Vendors May be Weak Link
Vendor risk management is often too overlooked by Fortune 1000 companies.
Three-quarters of supply chain executives said operational risk management is important for dealing with unpredictable events such as disasters, geopolitical risk, and demand volatility, according to “Don’t Play it Safe When it Comes to Supply Chain Risk Management,” a survey of more than 1,000 companies conducted by Accenture.
At the same time, 65 percent of executives at Fortune 1000 companies do not believe vendors are doing enough to minimize risk, according to another recently-released survey from the Consero Group, which focused on shared services.
The findings are indicative of one of the most volatile business environments seen in the last 15 to 20 years, as reflected by indices such as the Chicago Stock Exchange index, according to Mark Pearson, managing director of Accenture’s operations strategy consulting practice, and an author of the study.
“But this phenomenon is not just about the downside, because it has an upside as well, in that there is an opportunity to take market share if a company has the right tools in place to manage that risk,” he explained.
Business trends in recent decades have increased the importance of supply chain risk, Pearson said.
“We’ve spend the last 25 years globalizing supply chains, and applying concepts like just-in-time manufacturing, making our supply chains pretty lean, but also fragile,” he said.
To address the vulnerability, companies have developed strategies to respond to interruptions in the supply chain, with planning, analytics, and better visibility, Pearson said. Such strategies have included the creation of supply chain control towers.
According to Capgemini Consulting, a supply chain control tower is a central hub that captures and uses supply chain data to enhance visibility for short and long term decision-making that aligns with strategic objectives.
“These control towers,” Pearson said, “are fairly physical, and the concept is becoming very popular, due in part to some very good and well developed examples, coming out of the high-tech industry, such as Dell, for example.”
However, such control towers normally involve significant investments that run into the millions of dollars spent on technology and personnel, he said.
Executives also recognize the importance of vendor risk in shared services centers, which have increased in importance to organizations: 72 percent of leaders have increased their budgets over last the year, while 66 percent increased staff size, according to the Consero 2014 Shared Services & Outsourcing Data Survey.
Shared services executives rely on a host of vendors, ranging from law and accounting firms to software and other products.
“If vendors are unable to deliver the products or tools required, it creates difficulties,” said Paul Mandell, founder and CEO of Consero Group, based in Bethesda, Md.
“In addition, all kinds of legal risk exists when you have vendors handling data, if they’re not attuned to appropriate data security protocols. Another area of legal risk is rule violations by vendors, if they are making bribes across international lines,” Mandell said.
“Some commercial carriers offer insurance to cover supply chain risk, and compliance risk, but that will often only go so far when it comes to intentional violations of law. There may be financial compensation of some kind, but the damage to your relationship is hard to quantify,” Mandell said.
“Insurance companies are starting to build supply chain insurance products,” agreed Pearson, “but they don’t have a lot of experience. Whether it’s a soft or hard market, it’s a new market,” he said.
Quantifying Supply Chain Risks
Would it surprise you to learn that of 130 countries worldwide, the most favorable location for supply-chain exposures is Norway?
The Scandinavian country might not be a risk specialist’s first guess about supply chain conditions throughout the world, but that is indeed the case, said Steve Zenofsky, FM Global assistant vice president and spokesperson.
Coming in behind Norway in terms of affording favorable supply-chain factors were Switzerland and Canada. Most challenging areas for risk managers? Kyrgyzstan, Venezuela and the Dominican Republic.
The rankings are according to FM Global’s new, free online Global Resilience Index, which assesses conditions in 130 nations, and analyzes such factors as corruption, political risk, local infrastructure, risk of natural hazards, availability and price of oil, and quality of local suppliers.
George Haitsch, executive vice president and practice leader of Willis Global Solutions, said the Index is unique in offering free access to a tool that addresses factors specifically related to supply chain risk hazards.
For its part, he said, Willis offers clients an online tool called Atlas, which allows them to track natural catastrophes worldwide in real time.
“That’s the technology we have been working on,” said Haitsch, noting that natural-disaster risk and supply-chain risk have become increasingly intertwined.
Torolf Hamm, executive director in Willis’ catastrophe risk management practice, said in a blog post earlier this year that businesses are “increasingly keen to identify which key parts of the supply chain could be affected by the same natural hazard event and what risk mitigation options are available to reduce this exposure.”
Eric Jones, assistant vice president for Business Risk Consulting at FM Global, said the “real power with this tool is getting our clients to start thinking about the risks in their supply chain from a physical risk standpoint.”
“Using the index, risk specialists can get the attention of the C-suite and increase their organizational commitment from a time and resource standpoint,” he said.
The Index is designed to permit users to search for “core resilience drivers” impacting supply-chain risks, to learn which countries have the highest and lowest scores.
In drilling down for political risk climate, Switzerland, Finland, and New Zealand, for example, ranked highest.
For natural-hazard risk management, Ireland, Portugal and Singapore ranked highest, while Costa Rica, Israel, and the United States ranked highest for fire risk management.
The tool also displays a color-coded map showing which parts of the world are most and least risky in terms of supply chain factors from 2011 through 2014.
5 & 5: Rewards and Risks of Cloud Computing
Cloud computing lowers costs, increases capacity and provides security that companies would be hard-pressed to deliver on their own. Utilizing the cloud allows companies to “rent” hardware and software as a service and store data on a series of servers with unlimited availability and space. But the risks loom large, such as unforgiving contracts, hidden fees and sophisticated criminal attacks.
ACE’s recently published whitepaper, “Cloud Computing: Is Your Company Weighing Both Benefits and Risks?”, focuses on educating risk managers about the risks and rewards of this ever-evolving technology. Key issues raised in the paper include:
5 benefits of cloud computing
1. Lower infrastructure costs
The days of investing in standalone servers are over. For far less investment, a company can store data in the cloud with much greater capacity. Cloud technology reduces or eliminates management costs associated with IT personnel, data storage and real estate. Cloud providers can also absorb the expenses of software upgrades, hardware upgrades and the replacement of obsolete network and security devices.
2. Capacity when you need it … not when you don’t
Cloud computing enables businesses to ramp up their capacity during peak times, then ramp back down during the year, rather than wastefully buying capacity they don’t need. Take the retail sector, for example. During the holiday season, online traffic increases substantially as consumers shop for gifts. Now, companies in the retail sector can pay for the capacity they need only when they need it.
3. Security and speed increase
Cloud providers invest big dollars in securing data with the latest technology — striving for cutting-edge speed and security. In fact, they provide redundancy data that’s replicated and encrypted so it can be delivered quickly and securely. Companies that utilize the cloud would find it difficult to get such results on their own.
4. Anything, anytime, anywhere
With cloud technology, companies can access data from anywhere, at any time. Take Dropbox for example. Its popularity has grown because people want to share large files that exceed the capacity of their email inboxes. Now it’s expanded the way we share data. As time goes on, other cloud companies will surely be looking to improve upon that technology.
5. Regulatory compliance comes more easily
The data security and technology that regulators require typically come standard from cloud providers. They routinely test their networks and systems. They provide data backups and power redundancy. Some even overtly assist customers with regulatory compliance such as the Health Insurance Portability and Accountability Act (HIPAA) or Payment Card Industry Data Security Standard (PCI DSS).
1. Cloud contracts are unforgiving
Typically, risk managers and legal departments create contracts that mitigate losses caused by service providers. But cloud providers decline such stringent contracts, saying they hinder their ability to keep prices down. Instead, cloud contracts don’t include traditional indemnification or limitations of liability, particularly pertaining to privacy and data security. If a cloud provider suffers a data breach of customer information or sustains a network outage, risk managers are less likely to have the same contractual protection they are accustomed to seeing from traditional service providers.
2. Control is lost
In the cloud, companies are often forced to give up control of data and network availability. This can make staying compliant with regulations a challenge. For example cloud providers use data warehouses located in multiple jurisdictions, often transferring data across servers globally. While a company would be compliant in one location, it could be non-compliant when that data is transferred to a different location — and worst of all, the company may have no idea that it even happened.
3. High-level security threats loom
Higher levels of security attract sophisticated hackers. While a data thief may not be interested in your company’s information by itself, a large collection of data is a prime target. Advanced Persistent Threat (APT) attacks by highly skilled criminals continue to increase — putting your data at increased risk.
4. Hidden costs can hurt
Nobody can dispute the up-front cost savings provided by the cloud. But moving from one cloud to another can be expensive. Plus, one cloud is often not enough because of congestion and outages. More cloud providers equals more cost. Also, regulatory compliance again becomes a challenge since you can never outsource the risk to a third party. That leaves the burden of conducting vendor due diligence in a company’s hands.
5. Data security is actually your responsibility
Yes, security in the cloud is often more sophisticated than what a company can provide on its own. However, many organizations fail to realize that it’s their responsibility to secure their data before sending it to the cloud. In fact, cloud providers often won’t ensure the security of the data in their clouds and, legally, most jurisdictions hold the data owner accountable for security.
Risk managers can’t just take cloud computing at face value. Yes, it’s a great alternative for cost, speed and security, but hidden fees and unexpected threats can make utilization much riskier than anticipated.
Managing the risks requires a deeper understanding of the technology, careful due diligence and constant vigilance — and ACE can help guide an organization through the process.
To learn more about how to manage cloud risks, read the ACE whitepaper: Cloud Computing: Is Your Company Weighing Both Benefits and Risks?