CXO

Diverse suppliers: How much do you know about your vendors' health?

If one of your vendors were to suddenly go out of business, would you be prepared? Follow these tips from industry experts and you can minimize the disruption.


What would you do if your ISP went bankrupt and pulled the plug on your T1 line—without a moment's notice? Mike Nikolich, CEO of public relations firm Tech Image Ltd., was on the golf course with his executive team when his media relations manager called to give him the bad news. "My initial reaction was to shank the next five tee shots into the water on the 8th hole and swear like a longshoreman," he recalled. "I was absolutely shocked this happened and completely unprepared to deal with the problem."

Preliminary reports after this summer's historic blackout indicated that businesses in New York City alone lost over $1 billion—and that was in a mere 26 hours. Imagine the staggering losses you could face if one of your mission-critical technology vendors disappeared into the night. How long would it take you—and what would it cost—to find and integrate a new supplier?

Smaller businesses are more likely than large corporations to be hit. If you're a major national bank and your online interface goes out for a day or two, you'll garner some bad PR, but customers most likely won't leave in droves. And you'll have the connections—and the capital—necessary to get back up and running quickly. But if you're a relatively young, budget-conscious upstart—even if you're the success story in your industry and even if all your press till now has been positive—how long do you think you'll last if every e-mail sent to your company is hard bouncing? Or your long distance carrier disappears? Or the primary sales channel for your flagship product packs up and moves out overnight?

You get the picture. Disaster lurks in every corner, particularly when you're dealing with technology vendors and suppliers. Industry analysts at Gartner predict that by mid-2004 fully half of the IT companies we think of as stalwarts will "merge, change direction, or cease trading." And no matter how close you are with your vendor, do you really think you'll get a phone call warning you to seek out other options "just in case"?

Risk analysis is not enough
Assessing vendor and supplier health goes beyond risk analysis. Yes, you need to carefully evaluate your vendors before you choose them, but good companies can and do go bad. If you don't constantly evaluate your mission-critical providers, you could be the next vendor to fade away into darkness.

You need a backup plan in place. Keep your research up to date and reassess your needs—and companies that might be able to meet them—regularly. Certainly, you should keep in touch with your vendors as often as necessary to remain apprised of their market health.

Most vendors will balk if you try to insert language into their service agreement that mandates they give you 60 days' notice of their intent to shut down. Think back to your job-hunting days and get ready to negotiate. Go in asking for 120 days' notice. When they resist, offer to cut it to 90, but stress that this is a deal-breaker. You can "settle" for a 60-day notice, which should afford you plenty of time to put your contingency plans into place.

But don't get complacent and wait for the notice to arrive on your desk before you do anything. Agreement or not, many a desperate company has been known to bend the rules a bit, believe it or not.

What you don't know can hurt you
One IT manager (who requested anonymity) revealed that he worked for a major ISP for eight months. The company's dark secret was that the money had long since dried up, and, without massive infusions of new customers, they'd collapse. Big-name clients who had been guaranteed as much as six months' notice were lucky if they got a phone call the day the company officially declared Chapter 11. By that time, of course, service had been down for over three weeks. Employees knew that if they talked too early, they'd be unceremoniously booted. The need for one last paycheck kept them mum. "I still wake up sick over it," said the IT manager. "I quit a few weeks before the end, and I called three smaller companies to give them a heads up, but I could have done more."

Nikolich, who has since stopped taking his cell phone to the golf course, had to think fast. Ironically, he had been considering employing a redundant Internet connection just two months prior to the crisis. He was, therefore, more prepared than he otherwise might have been—he had a well-researched replacement provider lined up. But he couldn't make the transition completely seamless.

"Back in 2000, a T1 line took about 60 days to install from the initial order. The short-term solution was to have a 56K dial-up router installed while we scrambled to obtain a new T1 line. [Our new provider], GramTel, managed to have our new line installed and operational in about 35 days."

The fallout, said Nikolich, was immeasurable. The Internet is "one of the lifelines" of his business, and he has no way of knowing how many new business leads, opportunities, or editorial opportunities for clients were lost while the company was unable to access e-mail and other Net services.

The new T1 line cost thousands of dollars. But the lessons Nikolich learned were priceless:
  • Always have a contingency plan in place. A company that doesn't bother with disaster planning and risk assessment is as irresponsible as a parent who won't write a will.
  • Monitor the financial health of all the vendors you rely on for critical services. (You can read more about this in the vendor health assessment checklist below.) Nikolich uses Dun&Bradstreet Small Business Services to provide discreet financial checkups for about $15 per report. He calls it "cheap insurance."
  • Consider hiring an outside vendor to audit your network, Internet, and telecom needs annually. Nikolich said his auditor saved him 35 percent on his annual telco bills by recommending an alternate provider.
  • Don't overlook the basics. Make sure your servers have remote backups, and build redundancies into your network.

Remember, there are essentially two kinds of companies: the companies who have suffered major service interruptions and the companies who haven't—yet.

Vendor health assessment checklist
Your vendors and suppliers can often be the key to your success—or lead you on the path to fast failure. But what exactly do you need to look for when you're assessing your vendors' financial health and viability? This checklist will help you get a handle on what you need to know about your suppliers.

Before you hire
  • Do you hire new job candidates without checking their references? You'd be amazed at the number of companies that never bother to perform the same kind of due diligence on their vendors, even their most critical providers. Certainly you should ask for references, but, even more importantly, follow up. Call references. Meet with them in person if possible. Find out exactly what the vendor did for them and how smooth the process was and is today.
  • Research each vendor's funding history. Commercial services (Hoovers and Dun&Bradstreet, for instance) can provide incredibly useful financial information for a low fee. Public companies have to file papers with the SEC and you can often get that information right at the vendor's Web site. Don't let marketing hype sway you—play this by the numbers.
  • The vendor's Web site provides another useful clue: press releases. "Look at their PR history," said Alan Fulmer, president of Channel Intelligence. "Do they release regular updates? Or has their press recently dropped off dramatically? That can be a subtle indicator of a company on the way down."
  • Talk to your friends and colleagues. Read trade magazines in your industry, and in your vendor's. Find out what the man on the street knows and says about your potential supplier. In other words, research your vendors with at least as much intensity as you do your competitors.
  • Create a back-up plan. Save your research so that you'll know right away who the other major players are. Know what you'll do if you have a problem with your first-choice vendor. Keep the names of your alternates within easy reach.

After you hire
  • Demand the level of service you require. For mission-critical services, you may need weekly or even daily updates from a vendor. If you aren't getting the information you need, act quickly. It may be simple oversight or it may be a harbinger of things to come.
  • Pay attention to any sudden changes in your relationship with your vendor. If your salesperson or account manager leaves the company, find out why, said Fulmer. The information might be hard to elicit, and that in itself can be a bad sign. Obviously, if the person left to have a baby or because his spouse was relocated, no one will think twice about telling you. But companies going through layoffs or whose employees are abandoning the sinking ship don't like to advertise their troubles.
  • Check industry Web sites, magazines, and trade shows. Keep an ear out for the buzz. Try to see your vendors in social settings as well. Casual relationships with salespeople and with higher-ups can often be a great indicator of the company's financial health. A simple, "How's business?" could yield telling results.
  • Watch their sales force. Salespeople will be the first to go when marketing budgets are slashed, and how many companies slash marketing budgets because they're selling too much?
  • Continue to check each vendor's financial profile at least quarterly, said Fulmer. "Stay on top of those SEC papers, keep reading the trades." And keep an eye on your back-up vendors as well. When a crisis strikes, you want to be armed with as much information as possible to make a fast decision.

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