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From cloud computing to payroll processing, data analytics to cybersecurity, most businesses rely on third-party providers, enabling businesses to focus on core competencies while benefiting from the specialized expertise a third-party provider delivers. However, this reliance on third parties comes with significant risks. When third parties face disruptions, organizations may experience severe operational, financial and reputational impacts. The cost of downtime can quickly escalate to a staggering amount, particularly for businesses in certain industries, including finance and health care, where downtime can exceed $5 million an hour, not including potential fines and penalties. As a result, third-party risk management (TPRM) has become a critical component of business strategy, ensuring that these external partnerships do not become weak links in the corporate chain.
When third-party vendors experience unexpected downtime, the impacts are felt across multiple levels, causing operation delays, financial impacts, regulatory exposure and reputational damage.
Real-world examples of third-party impacts
Several recent high-profile incidents illustrate how disruptions involving third parties can have widespread impacts across multiple sectors.
The CrowdStrike outage in July 2024 caused an estimated $5.4 billion in direct losses for Fortune 500 companies, particularly healthcare and banking. The incident accentuated the need for TPRM to look inward, identifying concentration risk with cybersecurity vendor applications running on internal critical infrastructure and systems. In February 2024, a major healthcare organization experienced a large-scale outage caused by a cybersecurity incident that disrupted critical services, including billing systems, insurance claims processing and prescription payments. This outage highlighted the vulnerabilities of key third-party vendors in healthcare infrastructure, underscoring the need for robust business continuity strategies, incident response plans and third-party risk management (TPRM) practices.
One of the world’s largest banks experienced a significant cyberattack in 2023 that led to widespread disruptions in global financial markets, impacting the bank’s access to critical systems and forcing them to settle U.S. Treasury trades manually and reroute financial transactions. The incident was just another example of the interconnectedness most organizations have today, and the potential impact to critical business services from third party disruptions.
These outages highlight the vulnerabilities of third-party vendors, underscoring the need for robust business continuity strategies, incident response plans and third-party risk management (TPRM) resiliency measures.
The ripple effect of third-party failures
When third-party vendors experience downtime or cybersecurity incidents, the impacts are felt across multiple levels:
- Operational delays: Essential business functions can be interrupted, leading to decreased productivity and financial losses.
- Financial implications: Downtime and breaches can result in hefty fines, lost revenue and increased costs associated with remediation.
- Regulatory exposure: Many industries, such as healthcare and finance, have strict compliance requirements. Third-party failures can lead to violations and legal consequences.
- Reputational damage: Customers and stakeholders lose trust when a business is unable to deliver services because of third-party failures. Rebuilding trust can take years and be costly.
How to minimize business impact from a third-party disruption
Managing third-party risks and preparing for potential disruptions requires a proactive approach. Organizations need to build resilience not only within their own operations but also across their vendor ecosystem. Here are key steps to take to be prepared for a possible third-party failure:
- Develop a comprehensive third-party risk management program
- Regularly evaluate third-party vendors based on their importance to operations and the sensitivity of the data they handle.
- Conduct due diligence and ongoing risk assessments to ensure that third-party vendors are compliant with industry standards and have strong security protocols in place.
- Establish clear communication protocols
- Create predefined communication pathways to respond to incidents affecting third-party vendors. This includes defining who will communicate with the vendor and how updates will be provided to internal teams and stakeholders.
- Establish service level agreements (SLAs) that include expectations for response times and recovery in case of a disruption.
- Diversify your vendor base
- Avoid becoming overly reliant on a single third-party provider for critical services. Work with multiple cloud service providers or use hybrid models to mitigate risks from vendor outages.
- Ensure contractual clauses for resilience
- Include specific provisions in contracts with vendors that address incident response, business continuity, and disaster recovery plans. These should also include periodic testing and the ability to audit vendors’ resilience measures.
- Implement continuous monitoring and auditing
- Employ continuous monitoring tools to track the performance and security of third-party vendors. Monitoring solutions can provide real-time alerts about potential vulnerabilities or disruptions within the third-party ecosystem.
- Have a response plan for third-party failures
- Integrate third-party risk scenarios into all business continuity and disaster recovery plans. Conduct tabletop exercises that simulate disruptions caused by third-party vendors to ensure preparedness.
- Ensure the organization can function at a reduced capacity or implement backup solutions if a critical vendor becomes unavailable.
Third parties are essential to modern business operations, but they also introduce significant risks that must be proactively managed. By recognizing the importance of third-party vendors and preparing for potential disruptions, organizations can enhance their resilience, protect their reputation and maintain business continuity even in the face of unforeseen challenges. Developing a robust TPRM program, coupled with a proactive business continuity and incident response plan, is crucial for mitigating the impacts of third-party failures and ensuring operational stability.
To learn more about our technology resilience solutions, contact us or download our Guide to Business Continuity and Resilience. Or, refer to Achieving Resilience Starts at the Top.
