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5 Vendor Exit Strategy Considerations

4 min read
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No one wants to go into any type of relationship already planning its potential end, but when it comes to business engagements, it’s simply a best practice. An exit strategy is your best insurance against any messy loose ends should you find you need to go separate ways within a business relationship. Yet, exit strategies often slip through the cracks, and without one in place, you risk putting your organization in an untenable position.

Think for a moment about these questions: What would happen if your vendor simply could not provide the service or the product to your organization? What would the impacts be? What would the impact to your organization’s customers be?

Here’s another important question to consider: When was the last time you looked at your business continuity management plan (BCMP)? Part of every BCMP is a business impact analysis (BIA). The BIA will breakdown every process in your organization and then sort them in the order they must be recovered after a disaster.

For every vendor that supports a process within your organization, there needs to be a dedicated team watching out for your organization’s interests. This is where a third-party risk management team comes into play. It’s their responsibility to make sure that every process deemed critical or high risk within the organization has more than one vendor that could foreseeably provide that product or service.

It’s also the third-party risk management team’s responsibility to ensure every critical or high-risk vendor is being monitored continuously to determine if and when the vendor may fail. Critical vendor failure is something you want to be able to predict at the earliest possible moment.

5 Considerations to Improve Your Vendor Exit Strategy

Should your vendor indeed fail, or if your third-party risk management team flags a vendor that needs replacement, you’ll want to already be ahead of the game. Here are a few exit strategy considerations you’ll want to always keep in mind:

1. Establish an exit strategy early.

Establish an exit strategy for critical and high-risk vendors during vendor selection… well in advance of any formal decision to move away from any critical or high-risk vendor. It’s important to understand what the next best alternate can provide your organization. And, the best time to vet any potential replacement is during the vendor selection process. The vendor that came is second place may be the best alternative down the road so keep their information on file. If your number two selection isn’t good enough, keep searching for a suitable vendor.

2. Use a champion vs. challenger strategy.

Make it clear to every critical and high-risk vendor that your organization uses a Champion vs. Challenger strategy. By this, I mean a mini vendor selection process every time the vendor’s contract is up for renewal. Besides being a sound business strategy, it puts the vendor on notice that performance is being evaluated.

3. Evaluate your continuing service requirements.

  • An exit strategy should specify your organization’s service requirements during the transitional end of a vendor relationship.
  • For example, some of these requirements may include:
  • The vendor’s obligation to continue providing specific levels of performance during the transition period. (Note: Transition SLAs can differ from your standard SLAs.)
  • Defined roles from your vendor during transition
  • Providing parallel services for a predefined period during changeover
  • Additional assurances surrounding the confidentiality, integrity and availability of your data during the transition to a new vendor

4. Review data security and privacy.

Maintaining data security and privacy is critical, even during the transition from one vendor to the next. Here are just a few data security and privacy precautions you’ll want to make sure are accounted for:

  • Secure transfer of all your organizational and customer data, as well as any other digital assets the vendor may have in their possession
  • A mutually acceptable method of data destruction
  • Assurance that the vendor has destroyed and/or removed all sensitive information from their systems and has not shared your organization’s sensitive information, either intentionally or unintentionally, with their third or fourth parties

5. Think about deconversion costs.

You’ll need to consider the financial impact of any vendor termination before you sign the contract. Any deconversion costs or conversion costs should be specified in the contract upfront! Consider the following:

  • Are there going to be any fees for early termination of the contract?
  • Is the termination “for cause”?
  • What are the specific costs of the deconversion from your current vendor?
  • What will the new vendor charge for the conversion?
  • Are there any additional fees, transition costs or continuing base service fees?
  • Can you expect the return of any pre-paid fees for services not delivered?

The truth is all things come to an end. Terminating a vendor relationship isn’t always logical or congenial. Sometimes, it gets messy. Sometimes, it’s important to make a change in your vendor line-up even if things are going well with a particular vendor. You just don’t want to leave anything up to chance… hope isn’t a plan! Planning for failure seems ridiculous until you find you actually need the plan. Put in the work upfront and you’ll undoubtedly thank yourself later.

Prevent issues with your vendors by ensuring that they are complying with standards set in your contracts. Download the infographic to help.

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