilt by association.”
- Process (Operational) risk: This refers to the risk of a mission critical process breaking down for any length of time at the location of your third party. Such a breakdown can impact your supply chain and delay or disrupt product/service delivery to your customers.
- Disaster Recovery risk: If your third party experiences a massive Cyberattack or a natural disaster, your business may be severely impacted. Thus, it is critical that the third party has in place both a solid Disaster Recovery (DR) plan and a Business Continuity (BC) plan. Those plans will assure you of your third party’s Cyber-resiliency, that is, how quickly they can bounce back from a security breach.
- Data privacy risk: This is probably one of the biggest areas of concern today. Chances are, you share confidential information (especially as it relates to your customers) with a third party. Just as you are vigilant in protecting that confidential data, you must make sure that your third party does the same. If a third party suffers a security breach involving the loss or malicious heisting of your confidential information/data, then you, not the third party, will be held responsible. This issue has become much more prevalent with the recent passages of the CCPA and the GDPR.
- Noncompliance risk: Just as you need to be compliant with the recent regulatory frameworks, so does any third party that you rely on. If a third party is not compliant, there’s a good chance they will be audited–and your business could be dragged into it as well.
- Credit (financial) risk: This kind of risk can also be of grave concern, especially during this time of lockdowns. If your third party does not have sufficient cash flow or reserves to sustain themselves during a lockdown, you should act quickly to find another suitable third party that can deliver what you need right on time, without any disruption to your own processes.
- Geopolitical risk: This type of risk generally exists when your third party is in an entirely different country. For instance, political events that occur overseas could rock your supply chain, or insider attacks might damage the parts you need to produce and deliver a quality product.
Now that you understand the various kinds of third-party risks your business may face, you’ll want to take steps to prevent those risks from derailing your business operations. In our next article, we will walk you through several steps to protect your enterprise against third-party risk.