The cost of a third-party risk incident has risen rapidly over recent years finds Deloitte survey

Published: Thursday, 09 July 2020 07:38

One in two companies believe the cost of a third-party risk incident – such as a supply chain failure, data privacy breach or disruption to IT services – has at least doubled in the past five years, according to Deloitte research.

Deloitte’s Extended Enterprise Risk Management (EERM) survey was undertaken between November 2019 and January 2020, prior to the outbreak of COVID-19 being declared a global pandemic. At this point, 17 percent of organizations had faced a high-impact third-party risk incident in the past three years (up from 11 percent in 2019).

Looking at the ways in which they could be financially affected, 30 percent of respondents thought share prices could fall by 10 percent or more if a third-party incident was not adequately managed.

Kristian Park, risk advisory partner at Deloitte, commented: “Despite an increase in incidents, companies are not yet investing sufficiently in managing third-party risk.

“The COVID-19 pandemic has only highlighted the need for investment in risk management. Companies experienced a wide range of third-party incidents at the peak of the pandemic including supply chain, logistic and financial failures, as well as data breaches resulting in fines – all of which can have a significant impact on customer service, regulatory compliance and reputation.”  

Investment in responsible business

For the first time in five years, a desire to be a responsible business, that effectively manages social and environmental issues throughout its supply chain, was one of the key reasons companies invest in third-party risk management. Almost half, 43 percent cited it as a reason for investment. Despite this, a large proportion were still not allocating budget to associated areas:74 percent had not allocated funds to managing climate risk, 57 percent to environmental risk and 54 percent to modern slavery and labour.

Over half (59 percent) of respondents thought they were under-investing in EERM, though this fell from 70 percent last year. Budget for managing third-party risk was skewed towards certain areas, including information security, cyber risk, data privacy and health and safety. This is largely in line with the largest proportion of third-party incidents, which were related to cyber risk (23 percent), bribery corruption (23 percent) and information security (9 percent).

Park continued: “The survey showed a desire to develop risk capabilities and to become a responsible business. Whilst efforts were paused at the beginning of the pandemic, these themes are widespread and constant as companies start to recover, particularly around workplace safety and carbon footprint. Given a growing dependence on critical third party relationships, it’s key that companies act now to protect themselves and their extended enterprise.”

Survey methodology

Deloitte’s extended enterprise risk management (EERM) global survey collated results from over 1,145 respondents from 20 countries around the world. Survey results in this report reflect responses gathered from participants between November 2019 and January 2020.

More about Extended Enterprise Risk Management.