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Unintended Consequences of Not Investing in Third-Party Risk Management

Sep 15, 2020 by Venminder Experts

Looking for a sound business reason for third-party risk management? One of the best reasons is that it saves you money. However, proper third-party risk management, with the right tools and resources to assist, does way more than just save you money. There are a lot of other aspects of your organization it helps protect... like your reputation.

Still not convinced? Read on and we’ll cover some potential business threats you might not have even considered.

How Your Organization Can Be Affected by Common Types of Risk 

No matter what your industry type, or how big your organization is, all businesses face the same kinds of risks. Without an effective third-party risk management program, here’s how very common types of risk, or the “usual suspects,” can end up affecting your organization:

  • Strategic Risk –You lose the ability to plan and to operate effectively at a strategic level if third-party risk management isn’t an operational program at your organization. Your ability to operate at a strategic level depends upon the organization’s ability to have a unified view of the playing field. If you don’t know the industry, then you have a problem. If you don’t know what your organization is committed to regarding your vendors, then you have an even bigger problem.

  • Compliance Risk – You'll find yourself in the scenario above; an auditor or compliance professional will let you know you’re not in compliance. Why wait for compliance to force the organization into third-party risk management? You’re missing out on hard dollar savings if you take this approach.

  • Operational Risk – You don’t have an idea of what deals have really been made with vendors until you see it all in a single program. When everything is managed in one place, there will be aspects of contracts and vendors that will cause you to scratch your head in wonder.

  • Financial RiskThis is the risk that should jump off the page at you! You can’t truly know you’re getting a great deal on any contract from any vendor until you’ve compared pricing in the marketplace. All too often organizations set up auto-renewal contracts that have no cap on price increases. Then you get a call from someone in Accounts Payable calls who says, “When did we agree to this price increase?” Often, it’s too late at that point.

  • Reputational Risk – Do you care what people are saying about your organization? Are you of the belief that no press is bad press? While being talked about is better than being forgotten about, customers and potential customers who come away with a negative impression will cause you to gain new customers at a much slower rate. You'll also lose a percentage of your current customer base. So, in turn, your cost of customer acquisition and retention has just gone through the roof. Though reputation risk may be hardest to quantify, it’s the risk that can cost your organization the most money in the shortest amount of time.

Other Unintended Negative Consequences of Not Managing Vendor Risk

Unfortunately, the above risks only scratch the surface. There are whole host of other concerns that third-party risk management handles to ensure your organization is protected. If you’re failing to dedicate resources – especially resources with the right credentials to analyze due diligence – or to allocate the right tools to help you adequately manage third-party risk, you may experience some of the following: 

  1. Fallout from Loss of a Vendor. If the pandemic has taught us anything, it’s that having a plan in place is crucial to the survival of our organizations. Whether you experience a loss of delivery due to a surprise merger and acquisition or something else, your vendor is simply suffering financially or there’s a loss of service due to a global health crisis or natural disaster; having a third-party risk management program is our organization’s armor. It’s our soft landing, and it's our insurance that we have the plans, protocols and contractual standards in place to ensure we can continue operating at a comfortable level.

    It’s up to the third-party risk team to notify the vendor owner that they may see a rapid change in an organization’s delivery or behavior and to be on the lookout for any risks this may pose to your organization. Additionally, as part of the third-party risk management and due diligence process, a back-up vendor should be fully vetted and pretty much ready to contract with should any of the above scenarios occur.

  2. Customer Complaints. You don’t have to look far to find an example of a third-party that failed and caused an enormous loss for the organization they contracted to provide a product or service. We’ve even seen many enforcement actions by the Consumer Financial Protection Bureau (CFPB) caused by the negligence of a third-party. These are in the mainstream media every day.

    While there is no 100% guaranteed solution for a third party’s poor performance leaking into your organization, a solid third-party risk management program will minimize the probability of anything happening in the first place by mitigating the risk upfront and assisting with mitigating the loss should one occur due to the negligence of a third party.

    Pro-tip: There needs to be a formal process indicating who is responsible for investigating the complaint, noting its root cause and ensuring an appropriate response is given to the customer. 
  1. Audit and Examination Failure. Poor performance on an examination or audit can be time-consuming and costly to fix. Third-party risk management is the one area that both auditors and examiners will scrutinize on every audit and every exam. The point here is simple: Your auditors and examiners are very interested in whether your organization has a third-party risk management program, and if you do have a program, how well-run is it? Avoid the headache and implement a strong program.

Third-party risk management may seem like a large upfront investment; however, when you weigh the overall savings from protecting your reputation and in turn keeping customers, not missing significant contract dates that could cause the organization to spend dollars that weren’t meant to be spent, avoiding regulator penalties and more, all from a solid program, there’s a huge ROI.

Find out what the ROI you can achieve with proper vendor risk management. Download the eBook.

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Venminder Experts

Written by Venminder Experts

Venminder has a team of third-party risk experts who provide advice, analysis and services to thousands of individuals.

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