With each passing year the necessity for organizations and businesses to outsource operations and services only increases, and with it comes a higher necessity for effective third-party risk management. Organizations are held to a higher standard than ever before and with the growing abundance of third-party relationships one misstep by a third party can be detrimental to any organization.
One example of this can be drawn from Starbucks. Starbucks sources coffee from numerous areas and farmers but Brazilian labor inspectors found numerous plantations throughout the country that utilize slave labor. Several of these harvest coffee beans primarily for Starbucks.
Failing to conduct due diligence on a third party, whether it be a supplier or service provider, can have a serious impact on an organization's reputation or operational success. With this in mind, organizations should consider these top risks moving forward into 2023:
· Cybersecurity. Cyber-attacks are on the rise, this is not news to anyone, but what might be surprising is that many have speculated that the majority of cyber-attacks that impact an organization are due to a breach within a third party. Just last year the company Kojima Industries experienced a cyber breach that forced the company to suspend operations for a brief period of time. Kojima provides car components to Toyota resulting in the popular car manufacturer shutting down 14 of its plants. The sophistication of cyber-attacks is also on the rise leaving companies constantly pushing to improve their cybersecurity framework. While an organization may be successful in doing so the same cannot be said for the numerous third parties whom the organization conducts business with. It is critical that organizations under goa thorough vetting process of potential third-party vendors to ensure that their cybersecurity practices meet the organization’s standards.
· Environmental, Social, and Governance (ESG). Care for the environment and various social issues has become a critical aspect of business operations. Organizations are not only complying with environmental regulatory standards but having an ethical standing in regard to the numerous ESG issues has proven to improve an organization’s reputation and thus increase its customer base and further its ability to find better employees. The issue again then falls onto third parties. An organization at face value can claim to have a high ethical standing but if their third parties do not also hold those values the organization can quickly become over-encumbered with fines and a loss of reputation. Again, organizations must ensure that when choosing third parties that ESG standards are clearly expressed, and regulatory requirements are followed diligently.
· Fourth, Fifth, and Sixth-Party Risk Management. As previously stated, the necessity for organizations to outsource operations to third parties is only increasing and this goes for third-party organizations as well. When choosing a third party as a supplier organization must assume that the supplier also utilizes various third parties to receive goods and services for themselves. Whether this is the banks they operate with, software used throughout the company, or transportation, third-party vendors require other third parties to conduct their operations. This causes the issue of fourth, fifth, or even sixth-party risk management. To solve this problem, throughout the vetting process, organizations must also ensure that the very third parties that they intend to conduct business with also have extensive third-party risk management programs of themselves.
