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Third party incident risks

More than eight in ten organisations globally (83pc) 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 an audit firm. The figure rises to 90pc of all UK based respondents.

Almost half of those incidents globally (46pc) 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 £1.3m to £35m, reaching £650m for those firms operating internationally, and an average share price drop of 2.55pc.

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 (10pc) have a reasonable ongoing knowledge and awareness of their subcontractors – typically referred to as fourth/fifth parties – engaged by their third parties. Of this 10pc, only 2pc of organisations state they identify and monitor all subcontractors, and the other 8pc do so for their most critical relationships, such as vital infrastructure and IT. The remaining 90pc believe they are lacking the required knowledge or resources to monitor fourth/fifth parties.

Kristian Park, extended enterprise risk management (EERM) partner at Deloitte, says: “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.”

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

Overall, investment is skewed towards protecting information security (68pc) and data privacy (62pc). Yet organisations are still underinvesting in crucial areas such as labour rights (18pc) and geopolitical risk (12pc).

Park adds: “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.”


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