In business, managing risks is a constant challenge. But beyond your direct third-party relationships, a less obvious risk may be hiding: the vendors of your vendors, known as fourth-party vendors. Understanding and strategizing how to best manage fourth-party relationships is not just crucial–it’s a necessity.
A recent SecurityScorecard study found that 50% of organizations have indirect relationships with at least 200 breached fourth-party vendors in the last two years. This startling stat clearly demonstrates the immediate need for organizations to evaluate their relationships and risk management strategies with fourth-party vendors.
Fourth-party vendors, the suppliers and partners of your third-party vendors, are a critical but often overlooked aspect of your supply chain. About 60% of companies engage with over 1,000 third-party vendors. Each vendor likely has its suppliers, forming your fourth-party vendor network.
While your organization doesn’t interact directly with these fourth parties or have a contract, they are still integral to delivering your products and services to customers. Given their indirect but vital role, it’s increasingly important to understand and manage these relationships effectively.
In addition to fourth parties, organizations also need to be aware of their Nth parties- their fifth, sixth parties, and so on. While they may not be a direct engagement, they are still a critical part of third-party programs, and they can pose significant operational, legal, and reputational risks if not managed correctly. In addition, regulatory bodies are paying increased attention to these subcontractors and are holding organizations more and more accountable for not just their third-party vendors, but fourth and Nth-party vendors as well.
Fourth-party vendors play an integral role for many organizations. Here are some common examples to help clarify the relationships we’re discussing:
With an extensive list of potential fourth-party vendors, identify who is in your extended vendor network and develop and master effective strategies for managing these indirect relationships. This involves properly communicating with your third parties to work together to determine who their most critical fourth parties are and how the risks associated with them are being managed.
Fourth-party concentration risk occurs when a significant portion of an organization’s third-party vendors rely on the same fourth-party vendor, creating a potential single point of failure in the supply chain.
When a fourth party experiences a significant risk event like financial instability, cybersecurity breaches, or operational failures, it can disrupt your third parties’ business operations, which also affects your organization.
For example, say an organization has 1,000 third-party relationships, and half of them deal with the same fourth party that’s been affected by an unforeseen event (like the Russian invasion of Ukraine, which disrupted wheat, oil, and nickel), then 50% of your supply chain is effectively at a standstill, causing significant disruption to your operations.
This is why it’s so important to consider fourth parties in your overarching vendor management program.
The best way to manage fourth-party vendor risks is to implement a 3-part program that assures you, your third parties, and your fourth parties are all on the same page. Here’s a basic 4th-party risk management framework that organizations can start with:
These three core steps will allow organizations to determine the status of their third parties’ TPRM strategy and offer suggestions for improvement if necessary. It’s also helpful to ask your third parties for a list of their critical vendors, so you can look into them yourself to evaluate their reputation.
Communicate with their third parties and ensure they’re willing to keep you apprised of any concerns or changes with their critical vendors. Your third parties may not think to keep you in the loop automatically, so proper communication should be a key element of your fourth-party vendor risk management strategy.
Assessing and managing fourth-party risks can be challenging since you often don’t have any direct communication with them. Many organizations rely on third-party vendors to manage their third-party relationships, which can be problematic.
This dilemma is garnering more attention than it has in the past. KPMG recently noted that 79% of businesses said they needed to urgently improve their assessment of fourth parties in their supply chain.
The web of relationships within supply chains, especially involving fourth-party vendors, is a complex yet crucial aspect of modern business risk management. As organizations increasingly depend on a broad network of vendors, the importance of understanding and managing fourth-party risks effectively becomes even more essential.
A proactive approach involving identifying critical fourth parties, integrating fourth-party risk management into the due diligence process, and continuous monitoring is the best way to ensure resilience and adaptability while managing risks effectively.
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