In today’s global economy, most corporations need to partner with outside entities as a matter of business. Third parties can be hardware or software companies, financial or non-financial institutions, manufacturers or service providers, regulatory or non-regulatory entities, and local or overseas corporations, just to name a few.
In this blog, we will define the different categories of risk posed when any business enters into a business relationship with another institution, organization or company (and in our next blog, we will explain the steps needed to mitigate those risks).
Reputational Risk: Adverse effects and negative opinions that can damage the organization. The third-party relationship might result in disappointed clients, loss of trust, and consequently, financial loss.
Compliance Risk: Compliance risk results from violations of a company’s standard procedures, internal policies, laws, rules and regulations, and ethics.
Operational Risk: Operational risk derives from inadequate procedures, internal system errors or external events beyond an organization’s control.
Business Risk: Develops from a third party’s system failures, human mistakes, fraud or the incapability of to provide services on time. Improper due diligence and no appropriate contingency plan for selecting third parties leads directly to a heightened business risk.
Strategic Risk: Results from poor business decisions or incorrect implementation of any business policy or procedure, leading to detrimental effects on organizational strategic goals.
Credit Risk: Credit risk rises from the financial conditions of the third party itself. Sometimes a third party runs short on the funds needed to perform certain tasks they had agreed to perform – creating a default situation for the organization.
Country Risk: Country risk refers to a third party located in a foreign country having different cultural values and beliefs. The social, political or cultural values could adversely affect activities of the foreign-based third-party service providers and creates a challenging situation that may harm the organization.
Other Risk: Understanding of the third party agreement is very important. If any party misunderstands the agreement or even a clause, then personal interests might change or delivery of services might be affected. This can include any of the above risks, which are already described as potential risks in terms of liquidity, interest rate, currency conversion rate, legal issues or target market selection.
Next week: read about how to mitigate these risk factors. Or visit CRIGroup.com to find out more about CRI Group’s own exclusive, expert-developed 3rd Party Risk Management (3PRM) services.
Source: “Third Party Risk Management: Does Shaking Hands With A Third-Party Partner Make You Shaky?” by Aniqa Bukhari.