Amid all the turmoil in the tech sector, there are a few companies that deserve extra scrutiny: your vendors. If one of your key vendors goes belly up, your business could suffer. As an IT manager, you need be sure your vendors will continue to provide the goods and services you need from them. In this column, I’ll show you how to develop a “vendor viability plan,” a strategy that identifies which of your technology vendors is most at risk and what you should do about it.

How to track vendor viability
One of the obstacles you’ll need to overcome when you develop your organization’s vendor viability plan is obtaining timely, accurate information about the companies you deal with. It’s not difficult to find out how a large technology company like IBM is doing. IBM’s stock is widely reported in the mainstream and financial press, and research firms like Gartner and Meta track its services.

But what about smaller companies, such as the small software consultancy you rely on for custom Notes development? How are they doing?

It’s much more difficult to get reliable information about the financial performance of small and midsize technology companies. Many of them aren’t publicly traded, and few of them get the media coverage accorded Fortune 500 companies.

For most of us, vendor financial analysis takes place when we make a purchase decision, if it takes place at all. If the expenditure is high enough, we might check out the vendor via Dun & Bradstreet. But the fact is, once vendors get our business, most of us stop scrutinizing their financial performance.

Maybe you think checking vendors’ financial performance is the Accounting Department’s job, but is Accounting going to take over Exchange administration if your outsourcing firm goes into Chapter 7? It doesn’t matter who checks up on the vendor as long as someone does.

Some questions to ask
Here are some questions to ask when starting a vendor viability plan:

Which vendors should you include?
If you work with a large number of technology vendors, it isn’t practical to apply the same level of oversight to each of them. So how do you identify which vendors to monitor? One strategy is to chart a mission-critical ranking of vendors’ goods and services. You may also want to rank vendors on how difficult it would be to replace them—a kind of “vendor disaster recovery plan.”

Do you perform periodic credit checks on major vendors?
It’s probably a good idea to track the credit rating of your major vendors on a quarterly basis. The cost is modest, especially compared to the cost of not finding out about a problem until it’s too late.

Do you take advantage of free information about vendors?
Many Web sites provide financial information about vendors. Others offer useful business information, such as account wins and losses. Some of these sites offer a kind of electronic news clipping service. In other words, enter the vendors’ names, and the Web site will e-mail you summaries of news stories that mention the companies on your list.

What about the local business press?
Most cities and regions have a local business press that reports on local and regional businesses—often quite aggressively. Are you reading those papers on a regular basis?

Do you rely too much on your friendship with certain vendors?
How much can you expect a friend to tell you about the trouble his or her company is in? Can you rely on your account rep to be completely candid about such issues when doing so could hurt the vendor’s survival plans?

Do you schedule regular meetings with major vendors?
Most of us meet with our vendors when the vendor wants a meeting—either to push a new product or extend an existing contract. Scheduling regular meetings with your largest vendors allows you to set the agenda. Prepare for the meeting by creating a list of tough questions about the company’s performance and business goals. Remember that a vendor doesn’t need to go out of business to cause you problems. What if they close their office in your city? You can’t expect complete candor in such meetings, but you should be able to learn something useful.

Do you perform “exit interviews” with departing vendor account reps?
When one of a vendor’s account representatives leaves, you usually don’t hear about it until you get the call for the “handoff lunch,” the meeting where the departing rep or the regional manager introduces you to the new account rep. While you may have to accept this type of meeting, the meeting you really want is a one-on-one with the departing rep. You’ll be surprised by how much you can learn by saying something along the lines of, “The way I see it, you made a lot of commission from my decision to use your firm. I’d like you to pay me back by giving me some completely honest answers to several questions, starting with the real reason you’re leaving.”

Do you ask your subordinates what they hear about vendors?
They might be closer to the vendor’s staff than you are, so why not take advantage of that access?

What are you going to do with all this information?
This is the big question. Once you’ve uncovered some warning signs of a vendor’s problems—heavy staff turnover, loss of a big client, delay of a version upgrade—what are you going to do to protect your company? Before you can answer that, you have to know what your options are. For example, does your contract allow early opt-out if the vendor has financial difficulty?

There’s no way to guarantee that you won’t end up struggling with a vendor in severe financial distress. However, by creating and following a vendor viability plan, you may find out about a vendor’s financial trouble before it can affect your business.

When your vendor heads South

What preemptive measures do you take to see if your business partners are financially viable? Post a comment below, or drop us an e-mail.