Another week, another series of earnings warnings from technology companies. It’s a depressing pattern. The uncertain economic fortunes of the technology sector have been unraveling for a couple of years now, so most of us have become inured to it. Besides, you have more important things to do with your time than to constantly eyeball stock prices.

There are a few companies, however, that deserve your scrutiny: your vendors. If one of your key vendors goes belly up, that could hurt your business. Therefore, IT managers need to monitor the business performance of major vendors to ensure that they will continue providing the goods and services that are required. In this column, we’re going to look at how to develop, what I call, a vendor viability plan, and the questions you should ask yourself.

Vendor viability: What it means, and how to track it
Finding out how a large technology company is doing isn’t difficult. Take IBM, for example. If you want to know how Big Blue is doing, you have lots of options. For openers, its stock price is widely available. Second, many research firms, such as Gartner and Meta, track IBM’s products and services. Third, the financial and mainstream press report IBM’s performance. Add all that up, and it’s not too hard to get a handle on how a big tech company like IBM is doing.

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

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

That’s just one of the obstacles you’ll need to overcome when you develop your organization’s vendor viability plan, a strategy that identifies which of your technology vendors is most at risk, and what to do about it.

Let’s face it. For most of us, vendor financial analysis takes place, if at all, when we make a purchase decision. If the expenditure is high enough, we might check out the vendor via Dun & Bradstreet. Once they get our business, however, most of us stop scrutinizing their financial performance.

At this point, you may be saying “But that’s not my job! Shouldn’t that be finance or accounting?” To which I’d reply: Is Accounting going to take over Exchange administration if your outsourcing firm goes into Chapter 7? It doesn’t matter nearly so much who does the vendor checking as it does that someone actually does the work.

Some questions to ask
To get you started on a vendor viability plan, here are some questions to ask:

  • Which vendors should you include? If your organization is fairly large, you probably do business with a number of technology vendors. It isn’t practical to apply the same level of oversight to each of them. So how do you identify the vendors you want to monitor? Do you rank vendors by how much you spend? One strategy would be to chart a mission-critical ranking of the vendor’s 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? As noted above, most organizations don’t do such checks, but 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 with the cost of not finding out about a problem until much too late.
  • Do you take advantage of free vendor information? Many Web sites provide financial information on vendors. Others provide useful business information: for example, writing about account wins and losses. Some of these sites provide a kind of electronic clipping service. In other words, put in the vendors’ names, and the Web site will e-mail you with 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 is pretty aggressive at reporting about local/regional businesses. Are you reading that paper 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? Is it reasonable to count on your account rep to be completely candid about such issues, when doing so could actually hurt the company’s survival plans?
  • Do you schedule regular meetings with your major vendors? Most of us meet with our vendors when they want a meeting—either to push a new product, or extend an existing contract. Schedule regular meetings with your largest vendors. This strategy 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 have to go out of business to cause you problems. What if they just decided to close their office in your city? As mentioned in the previous item, you can’t expect complete candor in such meetings, but you should be able to learn a lot nonetheless.
  • Do you perform “exit interviews” with departing vendor account reps? When one of your vendor’s account reps leaves, you usually don’t hear about it until you get the call for the “handoff lunch.” That is 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—what is the real reason you are 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 this information? This is the big question. Once you have uncovered some warning signs (heavy staff turnover, loss of a big client, delay of a version upgrade, etc.), what are you going to do? Before you can even answer that, you have to know what your options are. For example, do your contracts include provisions for early opt-out in the case of vendor financial difficulty?

Of course, there is 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 before a vendor’s financial woes affect your business.