Third party failures: a problem for the majority of organisations

The supply chain is hazardous and third party failures (that is, from vendors) is a major problem for the majority of organisations.

In fact, more than eight in ten organisations globally (83%) have experienced a third party incident — such as a supplier losing data after falling victim to a cyber attack — in the past three years, according to new research by Deloitte. The figure rises to 90% of all UK based respondents.*

Almost half of those incidents globally (46%) have resulted in a high or moderate business impact such as significant impairment to customer service, material financial losses, reputational damage or a regulatory breach. According to previous calculations from Deloitte, fines issued directly from third party failures have ranged from £1.3 million to £35 million, reaching £650 million for those firms operating internationally, and an average share price drop of 2.55%.

It’s nothing new, but these figures are unacceptable. In an effort to deliver products as fast as possible, to beat an increasingly competitive landscape, third parties are failing to protect their customers.

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Insufficient visibility

The 2019 survey suggests that the majority of organisations have insufficient visibility of their supply chains and the potential risks they face from within these networks. In particular, only one out of ten organisations (10%) have a reasonable ongoing knowledge and awareness of their subcontractors — typically referred to as fourth/fifth parties — engaged by their third parties.

Of this 10%, only 2% of organisations state they identify and monitor all subcontractors, and the other 8% do so for their most critical relationships, such as vital infrastructure and IT. The remaining 90% believe they are lacking the required knowledge or resources to monitor fourth/fifth parties.

Kristian Park, extended enterprise risk management (EERM) partner at Deloitte, explains: “Companies across the world are increasingly relying on an ever-growing number of third, fourth and fifth parties to supply everything from readily available consumables like office stationary, to bespoke and highly critical products and services. However, many are not ‘brilliant at the basics’ and don’t have appropriate oversight of what is happening across their organisations, leaving them exposed to potential failures they may be held accountable for.

“With Brexit looming on the horizon, for those companies operating in the UK it’s more important than ever to have sufficient oversight of supply chains and any potential risks. Those who do so can not only proactively manage any goods or services that may be impacted in the short term, but also respond much quicker to any necessary changes — like meeting new regulations — that could lie ahead.”

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Skewed investment

Half of organisations (50%) are spending more than $1 million annually to manage third party risks at present. However, approximately 11% of those surveyed — typically representing the largest and most complex global organisations — spend more than $10 million per annum each and employ more than 100 full time staff to do so.

Investment is skewed towards protecting information security (68%) and data privacy (62%). But, organisations are still underinvesting in crucial areas such as labour rights (18%) and geopolitical risk (12%), according to the survey.

“With the rising number of cyber attacks and legislation such as General Data Protection Regulation (GDPR) coming into force, it’s hardly surprising that companies have been focusing their investment on areas such as information security and data privacy. However, visibility in areas such as labour rights within a parent company’s supply chain — particularly as regulation to combat modern slavery grows across the world as recently seen in Australia — is grossly lagging behind. The same goes for areas like health and safety and geopolitical risk as tensions over trade wars continue, as well as financial viability and concentration risk, where systemic failures as a result of over-reliance are possible,” says Park.

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Nick Ismail

Nick Ismail is a former editor for Information Age (from 2018 to 2022) before moving on to become Global Head of Brand Journalism at HCLTech. He has a particular interest in smart technologies, AI and...