Effective risk assessment of your current supply contracts

The business and economic environment is changing rapidly. A supplier that appeared to be capable and resilient two or three years ago may now be struggling to survive.

The environment in which your organisation is now operating is likely to be substantially different to that which pertained when you negotiated some of your supply arrangements. Are you confident that your vendors understand your current business context, for example in respect of your organisation’s outward obligations to its customers?

These types of issue are leading IT Managers to be much more proactive in their assessment of risks from their supply chain.

Assessing the status of each supplier

What’s their financial health?

Most IT Managers will track the financial results of their suppliers. However, that is a historic picture often with a considerable time-lag from the present, so it’s not necessarily the best way to know if their business is presently at risk.

You should also be alert to changes in behaviour and performance, at both the personal and company levels. These usually provide the first signs that something more serious is wrong.

Common examples include deterioration in the vendor’s general responsiveness, late deliveries and urgent demands for payment. Whilst none of these necessarily indicates a fundamental problem in a supplier’s business, in the current climate the smart IT Manager will quickly dig deeper. You need to know what risks your organisation is exposed to before it’s too late.

What’s the impact on the effectiveness of your organisation if any of your suppliers fold?

Clearly in some cases, the failure of a supplier may be no more than inconvenient. However, as the IT Manager, you need to very clear which supplier failures would have a serious impact and how quickly, so that you can arrange alternative, timely supply. That means having a “Plan B” in place and up-to-date, not waiting to see what happens and hope that you can respond in time.

What’s their longer-term viability?

Your vendor’s immediate position may have some weaknesses but you may assess that they are not in immediate danger. However, you may have a business dependency on them that is directly linked, for example, to long-term commitments to your customers.

Most IT Managers will naturally maintain a watching brief, at least on their most critical suppliers, with an effective alert system to pre-empt any surprises. You may also need to consider, however, the adoption of a dual-supplier strategy.

Having looked at the suppliers you should then consider how appropriate your contracts are to handle the changed circumstances of your business and that of your vendors.

Assessing your contracts for fitness for purpose in today’s business environment

Security of supply

Where you perceive risks to the security of ongoing supply from a particular vendor, does the contract give any useful protections (such as escrow arrangements, in the case of software)? If not, you should consider introducing appropriate protection. Alternatively, you might simply decide to secure an additional source of supply.

Change of ownership

What happens under “change of ownership”? If your supplier is bought by or merges with another business, that may have a significant impact for you in terms of continuity and quality of supply. Changes of management and/or ownership can lead to changes in style, priorities, quality, scope of service, product rationalisation, etc.
Does your contract provide sufficient protections for your company in the event of a change of ownership of your vendor?

Criticality of vendor to your business

If your organisation has changed in recent months, for example to adapt to the new economic environment, then you may have created a misalignment between the dependency you now have on certain vendors compared with the dependency you had or anticipated at the time you struck the original supply arrangement.

This might mean, for example, that the integrity of a vendor’s services is now on the critical path for your organisation's quality of service to its clients. If that’s not adequately understood by the vendor and/or not properly reflected in the contract then you have an increased business risk that needs urgent attention. You may need to consider amending the contract to reflect the changed circumstances.

From our experience of working with businesses of all sizes and in all sectors of the economy, these simple guidelines help IT Managers to quickly assess the risk status of their vendors and initiate appropriate actions to mitigate increased commercial risk.

Andrew Hall works for Devant, the specialists in commercial contract development, negotiation and training. Andrew has worked in senior roles at Sema Group, Accenture and EDS, for all of whom he has led the negotiation of major contracts.

Copyright © 2009 IDG Communications, Inc.

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