Top 5 Risks of Conducting Business With Third Parties

There are inherent risks involved for any organization that does business with third-party partners. Without a doubt, these are risks most companies must take, as working with third parties is a necessary (and most often beneficial) aspect of conducting business today.

Rather than taking the unrealistic and unnecessary approach of cutting all ties with outside companies, business leaders should instead take proper steps to mitigate risk and vet the third parties as thoroughly as possible.

First, let's look at the main risks posed by conducting business with third-party partners:

1) Harm to reputation. Adverse effects and negative opinions attached to a third party can damage the organization. Especially in high profile scandals involving a third-party partner, the effects might include disappointed clients and a loss of trust. Unfortunately, the lost confidence of your customer base is the kind of capital that is difficult, if not impossible, to restore or replace. 

2) Non-compliance issues. If a third-party partner is skirting regulations or falling short of compliance standards, this can affect your business directly, especially if they are a supplier or a contractor conducting work for your business. Consider a construction firm that contracts electrical work to a firm that subsequently falls into non-compliance in the eyes of various regulating bodies. This can have a disastrous effect on your company's projects -- and your bottom line.

3) Negative financial impacts: A third party’s system failures, human mistakes, fraud or an incapability to provide services as described, or in a timely manner, can directly impact your own ability to deliver for clients. Improper due diligence and no appropriate contingency plan for selecting third parties leads directly to a heightened business risk.

4) Cultural differences. Working with third parties located in foreign countries is often necessary for international corporations. However, there can be unseen difficulties in conducting business with partners based in countries that have varying cultural values and beliefs. The social, political or cultural values could adversely affect activities of the foreign-based third-party service providers, creating challenging situations that may harm the organization.

5) Changes in your supply line. Many third-party partners are essential suppliers of goods and/or services for large, multinational companies. But what happens if those suppliers go out of business suddenly? Or are faced with financial hardship, causing unreliable supply or gaps in delivery? Your own business could suffer. It's enough to keep a supply-chain manager awake at night.

The aforementioned risks will always be present for any company doing business with third parties, and the best way to address them is by conducting thorough due diligence on each and every partner in your business. A formalized vetting process should be initiated for every new or prospective partner, and regular checks should also be applied to existing (even longtime) partners. 

To cut corners on due diligence is to invite risk, and possible disaster, for your business future. Experts like the ones we have on hand at CRI Group specialize in addressing due diligence concerns and helping companies evaluate their third party relationships. 3PRM™, our Third-Party Risk Management strategy, provides a proactive approach to mitigating risks from third-party affiliations, protecting an organization from liability, brand damage and harm to business.

Whether you get help from CRI Group or another firm, don't delay in conducting proper due diligence on all of your third party partners. It could save your organization money and, more importantly, protect the valuable reputation you've taken years to cultivate.