Vendor Risk Management

Our Insights
Events & Webinars
Vendor Risk Management
Posted on

Technologies cause rapid changes in business environment. For the last couple of years we’ve evolved an ability of asking the right questions. Instead of wondering about outsourcing as a channel to innovate markets, we start exploring how it could improve and force companies’ strategies and actually why the traditional forms of outsourcing are dead. Proactive innovation driving in many cases means cooperation with vendors. From the back-office suppliers’ position, they are becoming key players in many fields, sometimes even reaching a role of a strategic advisor helping companies transform at many levels.

Writing this post, I’ve been aiming at highlighting the growing significance of vendor selection management. Some examples of the situations below show which mistakes made at the stage of choosing subcontractors, resulted with crises at the later stages.

Main takeaways:

  • Why the vendor has no more choice and must be agile?
  • What are the consequences when you bet on the wrong vendor?

So, how to choose the best vendor, build effective relations and foster cooperation a successful journey for all parts?

According to The Deloitte Global Outsourcing Survey 2018, avoiding traditional roadblocks as extensive upfront planning, lengthy implementation times and long-term contracts enables companies to be more agile, rapidly expand, enter new markets and transform internal operations. In the same survey business leaders admitted that cost optimization is no longer the most important (it is not even in „top five”). Instead of it, businesses are searching for solutions and partners have capabilities to deliver competitive processes, which let them be more agile, efficient and effective.
So… looking for a vendor seems to be like searching well-tailored employee meeting company needs? Apparently, yes — especially in times when outsourcing became playing the leading role in current business environment. Vendor, subcontractor, data processor, supplier, third party — we can name them in many ways.
After all, the most important thing is to realize that…

…Agility equals stability

In the series of McKinsey articles regarding agility, one of five trends is organization as a living organisms. As human body reacts quickly to microbes only when it’s in good, stable shape, business is able to immediately answer the challenges and opportunities only when having a strong backbone. Struggling with data processes needs trustworthy third parties.
Imagine that you give very important task to a new, non-checked, first in a row partner, and then ask yourself…

What could go wrong?

The answers is: everything! The subcontractor’s failures in performance may be fraught with serious consequences regardless of the scale of the business. They may even go beyond the boundaries of the business world by touching, for example, politics.
We all know the cases where 3rd parties’ errors (intentional or not) caused serious crises. For me, one of these situations is undoubtedly a 2016–2017 crisis of one of the biggest telecoms in Poland, with external marketing agency and their call center employees stealing customers’ contact data and selling it to the company’s competition. Does anybody recall the vendor’s name? Probably not. But everyone remembers the the slip-up and the telecom’s name.
And politics? Voting processes are more and more technology (and thus, vendor) dependant. Take the Polish 2014 regional elections. A company was selected by Polish Electoral Commission and given a task to launch an online platform capable of counting votes from over 25k electoral commissions (31M possible votes). There was actually one vendor selection criteria there and yes, it was the price. The prepared voting system caused chaos and resulted in the resignation of all Electoral Commision Members. It was childishly easy to attack by hacker and had errors that completely undermined social trust in the correctness of the electoral processes (e.g. after counting the votes in the elections for the Mayor of the City of Szczecin, the system announced a winner a candidate who was not listed in this district). Vendor’s name is long forgotten, as the company does not exist anymore. But the names and faces of Electoral Commision officials responsible are still well remembered.

The consequences

Vendor rarely takes the bullet and it’s usually the buyer who has to bite it. Of course, you can go to the court and draw the consequences afterwards, but will your customers care? It’s the buyer who is responsible for his vendors performance. If vendor doesn’t perform well, it’s his fault, but it’s the buyer who will suffer the following as collateral damage:

  • Loss of reputation
  • Penalties for non-compliance (regulation)
  • Legal responsibility
  • Operational and business interruptions

A long time relationship with your vendor? Is it manageable?

Vendors cause risks and for me risks mean “it can be managed.’’ It’s possible for companies to have vendor risk management processes, it’s possible to make the processes efficient.
If you got here with your reading, I have great news for you. I am working on another text which will aim at presenting how to build efficient risk management processes and how to do it long term. I will run it for you step by step:

  • Show you how to start
  • Create vendor risk profiles
  • Ensure 3rd party compliance
  • Choose the most risky vendors for audit
  • Mitigate risks coming from 3rd parties

And reveal secret how to build a business relationship based on the value that vendor is continuously providing to the client.

Expect my next post on this topic in January.
See you then!