Types of Third-Party Risk

Individuals who are considering entering into contracts with third parties on behalf of CIG – whether a simple contract for janitorial services or a complex contract for an IT solution – should assess the likely risks of the third-party relationship early within the procurement process, and continuously review risks throughout procurement and the life of the contract. Third-party risks can arise in a number of ways. Below are some common types of third party risks:

Compliance / Regulatory risk

A third party’s actions may impact an organisation’s compliance with regulations, agreements or legislation e.g.  health and safety, human rights, data protection, etc.

Concentration risk

Concentration risks may occur when an organisation relies too heavily on one supplier to perform several, critical and/or high-risk activities for their operations.

Contractual Risk

Inadequate contracts or poorly defined terms with third parties can lead to disputes, misunderstandings, and unmet expectations.

Data risk

Third parties may handle personal, sensitive or critical data on behalf of an organisation, which may be susceptible to data loss, misuse, or mishandling if their security measures are inadequate.

Financial risk

If a third party is financially unstable or engages in fraudulent activities, the organisation's financial stability can be compromised.

Geopolitical and Location-based Risk

Operating with third parties in different countries exposes organisations to risks arising from political instability, legal differences, or natural disasters.

Operational risk

The failure of a third party to deliver products or services as expected can lead to disruptions in the organisation's operations.

Reputational risk

The actions or behaviors of third parties can reflect poorly on the organisation's reputation, especially if the third party is involved in controversies or unethical practices.

Strategic risk

The risk that the actions of a third party could potentially prevent the organisation from achieving its goals and executing its long-term strategy.

Subcontractor Risk

Organisations may not have direct control over subcontractors used by their primary suppliers, increasing the complexity of managing risks

Supply chain risk

Risk associated with disruptions or vulnerabilities within the supply chain, such as delays, quality issues, or dependencies on single suppliers.