The old maxim, “What you don’t know can hurt you,” is certainly true in just about any setting – perhaps no more so than for companies that must rely upon other businesses for goods (ranging from raw materials to finished products) or services. That’s a scary prospect, given that all companies rely on the goods or services provided by at least one vendor – generally many more. Truth is that while you need your suppliers, each vendor relationship brings with it real risks – many that are hidden unless you take the time to know who you’re doing business with.

So, what are some of the key hidden vendor risks any business should be aware of?

• Fraud
• Financial Distress
• Regulatory or Legal Issues
• Business Disruption
• Public Perception

Fraud

This sits atop the list because it is a planned act or scheme on the part of the vendor and can be hard to guard against unless a company proactively defends itself against such bad behavior. Whether it’s demanding payment in advance and then not delivering the goods or the service promised, intentionally using substandard materials or making false claims or representations about a products, a vendor can expose an unsuspecting business to all sorts of risk spanning the gamut, from financial peril and damage to reputation among their customers to liability claims, civil and possible criminal litigation, regulatory actions, and more.

Financial Distress

Financial issues are a part of business and can disrupt any company’s ability to properly function or execute to plan. Whether anticipated (e.g. cyclical slowdown) or caught completely off guard (e.g. unanticipated lawsuit or natural disaster), financial distress and resulting cash flow issues can effect even the most well-intentioned company when it comes to meeting schedules and delivering quality products or services as contracted. Unfortunately, the financial distress experienced by the vendor now becomes a major risk for the company reliant on the timely delivery of those goods or services to meet the demands of their own customers.

Regulatory or Legal Issues

Be it an honestly run company or a business that plays hard and fast with the rules, running afoul of regulators or being dragged into contentious legal matters can be time consuming, extremely expensive and almost always impacts the entities ability to maintain operational efficiency. The risk to a company relying on a vendor in the midst of such issues can range from negligible to substantial, especially if they are unaware of their supplier’s problems and don’t know they need to mitigate their risk by seeking out alternative providers.

Business Disruption

Even the most well-oiled machine will experience wear and tear, and the eventual need for some sort of overhaul. In business this can come about from the loss of an important customer, the departure of key personnel, the installation of new management and a different philosophy, business climate changes, etc. Whatever the circumstance, change often brings about new challenges and overall business disruptions. Such disruption can blindside a company counting on their supplier or service provider to deliver as expected and on schedule.

Public Perception

In the age of social media, news, rumors, innuendo and just about anything else can quickly shift public perception about a company. So too can what a company is saying (or not saying) about itself or the speed with which it responds to news or public outcries. Even the frequency of tweets or Facebook posts can send a message, whether the company recognizes it or not.  Without doubt, public perception and sentiment can have a huge impact on the operations of a company. Seemingly removed, the fickle, often-shifting public perception regarding a vendor can represent a major form of hidden risk for a business reliant on that supplier.

Mitigating Vendor Risk

Fact is that companies small and large face the issue of vendor risk every day. There’s no way to completely alleviate such risks, but taking the time to better know who you’re doing business with will go a long ways toward alleviating their potential harm to your company. From a practical standpoint, a supplier providing a small amount of goods or services represents less risk and less need for worry or action, while major vendors you rely upon can represent considerable peril. Bottom line, it make good sense to have a comprehensive vendor investigation conducted on any company that can substantially harm your business knowingly or unwittingly.