DelCreo, Inc.

Third Party Risk Management

Weighing the Risks #15

Third Party Risk Management

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Hi, enjoy this weeks curated risk and business updates.

Supply chain disruptions during the COVID-19 pandemic, recent geopolitical events, rapid business digitization, and cyber attacks on entire supply chains have led to significant disruptions and losses, raising third party risk as a board and executive level concern. Businesses are now more aware of the need for robust third party risk management (TPRM) to ensure supply chain resilience and continuity, including assessing the financial health, operational stability, cybersecurity and geopolitical risks associated with third-party vendors.

Key TPRM developments in 2024 and beyond include:

  • Operational and business leaders are taking the lead on third party risk management, with support from risk management, cybersecurity, legal, finance etc.

  • Adoption of a relationship management lifecycle approach to managing risk - from strategic third party selection to off-boarding

  • Natural language processing (NLP) is being used to structure and analyze data embedded in third party reports, contracts and other documentation improving ability to identify and assess third party risks

  • Generative and other AI capabilities are being deployed to evaluate large, complex supply chains by sifting through and analyzing large amounts of structured and unstructured data including operational and financial factors, enabling teams to proactively monitor more third parties and go further into the supply chain to monitor fourth parties and beyond

  • Complex scenario simulations will be driven by data extracted by NLP and Generative AI technologies and become more more accessible to end users without significant coding or data scientist involvement

  • Advanced analytics using Bayesian networks, neural nets and other deep learning techniques are being used to provide early warning systems

  • Ongoing digitization of industries and supply chains means cybersecurity will continue to grow as a key third party risk that can affect a company’s technology environment, operations, and finances.

Request more information on DelCreo’s Risk Universe and risk assessment services.

As a reminder, here are our Risk Universe categories that we leverage to tackle and understand risk which include:

  • External Risk

  • Governance Risk

  • Strategic Risk

  • Product Risk

  • Business Operations Risk

  • Legal & Compliance Risk

  • Financial Risk

  • Technology Risk

We leverage our understanding of risk maps and risk universes to better advise our clients in strategic business decisions and to optimize the management of risk throughout the enterprise.

Weighing the Risks

Weekly Highlights

Three Key Ideas:

  • The Federal Reserve's cautious stance on interest rate cuts, despite cooling inflation, introduces economic risk factors affecting market stability and consumer confidence, with only one rate cut projected by year's end.

  • The rapid advancement of AI technology poses significant economic and political risk factors, with the need for robust regulations and standards to combat misinformation and ensure the responsible use of AI, as demonstrated by initiatives like the EU’s AI Act and the AI Governance Alliance.

  • The shift of CIOs reporting directly to CEOs highlights increased board oversight and decision-making risk, as CIOs play a crucial role in shaping AI strategies and aligning them with business objectives, demanding a culture that supports technological innovation and strategic collaboration.

Recommendations:

  • Business and risk managers should implement comprehensive enterprise risk management frameworks that integrate economic, technological, and governance risks, ensuring robust oversight, strategic alignment, and clear communication to address the complexities and opportunities presented by AI and fluctuating economic conditions.

Risk Universe Weekly Updates

External Risk

  • Despite cooling inflation, Fed is cautious on rate cuts

    • The Federal Reserve's cautious stance on interest rate cuts, maintaining them at a 23-year high of 5.25%-5.5%, introduces economic risk factors, particularly concerning inflation control and future rate cuts, affecting market stability and consumer confidence.

    • Despite encouraging inflation data from the latest CPI report, the Fed's projection of only one rate cut by year's end, down from earlier forecasts, poses political and industry risk factors, influencing market expectations and the broader economic outlook.

  • The Role Of Government And Industry In Safeguarding AI

    • The rapid advancement of AI technology poses significant economic and political risk factors, as governments and industries struggle to implement appropriate regulations and guardrails, exemplified by the EU’s AI Act and the U.S. Senate’s new roadmap for AI regulation.

    • Industry initiatives, such as the AI Governance Alliance and the Coalition for Content Provenance and Authenticity, address industry risk factors by developing standards to combat misinformation and ensure traceability of AI-generated content, supporting the broader goal of safeguarding democratic principles and human rights.

Governance Risk

  • AI Puts CIOs in the Spotlight, Right Next to the CEO

    • The shift of CIOs reporting directly to CEOs, rather than CFOs, highlights increased board oversight and decision-making risk, as CIOs now play a crucial role in shaping corporate AI strategies and aligning them with business objectives, elevating the importance of their leadership in driving technology and data initiatives.

    • The rising prominence of CIOs in corporate governance underscores potential company structure and culture risks, as the integration of AI and data management strategies requires robust oversight and alignment with overall business goals, demanding a culture that supports technological innovation and strategic collaboration across executive teams.

Strategic Risk

  • JPMorgan Sees Investors’ AI Exuberance Extending to Adopters

    • The focus on companies adopting AI for business transformation presents both competition and disruptive innovation risks, as these firms could outperform traditional chipmakers and cloud providers, reshaping market dynamics and creating new leaders in the tech industry.

    • Strategic investment in AI-driven companies involves brand and reputation risk, as firms like Apple and financial institutions such as JPMorgan face heightened scrutiny on their ability to effectively integrate AI into their operations, impacting their business models and long-term execution success.

  • Adapting service and consultancy businesses to the boom in AI use [Q&A]

    • Companies that integrate AI into their operations face significant company execution and business model risks, as the technology must be strategically aligned with specific business needs and outcomes to avoid becoming a hyped trend without tangible benefits, potentially impacting profitability and efficiency.

    • Embracing AI also presents brand and reputation risks, as responsible deployment and transparent communication are crucial to managing workforce concerns and maintaining a balance between human expertise and AI, ensuring that the adoption of AI enhances rather than undermines the company's reputation and operational integrity.

  • Enterprises plan to increase AI investment

    • The rapid increase in AI investments by enterprise IT and operations leaders introduces significant company execution and business model risks, as the success of AI deployment hinges on having a well-defined, organization-wide strategy to enhance productivity, customer experience, and cost-efficiency while mitigating potential implementation obstacles.

    • Concerns around AI, including security risks, insufficient education, and employee fears of job displacement, present brand and reputation risks, as addressing these issues is crucial for fostering widespread acceptance and ensuring that AI integration does not negatively impact the company’s workforce or public perception.

Business Operations Risk

  • New York Manufacturing Shrinks Less Than Forecast as Prices Cool

    • New York state factory activity showed less contraction than expected in June, yet continued weak conditions indicate significant business interruption risk and production/factory operations risk, with fluctuations in monthly data reflecting ongoing instability in the manufacturing sector.

    • The decline in prices received and materials costs, alongside improved shipment and new order outlooks, suggests a reliance on third-party suppliers and materials, highlighting supply chain risk and corporate IT infrastructure risk, as manufacturers navigate these challenges to maintain operations and meet future demand.

  • Business logistics costs finally reverting to prepandemic levels, according to annual report

    • The 10% drop in U.S. business logistics costs to $2.4 trillion in 2023 indicates a normalization post-pandemic, with significant reductions in asset-heavy transportation sectors like air cargo and ocean shipping. This shift poses a supply chain risk as companies must adapt to fluctuating transportation costs and capacity changes, which affect overall logistics strategies.

    • Declining storage costs and stable motor freight rates reflect a surplus in capacity and reduced consumer demand, introducing business interruption and production/factory operations risks. Companies need to lock in lower rates and diversify their carrier portfolios to mitigate these risks and prepare for potential capacity tightening and rate increases later in the year.

Financial Risk

  • Makeovers and M&A: how the UK pub sector is recovering

    • The UK pub sector faces significant financial performance risk as it recovers from pandemic impacts amid surging inflation and cost of living pressures, with many pubs closing and larger groups consolidating through acquisitions and refurbishments to maintain profitability and market position.

    • Fluctuations in results and forecasting risk are highlighted by varying monthly sales due to external factors like weather and sporting events, while capital investments and liquidity risk are managed through strategic expenditures on property upgrades and expansions, aiming to boost margins and operational efficiency.

Technology Risk

  • Amazon to Invest Billions in Taiwan Cloud Infrastructure

    • Amazon's significant investment in Taiwan to build data centers presents technology platform operations risk and product technology platform risk, as it aims to enhance AWS infrastructure to meet the growing regional demand for cloud services while ensuring secure data storage and low-latency workloads.

    • The aggressive global expansion of AWS infrastructure, alongside investments in generative AI, underscores technology risk factors, including the need to maintain competitive advantage against rivals like Microsoft and Google, and the challenges associated with scaling and managing extensive cloud-computing operations.

  • The AI boom is unraveling the most dominant tech trade of the last decade

    • The rapid adoption of generative AI highlights product technology platform risk and technology platform operations risk for software companies, as they struggle to monetize AI and develop applications that deliver significant ROI, while hardware companies benefit from increased demand for AI-enabled GPU chips.

    • Tight IT budgets and the shift in corporate spending towards GPU hardware exacerbate technology risk factors for software firms, which face challenges in organizing data for AI and delayed infrastructure readiness, resulting in continued underperformance compared to hardware stocks until at least 2025.

  • Microsoft stock will surge 24% amid a 'tidal wave' of AI-monetization opportunities, Wedbush says

    • Microsoft faces product technology platform risk and technology platform operations risk as it integrates AI into its cloud computing services, particularly with the Copilot and Azure platforms, which are expected to significantly boost revenue but require seamless implementation and scalability to maintain competitive advantage.

    • The technology risk factors are underscored by the need for Microsoft to sustain its lead over competitors like Amazon and Google in the cloud space, while managing the complexities of AI monetization and ensuring robust growth and margins amid the anticipated "AI Revolution" and increased customer demand for AI capabilities.