What is concentration risk?

Concentration risk is a direct or indirect exposure, or group of exposures, that has the potential to lead to large losses that can threaten an organization’s ability to perform its core business. This type of risk can be the result of dependence on a geographic area, single vendors or fourth parties.

How does concentration risk relate to my third-parties?

Operational risk, vendor risk, and/or other risk types can increase significantly when third-party relationships result in concentrations, either at the organizational or industry level. For example, concentrations can occur when an organization relies on one third party for multiple activities, leaving the organization vulnerable if there is an issue with the third party. This can be particularly acute if one third party is used for several activities that are essential to the organization’s ongoing operations.

What are some examples of third-party concentration risk?

Dependence on a single vendor: Utilizing a single vendor to support all operations can place an organization at risk if issues arise with that vendor. Limiting vendor concentration can help build resilience and avoid halts in business operations should a problem occur with that vendor.

Geographic concentration: Concentrating vendors in a single region can leave companies vulnerable should the region suffer the effects of civil unrest, geopolitical conflicts or extreme weather events. Vulnerability is increased if the vendors are critical, or if they are all located in high-risk region.

Fourth-party concentration: This risk results when a company utilizes a vendor (or multiple vendors) who all outsource production and/or services to the same fourth parties. Similar to dependence on a single vendor, concentration of fourth-parties can leave companies vulnerable as it would affect both them, and their third-parties.

How can Aravo help mitigate against concentration risk?

Concentration risk can be mitigated or avoided altogether through a comprehensive third-party risk management program. Aravo offers multiple capabilities to help ensure that your third and fourth-party vendors are diversified, and that your TPRM program is resilient should a loss occur.

This includes:

• Engagement level assessments: Aravo assesses risk down to the engagement and sub-engagement levels (allowing you to see all the engagements you have with that vendor – and their criticality) which can help you ensure you don’t have over-reliance on a single vendor.
• Geo-location: Native geolocation tracking of third parties and their associated sites, means you can better manage geographic concentrations.
• Hazard tracking:  Hazard tracking overlaid with the geo-locations of your third-parties and supply chain, gives you the ability to respond to any location risks quickly.
• 4^th and Nth party mapping and monitoring. The Aravo data model supports any number of types of relationships, including vendor-to-vendor. Nth party data can even be incorporated into the vendor record, and a report and data visualization can also be generated.

Other capabilities include:

• Vendor Intake and Scoping
• Vendor Due Diligence
• Vendor Onboarding
• Vendor Contracts Management
• Vendor Performance Management
• Vendor Termination and Offboarding

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