Third-Party Power: Leveraging strengths while mitigating risks

Third party vendors are becoming increasingly relied on to contribute to company capabilities. The use of third parties for critical services can provide many benefits. As operational infrastructure options multiply, third parties offer dedicated resources that provide specialized services and functionality at a higher level of quality and at a comparable or lower cost than if a firm tried to maintain those capabilities in house.

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Third party service providers also offer the flexibility to scale services to match growth, which can free the firm from making heavy sustained investment in capabilities. This freedom from capital commitment can offer investors a higher return on their investment.

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While the benefits can be substantial, there are also significant risks associated with the use of third parties for critical infrastructure and service capabilities.

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Benton Brown highlights some of the risks to consider when formulating a strategy to engage third party service providers:

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Reliability

The desire for a third party vendor to invest in building robust capabilities can take second place to them making a profit. If a vendor under-invests in building robust capabilities, it can affect the resilience of their service and leave them unable to meet their commitments under adverse scenarios. Consider a vendor’s willingness and ability to provide a consistent scalable service.

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Confidentiality

Sharing valuable and confidential data with third party suppliers is almost inevitable. Ensuring they have adequate security provisions, including technical as well as human factor engineering to safeguard against external hacking as well as internal deliberate breaches of trust will protect against sensitive information being compromised. Continuous monitoring and assessment of vendor security policies should be undertaken to guard against risk.

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Reputation

Even if your data and functionalities are sufficiently secure for your purposes, if your vendor has experienced negative publicity due to operational failures, your reputation may suffer by association. High profile data breaches, have shown this to be the case in recent news.

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Lack of control

As a vendor becomes more integrated in your business model, you may lose institutional knowledge and independence as to how to execute certain capabilities. The ability to innovate or alter your business model could be beyond the vendor’s established way of supporting you. Incidentally, if you use a large vendor, you are less significant to them than they are to you.

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Geopolitcal factors

Given the ever-shifting macroeconomic landscape, careful scrutiny should be applied to external factors that could disrupt your third-party outsourcing arrangements. These include uncontrollable risks like geographic constraints, environmental disruptions, political instability, conflict, cultural discrepancies, and language barriers.

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Contractual provisions

There are several legal risks that may arise from the wording of your contract with the third party vendor. Depending on the jurisdictions agreed to, certain provisions may not be enforceable. This risk is higher when you are domiciled in one jurisdiction, the vendor is domiciled in another jurisdiction, and you both operate in other jurisdictions beyond your respective home jurisdictions. One provision that bears scrutiny is the practicality of termination conditions between you and the vendor.

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Holley Holland Risk Professionals have many years’ experience in advising top institutions on the design and execution of controls and assessments required to navigate the outsourcing of critical services. Engaging with us to support your outsourcing activities will ensure you are making a fully informed decision having carried out robust risk management.

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Please reach out to Benton Brown for more information on Third Party Supplier Engagement today.