Third-Party Risk: A Growing Threat in Today’s Interconnected World

Oshadha Ranaweera, 5 min read

The modern business landscape thrives on collaboration. Companies rely on a vast network of third-party vendors, suppliers, contractors, and partners to deliver products, services, and expertise. While this intricate web of relationships fuels innovation and efficiency, it also exposes organisations to a hidden threat: third-party risk.

Third-party risk refers to the potential for negative consequences arising from the actions or inactions of a company’s third parties. These exposures can manifest in various forms, including:

  • Security breaches: A data breach at a cloud storage provider being used by a company could expose sensitive customer information.
  • Financial disruption: The insolvency of a critical supplier could disrupt production and lead to financial losses.
  • Compliance failures: A subcontractor’s failure to adhere to environmental regulations might lead to fines for the primary company.
  • Reputational damage: Negative publicity surrounding a third-party’s practices could tarnish the brand image of the main organisation.

The increasingly interconnected world of businesses further amplifies levels of third-party risk. Modern supply chains are often geographically dispersed and involve multiple layers of subcontractors. Additionally, the reliance on cloud services and digital infrastructure introduces new potential vulnerabilities.

The evolving risk landscape

There are a range of factors that contribute to the evolving nature of third-party risk, and one of the most significant is cybersecurity threats. The rise of cyberattacks underscores the importance of robust security measures throughout an entire vendor ecosystem.

An attack on one element of a supply chain can have rapid and significant flow-on effects for all others. An organisation could have the best available security measures in place, yet find itself exposed because of lapses by third parties. When considering the risk landscape, it’s important to also consider factors such as global political instability. Geopolitical tensions and trade wars can disrupt supply chains and create unforeseen risks.

An increasing reliance on technology also amplifies third-party risk. The growing integration of third-party technology solutions into core business operations expands the potential attack surface and can weaken an organisation’s security posture.

At the same time, sovereignty has also become a vital consideration in the context of supply chain security, particularly amid growing concerns over data privacy, intellectual property rights, and geopolitical tensions. Nations are increasingly prioritising policies and regulations aimed at maintaining control over their digital assets, securing domestic supply chains, and mitigating dependencies on foreign technologies. This shift towards digital sovereignty has deep implications for global supply chains, prompting companies to navigate complex regulatory landscapes while ensuring compliance and operational continuity.

Achieving effective third-party risk management

Recognising the gravity of third-party risk, increasing numbers of organisations are adopting a proactive approach to its management. One of the most important steps to undertake is thorough vendor due diligence. Completed during the vendor selection process, it involves assessment of a third-party’s financial stability, security posture, compliance practices, and reputation.

Thorough assessment should also be undertaken during the contract negotiation process. All contracts with third parties should clearly outline expectations regarding security, data privacy, compliance, and communication protocols in case of incidents. There should also be continuous monitoring in place throughout the relationship. Regular assessments of third-party performance through audits, penetration testing, and reviews of financial health are essential.

Organisations should also consider conducting cybersecurity awareness training both for internal staff and third-party employees. This can help to significantly strengthen overall security postures.

To achieve the most effective third-party risk management, organisations also need to adopt a risk-based approach to their vendors. This involves prioritising resources based on the potential impact of different third-party relationships and examining high-risk vendors with greater rigor.

Building a culture of risk awareness is also important. Staff should be encouraged to be aware of third-party risks and to report potential third-party concerns promptly. By prioritising third-party risk management, organisations can navigate the ever-evolving business landscape with confidence, forging strong partnerships and securing long-term success.

The business benefits of proactive risk management

Implementing a comprehensive third-party risk management program offers a range of significant benefits to an organisation. These include:

  • Lower risk of operational disruption: Proactive efforts to identify and address potential risks can prevent disruptions to operations and supply chains.
  • Enhanced compliance: Robust third-party risk management programs can help to ensure adherence to evolving regulatory requirements.
  • Improved brand reputation: By carefully managing third-party risks, organisations can build trust with customers and partners. This helps to enhance their brand and supports long-term relationships.
  • Lower insurance premiums: Demonstrating a strong risk management culture can lead to lower premiums from cyber insurance or other relevant policies.
Moving forward with confidence

In today’ interconnected world, collaboration with third parties is indispensable for business success, however neglecting third-party risk can be detrimental. By prioritising a proactive approach to risk management, organisations can mitigate potential threats, secure their operations, and foster stronger relationships with their valued partners.

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