Unintended Consequences of Declining Vendor Financial Performance

Monitoring your vendor’s financial performance is more important than ever. Things like soaring inflation and banking failures are shining a spotlight on economic instability, which can impact your vendor’s financials and ultimately bring more risk to your organization. If you discover that your vendor’s financial health is declining, you may be facing some unintended consequences.  

What Can Happen When a Vendor Has Poor Financial Health?

A vendor’s financial documents should always be analyzed by a qualified subject matter expert (SME) who can identify any red flags or areas of concern. The SME may discover a gradual or sudden decline in a vendor’s financial performance, which can result in some potential outcomes:

• Decline in service levels – A vendor that is losing profits may decide to cut costs in their operations, perhaps by reducing spending on product development or sunsetting a legacy product. As a result, the vendor might struggle to meet its contractual service level agreements.
• Reputational damage – When your vendor’s service levels drop, your customers will take notice. Your customers won’t differentiate who’s responsible for your poor-quality products or services, and your reputation is ultimately put at risk for your vendor’s actions.
• Increased cyber risk – Poor financial health can mean that the vendor is unable to fully invest in a robust cybersecurity program. Maybe they can’t retain qualified cybersecurity professionals, or they choose to save on costs by using older software that’s particularly vulnerable to cyber threats.
• Inability to deliver products and services – In more extreme situations, a vendor that has poor financial health may be unable to sustain its operations and must eventually close its doors. This would force you to find an alternative vendor, bring the outsourced activity in-house, or even discontinue the activity altogether. 

4 Hidden Signs of Declining Vendor Financial Performance

Reviewing a vendor’s financial statements is an obvious way to identify its declining health. But there are a few other less-obvious signs that a vendor’s financial performance might be declining, such as:

1. Staff reductions. Mass layoffs are often a sign that a vendor is struggling financially. If you’ve noticed an increase in LinkedIn posts from former employees looking for work, this might be a sign that the vendor’s financial performance is declining. 
2. Slowed-down research and development. Perhaps your vendor has a long history of innovative research and development, with new products or updates regularly being released. However, you’ve noticed that this area of business has been slowing down in recent months. This may indicate that the vendor doesn’t have the funds to invest in this area.
3. Bad press and litigation. If your vendor is making headlines because of poor service, unhappy customers, or pending litigation, the root cause might be related to its financial health.
4. Merger & acquisition activities. Either of these activities may indicate that the vendor is going through financial difficulties. There should be adequate concern that the vendor or its parent company has enough money to sustain the current level of service. 

Protecting Your Organization with SLAs

A vendor’s financial health can be very complex so it’s important to enlist the knowledge of a SME who can take a holistic view of different data points. The key to managing a vendor with poor financial performance is a well-written service level agreement (SLA), though keep in mind that lack of financial performance is generally not a condition for termination of a contract. Declining financial performance can manifest itself in unexpected ways, so it’s important to stay aware of the signs and understand how your organization may be negatively impacted.