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A third party is an individual or entity that is involved in a transaction but is not one of the principals and, thus, has a lesser interest in the transaction.

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It can also be referred to as an entity that a company uses to mitigate risk. An example of a third party may be a collection agency.

If a debtor owes a creditor a sum of money and has not been making the scheduled payments, the creditor is likely to hire a collection agency to ensure that the debtor honors his agreement.

However, third-party involvement in investment decisions can lead to improved decision-making processes resulting in higher quality decisions and improved firm performance.

Types of Third Parties

Third-party services can be found across multiple industries and specialties. Some common ones include:

Real estate escrow company:

This neutral and disinterested third party holds essential documents, funds, or other essential items in trust until the conditions set by the property buyer and seller are fulfilled.

Collection agencies:

Some companies may use a collection agency to contact customers on their behalf to collect overdue payments.

Payment processors:

Payment processing companies, like PayPal and Stripe, are used to facilitate card payments between customers and businesses.

Investment brokers:

These financial professionals execute buy or sell orders on securities on behalf of their clients.

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Investment brokers may also offer consulting services, recommending certain financial products to their clients.

Mediators:

These lawyers act as third-party neutrals that help two different parties arrive at a resolution.

Logistics partners:

Some companies might outsource some of their business operations, such as warehousing and delivery, to a third-party logistics provider.

As third-party displays different types, it can perform the following roles in investment decisions and those roles include:

An expert

As an expert, the third party brings specific knowledge or skills related to an industry or function, which are otherwise unavailable inside the domain of the principal.

This is most often the case with legal or accounting skills, which may be limited or non-existent within the corporations for specific functions. In addition, the third party may be able to tap information resources such as competitors, which the principal is unable or unwilling to use.

The benefit to the organization in the case of the expert is obvious which is the expertise, which may be too costly to maintain internally, can be obtained on a needed basis.

The provocateur

As a provocateur, the third party is integrated into the early stages of the investment decision-making process to help identify critical information needs, ask difficult and perhaps unanticipated questions, and challenge the status quo. The provocateur is uniquely trained to provide insight into the investment decision-making process and to capture and articulate this knowledge as part of his or her agent’s responsibilities.

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In this role, the third party may provoke the management team into looking at problems in new ways, provide additional information on environmental factors, and challenge existing organizational biases.

The legitimizer

As a legitimizer, a third party may be brought in to verify or elaborate further on information the principal already suspects or believes may be true or legitimize a particular strategic decision on investment. Because of unique access to information from industry sources such as competitors and anonymous enquires to customers and suppliers, a third party may ferret out information to support or disprove an organizational bias or predisposition.

This role benefits the principal by clarifying cause and effect relationships and adding additional insight or information, which lends credence and confidence to a course of action. The legitimizer’s perspective may prevent misallocation of resources, escalating commitment to a failing cause, or strategic mistakes.

In conclusion, third parties represent just the resource that may be used by a top management team to reduce the boundedness of the rationality, aid in the articulation of its strategy, and assist in the implementation of strategic investment decisions.

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This article was first published on 16th June 2022

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