Bankruptcy and Vendor Performance

Should you worry about your vendor's financial health? Of course...

What happens when a company starts to suffer performance problems because of their financial health?

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You've been monitoring your vendors performance; there are a number of outages and downtime is a constant nightmare. Your boss wants to understand what's going wrong. Your internal clients believe there's a magic IT wand that will make it all better. And to top it off the executive team is asking if they should consider forklifting an enterprise suite of products; spending millions of dollars and 18 to 24 months to convert to a new platform. Of course all eyes are now on you... There's an expectation that Vendor Management will have a solution.

Sound familiar?

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If you live the life as a Vendor Manager or Third Party Risk Manager then this scenario has played itself out a number of times. So what do you need to consider? If the events are truly driven because the vendor is suffering financially, there are a number of things you can expect. Some can even be managed to a very positive effect.

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First, you can expect the service to continue to deteriorate. It will only improve once on little thing happens... Bankruptcy! It is hard to believe, but service will immediately improve the day your vendor files Bankruptcy. Of course I mean Bankruptcy protection to reorganize. And for those thinking this... no, service is not improved because you can now hold the vendor hostage to a contract clause where Bankruptcy gives you termination rights (the Bankruptcy court will find a way to make certain that clause is unenforceable anyway). In fact, you as the vendor manager had nothing to do with the performance improvement. But Bankruptcy did make it all better... Why?

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The one thing that drives customer support and thereby extension positive performance; The Support Staff. Give that some thought. If staff are worried about things like, paying the rent, keeping food on the table for the little ones or even just making the next car payment, then they are not thinking about you as a customer. If you keep this in mind when you're dealing with your vendor; you may find creative ways to get the extra attention you need.

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We often forget about the human element when dealing with a poor performing vendor. We really want to just yell, holler and scream at someone. But as you are yelling... the person on the other side of that conversation is searching LinkedIn for a new job. The person receiving your rant is likely posting resumes and updating their professional network. They have dentist and doctor appointments, sick kids or relatives or just don't show up to the office randomly because they are out interviewing with a potential new employer. So your project with the vendor is behind, the root cause analysis you were looking for regarding last weeks outage is still being worked on and you have not progressed one bit in a positive direction. That's why Bankruptcy is the cure...well sort of...

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For anyone that's been through this process, they can tell you the day of or sometime the day before the company files bankruptcy, there's a great internal gathering. Everyone is told the news; and they may even be introduced to the new Operational Excellence team. But the one thing that rings true is this... The band-aid is ripped off. The financial suffering is recognized. Senior Management sings the praises of the staff and how bankruptcy has freed up essential cash so they can resolve the problems everyone has suffered. It's a big "cheerleading" day and a whole host of anxieties are quelled. To top it off, everyone is given assurances that they are necessary and needed. The results of this recognition of the elephant in the room... well it is your magic wand! Staff feel a release; and by and large most stop looking for that replacement job. They get back to work. Performance improves because people believe the boss and they are back to paying attention to clients...

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So what can you do between now and the bankruptcy?

Here are a few of my tips...

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First, I remind my internal clients a phrase attributed to President Lincoln, "You'll get more flies with a drop of honey than a gallon of vinegar!" Anyone with kids understands yelling just gets you so far and fails more times than not. If the performance issues have been on-going, you've likely exhausted the yelling at the vendor avenue anyway. You need a new tactic.

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Second, empathize with the person (not the vendor); but the human you are engaged with. They are likely under as much pressure as you to get things working... Maybe even more so, because you are not the only person or client yelling at them. And they are in fear of soon not having a job...

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Third... Is this an opportunity for you both? (Depending on your non-solicitation clause) You've been wanting to get an expert in-house on the product, is this the time to make a play for key staff? Might be a win-win for all three. You get an expert, the vendor reduces costly headcount and your new SME is now gainfully employed.

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Fourth... communicate the problems. Weekly meetings with a productive agenda. Keep in mind, this should be a working group. Engage the technology teams to find a creative solution. Get like minded individuals together. For instance, is the vendor having issues with operating in a virtual environment? Do you know someone that has successfully worked in that environment? Can you facilitate a call outside of the "regular" discussions. I've found that getting engineers in a room without senior management, leads to positive results; even if some secret sauce sharing needs to take place. You're looking for results, not IP protections...

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Fifth... Recognize that you may have to exit the relationship. By that, I mean the Executive Team wants to know what it will take to swap out the vendor. Sit down with your internal client and run short and long term scenarios designed to move you toward an exit strategy. Document the plan and have it in your back pocket; knowing it is your last resort.

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In summary, the financial stress on a vendor causes more damage up to and just before bankruptcy. Don't fear the bankruptcy; fear the Merger and Acquisition (I'll save that for another post). Communicate effectively. Remember, you are dealing with people; humans just like you that need to pay the rent and take care of family. Look for the opportunity to hire a subject matter expert. Engage the vendor outside of "management" to find creative solutions and even pull yourself out (remember your interaction even the observation can change the results, think Schrödinger's cat). And last, but always top of mind, make certain your internal client has a plan, even if you need to walk them through it..

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Good luck!