Category Archives: Risk Management

Source-to-Pay+ Part 4B: Third Party Risk, Part 2

In Part 1 of this series we noted that Risk Management went much beyond Supplier Risk, and the primitive Supplier “Risk” Management application that is bundled in many S2P suites (which is really more of a Supplier “Uncertainty” Management module). Then, in Part 2 of this series, we noted that there are risks in every supply chain entity; with the people and materials used; and with the locales they operate in. Then in Part 3 of this series we discussed inwardly focussed Corporate Risk Management, which some companies offer partial solutions to in the form of GRC (Governance, Risk, and Compliance) solutions.

Then, yesterday in Part 4A, we began our discussion of third party risks and outlined some of the specific baseline capabilities that such a solution should possess. Today we complete our discussion of third party risk and outline the remainder of baseline capabilities that we believe such a solution should possess.

Sustainability An organization needs to be sustainable, which it can only be if the suppliers it uses are sustainable as well. As such, a TPRM solution needs to monitor the sustainability of its suppliers. Their carbon footprint, or at least the footprint of the products/services they provide, associated GHG emissions, and (fresh)water utilization, especially if significant or beyond the norm (and reducable).

This part of the application should integrate with third party data feeds and assessments on sustainability as well as the integrated assessment module.
Commodity Markets Sudden, unexpected, price increases represent a great risk to the organization, no matter where they occur in the chain. Since it’s usually the supplier (or the supplier’s supplier) who buys the raw materials from the commodity markets, the organization often doesn’t know about the price increase until it’s too late. Thus, it’s critical that an organization monitor the commodity markets for any raw materials it needs in considerable quantity that can have a significant impact on its financials.

Thus, a good TPRM system will integrate with commodity market feeds and track the raw materials used in the relevant Bill of Materials of the organization. As such, the system should also integrate with the ERP and be able to pull in the raw materials the organization’s suppliers need to acquire in large quantities on a regular basis.
Location Considerations There’s a lot of risk associated with a location. Geopolitical, economic, natural disaster, and so on. The system should track all of the locations associated with each third party, the risks associated with the location, the likelihood, and, if possible, the potential impact.

This part of the solution should tie into the event monitoring, sentiment monitoring, third party feeds, and any other indicators that could indicate a location-based risk. When one is detected, all of the (potentially) impacted suppliers should be identified, and the potential severity of the event also identified.
Certificates The solution must track all appropriate certificates / certifications for third parties that the organization needs to verify that the organizations are compliant with regulations, have the appropriate insurance, and so on.

A good solution will also integrate with third parties that can verify the existence/issuance of the certificate, the dates of validity, and other key meta-data.
Industrial Accidents It’s important to keep track of any industrial accidents in the third parties you do business with, whether they have been cleaned up, what the impacts were, and whether or not the third parties have taken steps to prevent similar accidents from happening again. A supplier that could be shut down at any time due to an accident which has more than a negligible chance of occurring is not a reliable supplier. Plus, this can also impact reputation / brand.

Thus, the application needs to tap into organizational filings and disclosures to identify past accidents, event monitoring to identify accidents as they happen, assessments to get updates from suppliers as they clean up / recover, action plans that capture what the supplier/third party plans to do, and monitoring.
Recalls Just like its important to keep track of industrial accidents, it’s also important to keep track of recalls. For what, how often, and how severe. A supplier that has to regularly do recalls has quality (management) issues and is not a supplier you want to be relying on.

It’s important that the application track recalls, track any updates on those recalls, and track any news stories that led to those recalls. You also want to know how often a supplier has had to do a recall in the past.
Related Parties We’ve more-or-less stated this in many of the sections above, but it’s critical that you track the parties related with a supplier/third-party of interest. Those that supply, service, or invest in the third parties you rely on should also be tracked. In addition to tracking these, it’s critical to maintain the relevant relationships between the parties and keep this up to date.

The system should integrate with third party corporate registries that track ownership and relationship information and update the relationships in the TPRM as necessary.
Action Plans / Development Goals As we hinted at in our discussion of Industrial Accidents, it’s not enough to just track the risks, the likelihood, and indicators they are materializing / have materialized, an organization has to work with suppliers to minimize the likelihood and, should they materialize, minimize the recovery time and the impact on the organization.

The application must support the definition of a multi-stage plan, with multiple tasks per stage, collaborative development of the plan, approval workflows, and when the plan is instantiated, execution and tracking of the progress made by the third party. Basically, it’s customizable development program management for a third party.
Maturity Model The platform should support the definition of maturity models by third party (supplier) organization type, the mapping of third parties to these models, default action plans that can be instantiated to help a third party progress up the maturity model, and associated metrics to measure the aptitude of a third party at each level.

In other words, it’s not just point-based program management for the development of select capabilities in a third party, it’s integrated multi-faceted organizational management of a third party with monitoring, management, and reporting over time.

Moreover, a Third Party Risk Management (TPRM) will also contain a host of generic analytics/planning/monitoring capabilities, but since many of these are common, and since stand alone risk-focussed analytics applications are also part of the plethora of offerings out there, instead of discussing these generic features in this and every other article, as we noted in our coverage of Corporate Risk, we will instead discuss these capabilities in an article dedicated to Risk Analytics and Monitoring.

Source-to-Pay+ Part 4A: Third Party Risk, Part 1

In Part 1 we noted that Risk Management went much beyond Supplier Risk, and the primitive Supplier “Risk” Management application (that we prefer to call Supplier “Uncertainty” Management) that is bundled in many S2P suites. Then, in Part 2, we noted that there are risks in every supply chain entity; with the people and materials used; and with the locales they operate in. Then, in Part 3, we discussed inwardly focussed Corporate Risk Management, which some companies offer partial solutions to in the form of GRC (Governance, Risk, and Compliance) solutions.

Today we are going to talk about some of the third party risks and outline the function specific baseline capabilities that such a solution should possess. Before we get started on the risks, we should note that a third party risk management (TPRM) can also be used for Supplier Management as a supplier, in addition to being a second party, could also be one of the many “third parties” an organization has to worry about if it is a sub-tier provider contracted by another primary, first-tier, supplier of the organization and a good TPRM solution will contain all of the functionality in an average Supplier Risk/Uncertainty Management module in a Source-to-Pay solution and much, much more.

We’ll continue in yesterday’s format, outlining some of the key capabilities and what that may mean solution-wise. There are quite a few key capabilities. So many, in fact, that, as you may we’re actually breaking this article up into 2 parts.

Capability Description
Customizable Assessments No matter how many capabilities come out of the box, every organization is going to need to do a customized assessment of a third party at some point. Thus, any TPRM system must support the creation of customized assessments with arbitrary questions, multiple forms of answers (multi-select, numeric, free-form, etc.), customizable weighting systems (that also support group-based weightings using averages, medium, or weightings based on role) and customizable reporting on the results.

In addition, the system should come with a slew of starting, customizable assessments out-of-the-box on every area covered in the application, whether or not there are third party data feeds and assessments that can be sucked into the application for use by the client. (This is because most third party feeds and assessments come with a cost, which may not be worth it to the organization if that aspect is only relevant to a few suppliers or doesn’t cover all of the aspects an organization needs.)
Reputation/Brand As we noted in our last article, a significant risk to the company is its reputation/brand, and that includes reputation/brand risks that come from being associated with third parties with reputation/brand risks. As a result, an organization needs to keep on top of the reputation/brand of its suppliers and partners.

Thus, it needs a platform that can monitor news sources and social media and look for stories about all of its suppliers and partners that could blow up, sentiment that could propagate, and events that could cause repercussions through the supply chain.
Regulatory Compliance Organizations need to be compliant with regulations in every geography in which the organization does business, which means that it needs its core suppliers and key partners to also be compliant with those regulations. As a result, it needs to monitor all of its suppliers and their suppliers/partners for compliance with the regulations that are relevant to those suppliers/partners.

This may mean tracking certifications, tracking raw material inputs, tracking human resources assigned to projects, tracking carbon/GHG reports from the third party, and other key pieces of information. It may mean asking suppliers for additional (self) assessments, getting (temporary) access to third party data feeds, and having third party do compliance audits for you.
Ownership/Financials Just like your company cannot be associated with sanctioned entities, you need to be careful not to do business with suppliers who are (partially) owned or controlled by sanctioned entities as well or who are doing business with sanctioned entities to support your organization. In addition, you don’t want to be doing business with suppliers or third parties who are financially unstable, as their bankruptcy could negatively impact your business.

Thus, this system must tie into all sanctioned and denied party lists of every country it operates in, cross-reference the ownership and partners of all suppliers/third parties the company does business with against the sanction list, and monitor ownership changes as they occur. In addition, it should tie into systems that monitor financials of public companies as well as systems that judge the financial stability of private companies.
Human/Labour Rights Legislation has been introduced and/or is being considered in many jurisdictions around the world that make your organization responsible for any abuses of human or labour rights in the supply chain. It’s important to have systems that can monitor for human/labour rights in the supply chain, even if this is only through integrations with third parties that do (independent) on-site assessments.

This should also make use of the brand/reputation monitoring module that monitors news sources, events, and related data feeds to scan for anything that could indicate a human/labour rights violation.

Come back tomorrow for Part 4B as we continue our discussion of Third Party Risk.

Source-to-Pay+ part 3: Corporate Risk

In Part 1 we noted that Risk Management went much beyond Supplier Risk, and the primitive Supplier “Risk” Management application that is bundled in many S2P suites. Then, in Part 2, we noted that there are risks in every supply chain entity; with the people and materials use; and with the locales they operate in. These risks come in all shapes and sizes. And any single risk can sink the company.

Today we are going to talk about some of the internal corporate risks and outline the function specific baseline capabilities that such a solution will normally possess.

Capability Description
Reputation/Brand A significant risk to a company is its reputation/brand, especially if it’s primarily selling to consumers. And the problem with reputation/brand damage is that it can come from anywhere. Quality issue that leads to a defect that causes consumers harm. Raw materials that are harmful to human health and might cause cancer, or worse, if consumed, inhaled, or even touched. An offensive statement (to a group of people) by an executive. A targeted online misinformation campaign by a disgruntled customer. Environmentalists who claim the organization is doing unnecessary environmental damage. Forced and Slave Labour. The repercussions of continuing to buy cobalt and copper from the congo while turning a blind eye to rampant sexual violence and rape. (An average of 48 victims are treated per day by Medicins Sans Frontieres, that’s 17,520 per year. And this has been going on for over a decade.)

And in these difficult times, you also have to deal with

  • Sourcing from countries engaged in “special military exercises” that have effectively started wars with other countries and
  • Sourcing from countries whose response to terrorist attacks have resulted in 10X the number of casualties caused by the terrorists.

In these two situations, it might be the case that most of your consumer base doesn’t care, but some will praise you while staying the course and helping the side they think is right (or good) while others will go out of their way to aggressively attack your brand for helping the side they think is wrong (or evil). And so on.

As such, the platform needs to be able to monitor news sources and social media. It must look for stories that could blow up, sentiment that could propagate, and events associated with related entities that could propagate. It must tie into multi-tier manufacturing systems and monitor raw materials, quality control systems to monitor production quality, It must tie into CSR/EHG systems to make sure the company is being environmentally conscious. And so on.
Sanctioned Entities An organization that does business with organizations on sanctioned or denied lists can get in serious trouble. It can be prohibited from doing business with government entities, fined, and the executives (criminally) charged. But it’s not just entities, it’s individuals as well. And it’s not just potential employees or contractors, but (potential) investors as well.

Its critical that the system tie into all sanction and denied party lists of every country it does business in, all lists of organizations that have had lawsuits brought against them (and the results if the lawsuits have been concluded), and lists of individuals who have investments in related corporations.
Fraud Every organization that makes money is at risk of being defrauded. That fraud can come from employees, including top executives, suppliers, third parties, and cyber criminals.

Such a system should integrate into the Supplier/Vendor Master and ensure that all invoices are coming from valid entities, the purchase order system to ensure the invoices match purchase orders and the payment amounts are valid, the payment system to make sure the payments go to accounts known to be associated with the vendor who sent the invoice, and no payments made without an invoice or appropriate counter-signed / doubly approved payment approval.

Such a system should also look at connections. Connections between the individuals in the organization who cut the PO, claim the services were delivered, make the payment, and the individuals who sent the invoice, verified the delivery, and accepted the payment.

Such a system should also integrate with the cyber monitoring and internet security systems and look for unusual activity that could indicate potential fraud.
Employees Employees are the biggest internal risks. And not just those who are looking to commit fraud, which will, hopefully, be a very small percentage of employees. There are also those who (might) have a conflict of interest, which could sway them in their decision making. And then there are the rest of the employees, who are human and make mistakes. Small mistakes like accidentally approving an invoice for 5K from a vendor who didn’t actually deliver the services, and might never deliver the services, because there are no processes in place to verify the delivery from approved vendors who have delivered in the past. Big mistakes like not locking down a port that allows a hacker to get into the local payment systems and alter the bank account for the 500K payment going out tomorrow. And everything in between.

This system should not only integrate with background check systems for employees who have access to the payment systems, but those who have access to restricted/classified IP, sensitive systems that need specialized training, and so on.

It should also integrate with certification and training systems to track an employee’s certifications and training.
GHG/Carbon In today’s climate, it’s important for a large company to track it’s internal carbon usage, not just the supply chain.

It’s likely that the organization will have it’s own system for carbon tracking. Such an organization will need to make sure the system is configured to track internal emissions and chain emissions separately, assign internal emissions to the company and the outbound chain as appropriate, and export the summaries to the corporate risk tracking system.
GDPR/Privacy GDPR is here, it must be respected, and failure to do so can be costly. But it’s not just GDPR an organization needs to be concerned with as privacy regulations are cropping up all over the world, and many countries in which the organization does business as a buyer, a seller, or both.

An organization must identify the private data it maintains on its employees, contractors, representatives of third parties, and the public. It must ensure such data is secured, encrypted, accessible only by those with explicit authority, and tagged as data the organization is legally allowed, or required, to keep and data that does not fall under that category. The location of such data must be indexed and the data, as well as all backups thereof, must be easily erased if someone asks to be forgotten (with the exception of any data the organization is legally required to maintain), and that must include all backups.
Contract The organization has contractual risk, both in the contracts with its suppliers as well as the contracts with its customers, and with respects to the contracts it never signed, but implied when it made the first order or purchase from a supplier. These risks include the losses from failure to complete its obligations as well as risks from suppliers and customers failing to complete theirs as well as force majeure risks and lack of of assignment to third parties and/or lack of adequate insurance coverage.

It’s critical that the Corporate Risk System integrate with all of the contract systems used by the organization, track contracts by risk type, identify lack of key clauses, and identify areas where lack of contracts or insurance put the organization at significant risk.
Epidemics/Pandemics The pandemic was not the last epidemic/pandemic the organization is going to face. More are coming. The organization needs to identify which parts of the operation are most at risk, what can be done to prepare for it, and what is in place when the worst happens.

As to how the system should support the planning, monitoring for, detection, and response to an emerging epidemic/pandemic, that’s probably organization dependent. But any Corporate Risk system that doesn’t at least recognize the need is not meeting the full problem.

A corporate risk system will also contain a host of generic analytics/planning/monitoring capabilities, but since many of these are, or at least should be, common among multiple types of risk systems, and since stand alone risk-focussed analytics applications are also part of the plethora of offerings out there, instead of discussing these generic features in this and every other article describing a particular focus/type of risk application, we will instead discuss these capabilities in an article dedicated to Risk Analytics and Monitoring near the end of this series.

Source-to-Pay+ part 2: End-to-End Risk Management

In Part 1 we noted that Risk Management goes much beyond Supplier Risk, and a primitive Supplier “Risk” Management application (which we prefer to label Supplier Uncertainty Management since it’s not full blown risk management, and there’s uncertainty as to how much it will actually do for you) is only the beginning of what your organization will likely need.

When it comes to risk, there are risks in:

  • your company
  • your suppliers
  • their suppliers
  • third parties you interact with (which may not be [direct] suppliers of goods or services)
  • your carriers
  • your supply chain network (ports, warehouses, [cross]docks, etc.)

These risks can be with

  • your people
  • your board
  • your investors
  • your supplier’s people, board, or investors
  • the materials your suppliers use
  • the locale they operate in
  • the suppliers your suppliers use
  • the locale they operate in
  • the carriers
  • the ports your carriers use
  • the warehouses used for interim storage
  • and any other part of, or player in, the supply chain

And the types of risks are numerous. They include, but are far from limited to:

  • unskilled/uncertified people
  • sanctioned/prohibited individuals and entity
  • restricted / banned materials
  • use of underage / forced / slave labour
  • geo-politics
  • economics / currency fluctuations
  • natural disasters
  • labour unrest / strikes
  • fraud / theft
  • the internet
  • and so on

And you need a very extensive application to identify, analyze, monitor, mitigate, and manage these risks. In fact, you may even need a suite of these applications, especially when you consider that most applications consider risks from the viewpoint of:

  • the company (especially those that offer GRC applications)
  • the supplier / third party (SRM/SUM+ / TPRM)
  • supply chain visibility
  • … w/or in-transport visibility
  • w/or multi-tier (manufacturing chain) visibility
  • cyber monitoring

And such an application will need entity/function specific capabilities as well as generic capabilities. The generic capabilities might include, but not be limited to:

  • data feed/stream integration
  • metric definition
  • trend analysis
  • user defined reports
  • data / trend monitoring
  • (mitigation) plan creation
  • plan management

Risk is broad, and the solution footprint needs to be broad as well. In the next few articles we will tackle some of the major application areas we noted above.

Source-to-Pay+ Part 1: The Beginning.

Once upon a time
not so long ago …

SI ran The 39 Steps … err … The 39 Clues … err … The 39 Part Series to Help You Figure Out Where to Start with Source-to-Pay and helped you understand what each of the six core technologies in Source-to-Pay do, how to evaluate them, and the order of implementation necessary to maximize short-term results (which is the only thing the CFO cutting the check for the systems cares about). Not that it should be hard, given that, as the doctor explained, if your organization is a mid market, the answer to Per Year, How Much Should You Outlay for Source to Pay? 120K! (because Yes Mid-Markets, 120K is More Than Enough for Source-to-Pay!). That’s cheap, and if you can’t get a 10X ROI on that, the doctor would be surprised. (Yes, you’ll need some integrations and some services, and that will double or triple the price and you may only see a 5X or 7X ROI, but still.)

But the reality is, especially in today’s turbulent times (where me and my wine is not enough), even full Source-to-Pay is not enough. Risks abound, and even if your Supplier Management Platform has an Uncertainty (Risk) module, there’s more than supplier risk to worry about. There’s third party, supply chain, logistics, geographic, natural disaster, and many other risks that Supplier Risk Management, which we prefer to call Supplier Uncertainty Management (due to the lack of depth, action management, support for mitigation planning, etc. we prefer NOT to call these Risk modules), applications in Source-to-Pay typically don’t address.

Then we have Corporate Social Responsibility (CSR), Environmental & Social Governance (ESG), and Carbon / Scope 1,2,3. Today, a non-responsible company that buys from suppliers who are particularly environmentally unfriendly, don’t treat their workers well, or, even worse, use forced or slave labour is the one that gets the consumer backlash, and possibly the civil AND criminal liability (with certain jurisdictions introducing laws making the last company down the chain responsible). A company that just hoards profit and doesn’t make an effort to give back is frowned upon. And a company that stays on dirty power when there is an alternative, wastefully uses fresh water, or unnecessarily consumes non-recyclable resources in its day to day operations is just being dumb. Moreover, when you consider that Carbon Tracking is Important — But a Calculator or a Credit is Not A Solution! but What You’re Really Concerned About is YOUR e-Liability, that it’s not just about tracking, but reducing where possible, and that there are real baselines given that it’s impossible to mine, process, produce, ship, or consume without emitting carbon, it’s not easy to figure out what you need.

When you are buying direct, you have to consider the supply chain as well as the implications of a change in the supply base. The ink on the contract is when the fun truly begins. The product has to arrive on time, on budget, damage free, at the right location. This requires logistics coordination, and if the contract will change the supply base configuration, this is something that should be considered up front. So logistics/network analysis is creeping into Sourcing.

Then there is the issue of T&E — what happens when it’s put on the card, because its too small to bother with a Procurement effort (it never is, although it’s not always worth the time of a Procurement Pro, and that’s why you need an appropriate T&E/Tail Spend system to make sure the end buyer gets it right) or someone is trying to bury something that they know is not truly needed, off contract, or shouldn’t be expensed.

Plus, at the end of the day, you have to pay … and most Source-to-Pay end at the OK-to-Pay. What do you do when it’s time to pay?

And so it goes.

As such, it’s time to start another multi-part series to help you, dear reader, understand the extended Procurement landscape and what you should be looking for in such systems. We’re not going to attempt to tell you what to implement first, as that will depend upon what your biggest need is, which will usually depend on what the biggest risks are to the organization at the current time — unidentified spend, risk of supply, breaks in the supply network, forthcoming legislation, global payments, and so on. We’re just going to take an area and explore it, for as many articles as it takes. More to come. Much More.