Assessing your company’s vendors: A list of risk factors

Many companies these days are relying on vendors to perform various services that they used to perform themselves in the past. When the company relies on vendors, they must engage in risk management . The first step of this risk management is a vendor risk assessment for each potential vendor. When performing risk management, there are a number of facets to consider.
The first area to consider is organizational risk. This is an assessment of the employees within the vendor’s company. A good sign of a healthy company is a content, stable workforce. When you judge the vendor, what do you see? Do the people seem to be staying with the company, or is there a lot of turnover among both the senior level people and the general population of workers? Are people being laid off? Are employees resigning voluntarily? Look at the highest levels. Are the president, chairman, and CEO all within the same family or even the same person? How many of the board members are from outside the company? Do other higher-level staff members have multiple roles as other employees leave? Probably the biggest organizational red flag of all is if the senior executives are selling their stock.
The next area to measure is the financial area. How much financial risk does the vendor present? In this area, it is important to look for patterns rather than just one or two risk factors. How much cash does the vendor have in the bank? What is their credit rating? Can they obtain financing or to negotiate a loan in order to build the business? Worst of all, have they ever declared bankruptcy? Take a look at their return on equity, return on investment, and return on assets.
Third is the support risk. As discussed earlier, layoffs of employees that perform the tasks for which you hired the vendor indicate increased risk that needs to be addressed by your company. Does this lead to a reduction in the level of service that you have become accustomed to and expect to receive for your money? Are well-trained workers being replaced by new workers who lack the level and skill and support? Are other fellow-customers dropping your vendor? What do they know that you don’t? Is their product quality }falling|dropping}, are there shortages of spares, and a lower level of support for their products?
Another important risk to evaluate is the vendor’s strategy risk. An assessment of strategy risk studies the vendor at its upper levels. Have they made changes to the highest level set of directives that define the vendor’s overall mission? Sudden changes to the directives can indicate unseen changes to alignment or a decrease in the depth of the vendor’s vision. Watch out for sudden changes in the vendor’s sales and marketing approach. Is the vendor making smaller deals? Are you looking at their vertical strategy or industry focus? Do these still meet your needs?
Measuring the risk associated with your vendors is not an easy task, but the health of your company depends on the health of theirs.

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