In today’s interconnected, digitally powered economy, minimizing and mitigating vendor risks is vital for financial organizations, healthcare companies, insurers, airlines, and other global enterprises. Industry analysts estimate that nearly half of all businesses will have experienced a software supply chain attack by the end of 2025. The cost of vendor-related threats is on track to more than double in the next five years. Cyberattacks are only one type of vendor risk that your organization needs to prepare for.
What Types of Vendor Risk Impact Your Organization?
Some vendor risks are more common than others, but a robust risk management strategy requires contingencies for a variety of scenarios.
1. Operational Risk
In vendor risk management, operational risks involve a third party’s products, services, employees, and processes. Any service or workflow interruptions on the part of vendors can directly impact your organization’s ability to meet objectives.
Specific types of operational risk from vendors include:
- Drop in the quality of products or services
- System downtime
- Employment problems or staff turnover
- Loss of key personnel
- Late deliveries or supply-chain disruptions
- Equipment malfunctions caused by inadequate maintenance
When a vendor’s operations stop functioning correctly, it can trigger delays in your company’s services. You may not be able to fulfill client orders on time or coordinate remote work properly.
For example, when Amazon Web Services experienced a platform outage that lasted nine hours, organizations that relied on its shipping and cloud infrastructure were left stranded, including Whole Foods and Arizona State University.
2. Cybersecurity Risk
Vendor cybersecurity can have a major effect on your organization’s data security and compliance. Countless enterprises rely on third-party infrastructure for day-to-day operations, from cloud storage and CRM software to payment gateways and IT service providers.
Many of these vendors have privileged access to your organization’s data systems, so their vulnerabilities are your vulnerabilities. If your organization isn’t careful, the software supply chain can be like a Trojan horse that bypasses your normal safeguards easily.
The list of potential information security risks is vast:
- Software bugs and vulnerabilities
- Phishing attacks and data breaches
- Malware or ransomware attacks
- Failure to apply security patches or misconfiguration errors
- Improper records access or modification by unauthorized employees
- Internal theft of sensitive information
Carefully evaluating vendor infosec practices and controls is critical, no matter your industry. Cybercriminals attack supply-chain companies of all sizes. In 2023, over 40% of small businesses experienced a cyberattack.
3. Strategic Risk
Not all vendors share your organization’s priorities or principles. You may stake your reputation on timely delivery and top-quality products, but your supply-chain partner may focus on other goals, such as minimizing costs.
When an unexpected situation or obstacle arises, relationship conflicts can lead to strategic risks — problems achieving your company’s short-term or long-term objectives.
A modern example involves AI. Perhaps you prohibit employees from using popular AI products due to the risk of sensitive data exposure. Does your supplier share the same point of view?
The opposite can also be true, with your organization pursuing advanced solutions and vendors refusing to adopt up-to-date improvements. Addressing strategic discrepancies and performing due diligence are essential parts of the risk lifecycle for supply-chain relationships.
4. Financial Risk
Companies don’t operate in a vacuum. To deliver the agreed-upon goods or services, vendors must maintain healthy cash flow and have good credit or investor relationships.
Missing financial targets or losing working capital can lead suppliers to lay off employees, miss project delivery dates, cancel orders, or do away with valuable features.
An example of vendor financial risk is when a smaller supplier loses one of its main customers. This sudden financial loss can cause dramatic changes in the level of service provided to other clients.
Financial risks are one of the most critical areas in supply chain risk management because of their trickle-down effects. Money problems can lead to compliance violations, cybersecurity vulnerabilities, ethical breaches, and operational collapse.
5. Legal and Regulatory Compliance Risk
In many industries, navigating government regulations, industry standards, and legal requirements is becoming increasingly complex. This is especially true for global enterprises that must comply with GDPR requirements.
Virtually all compliance frameworks hold you responsible for ensuring that vendors and suppliers adhere to the same data security standards as your organization. This is the case for:
- HIPAA and HITRUST compliance
- PCI DSS compliance
- ISO 27001 certification
- SOC 2 compliance
- CMMC and NIST SP 800-171
Depending on your operations, the activities of third-party vendors can even entangle your organization in legal trouble. This was the case when security software provider CrowdStrike deployed a flawed update that crashed Microsoft operating systems for airlines, banks, and other clients. Lawsuits targeted both companies for the failure.
6. ESG Risks
Environmental, social, and governance risk is related to a vendor’s ethical practices, ecological impacts, and labor practices. ESG risks are broad and can be tricky to quantify, as they rely heavily on public perception and your organization’s internal standards.
Potential vendor risks in this category include:
- Labor violations, poor treatment of employees, or unsafe working conditions
- Use of unfairly compensated workers in economically disadvantaged countries
- Excessive consumption of natural resources
- Environmental contamination or pollution
- Other unethical behavior
ESG risks often border regulatory and reputational risks. In the U.S., workplace safety violations can result in OSHA penalties of over $150,000 per violation. A harmful work environment in other countries may not technically break the law, but it can lead to public outrage.
7. Reputational Risk
With the rise of social media, individuals and communities can have a powerful effect on corporate profitability. This impact isn’t limited to boardroom decisions; it also applies to your vendor relationships. If a vendor becomes embroiled in a scandal, your brand can suffer reputational (and ultimately, financial) harm.
Vendor reputational risk is often an aftereffect of other types of risk. For example, a cloud-service vendor’s cybersecurity breach can affect your organization’s customers as well if you rely on the platform for data storage.
Similarly, even though apparel brands like Calvin Klein, Tommy Hilfiger, and Gap source fabric from third-party suppliers, the brands also face reputational harm when those supply chains are suspected of human rights abuses.
8. Business Continuity Risk
Operational and business continuity vendor risks are closely related. Both involve disruptions to vendor activities that affect your company’s operations. Business continuity generally involves disaster scenarios or critical interruptions, such as:
- Floods, hurricanes, tornadoes, and other natural disasters
- Extended power outages
- Critical data loss
- Labor strikes
- Malicious employee behavior with wide-ranging consequences
- Bankruptcy/business collapse
Cybersecurity risks can also intertwine with business continuity. This was the case with the 2024 Change Healthcare ransomware attack, which crippled the ability of hospitals to process claims, verify insurance, and access patient records. One-third of affected organizations saw a major drop in revenue, and almost 75% reported patient care interruptions.
9. Geopolitical Risk
Any company with a global supply chain can experience disruptions due to geopolitical tensions. Government sanctions against vendors can have a direct impact on clients.
Wars affect the availability of raw materials for manufacturing. They can also force the closure of data centers, regional offices, production labs, and software companies.
Geopolitical tensions can also impact the financial viability of vendor partnerships. Inflation, real estate costs, and employee wage increases often affect vendor pricing.
10. Climate-Based Risk
Enterprises can no longer afford to ignore the impact of climate change on supply-chain risks:
- Extreme weather events, such as droughts, affect the cost of energy generation and data center viability.
- Increased flooding can make on-prem servers riskier and even threaten smaller hybrid cloud setups.
- Outdated energy grids can be vulnerable to extreme temperature fluctuations.
- Wildfires can cause enormous damage to vendors in every industry.
The severity of this type of vendor risk generally depends on how diverse your supply chain is and where key hubs are located.
11. Vendor Concentration Risk
Overreliance on one or two vendors poses unique risks, even if those businesses have stellar reputations. Even behemoths like Microsoft, Amazon, Experian, and Nokia weren’t immune to costly downtime, software vulnerabilities, data breaches, and shocking business collapses. Weighing the pros and cons of your current partnerships allows your organization to minimize risks while achieving strategic goals.
How Can Enterprises Manage Vendor Risks Successfully?
The outsize impact of supply-chain risks on enterprise operations has made governance, risk, and compliance frameworks more important than ever. Vendor risk management should be included in any GRC program (or ERM framework).
Carrying out a comprehensive risk assessment is a priority in any vendor relationship. Depending on your industry and the services provided, you should also include:
- Periodic vendor security reviews or on-site monitoring
- Independent compliance audits
- Ongoing cybersecurity certification requirements (SOC 2 Type 2, ISO 27001, etc.)
- Strategic KPIs to track vendor performance
- Comprehensive data protection or regulatory compliance clauses in vendor agreements
Effective risk management also includes mitigation activities. Put simply, you need to prepare for vendor failures. Have business continuity plans in place. Never entrust your organization’s future to a single vendor, no matter the brand.
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