News Risk Management09 May 2018

Six in ten organisations feel vulnerable to subcontractor risks-Deloitte

09 May 2018

Fifty-seven percent of global organisations feel they do not have appropriate visibility of subcontractors engaged by their third parties, according to a recent survey from Deloitte.

A further 21% are unsure of oversight practices, and fewer still (2%) routinely review the risk subcontractors (so-called fourth/fifth parties) said the professional services company’s third global survey on Extended Enterprise Risk Management (EERM).

This is despite the fact that these subcontractors would be covered in the upcoming EU General Data Protection Regulation (GDPR) that kicks in on 25 May.

Deloite extended enterprise risk management (EERM) partner Kristian Park said, “With GDPR coming into force across Europe next month, organisations will already be looking with renewed focus at their third party structures.

“For some, there is still a way to go to implement adequate subcontractor management. Compliance with GDPR not only covers organisations themselves, but also the contractors and subcontractors they engage,” he said.

Subcontractors must be appropriately monitored

Mr Park added that under the regulation, subcontractors representing fourth and fifth parties must be appropriately monitored. While the specific responsibilities will depend on whether they’re considered a data ‘controller’ or ‘processor’, such responsibilities typically include demonstrating robust data security safeguards, and reporting data breaches within 72 hours.

“In the run up to 25 May, we’d expect to see more organisations make additional investments to adequately manage multiple layers of outsourcers. There is no one-size-fits-all, and the appropriateness of contractor monitoring for GDPR is defined by the nature of dependency from the perspective of data. The frequency and rigour of monitoring is expected to intensify, the greater the reliance in terms of confidential data,” said Mr Park.

Regular monitoring of subcontractors remains low, with just 2% of those surveyed engaging in this periodically, and 10% solely reviewing subcontractors identified as critical to continuity of business.

Mr Park said that this means 88% of organisations are either dependent on their third parties to conduct subcontractor risk reviews, or have an unstructured, ad-hoc approach to fourth and fifth party oversight.

“This figure could also indicate that some organisations are simply unaware of their policy or, more alarmingly, do not have one,” he said.

Organisations making additional investments into EERM initiatives

The Deloitte survey also reveals that some organisations are already making additional investments into EERM initiatives.

“These organisations recognise the business case and see the opportunity to enable growth, innovation and business performance from their contractors and sub-contractors in a risk-intelligent way,” said Mr Park.

Reliance on third parties continues to grow this year with over half (53%) of respondents reporting ‘some’ or ‘significant’ increase in dependency. Changing regulation and heightened levels of regulatory scrutiny were considered the two greatest contributory factors to increasing the risk inherent in this.

Despite critical levels of third party dependency, only 20% of organisations have streamlined their EERM systems and processes. Fifty-three percent of this year’s respondents now believe that their journey to achieve EERM maturity is two to three years or more.

“This is a significantly longer journey than anticipated in earlier surveys, when respondents reported that this could be achieved in six months to a year”, said Mr Park. “This reflects a more realistic time-frame, and we’d expect organisations to be closely aligning plans to address the expected regulatory outlook over this period.”

This year’s Deloitte survey saw some 975 responses from organisations across 15 countries across the Americas, EMEA, and APAC. Survey respondents include CFOs, heads of procurement/vendor management, CROs, heads of internal audit, and compliance and IT risk function leads.

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