With a potential recession on the horizon, we know you want resources to help your business master the moment. We've put together our Agility & Excellence Resource Center to bring you strategies and solutions with a finger on the pulse of what's ahead.

In economically unstable moments, companies must be especially proactive in rethinking their vendor relationships. After all, the uncertainty of a downturn can have a significant impact on businesses, and building a solid and reliable vendor network can make all the difference in navigating the volatility with resilience. Evaluating your vendors' financial stability, risk management strategies and adaptability to changing market conditions can improve accountability and prevent costly mistakes that can measurably affect your bottom line.

In today's business landscape, vendors are no longer merely seen as a means to an end — contracts to secure cost efficiencies and supplies. They now play a much more significant role as partners in success, impacting a company's reputation, security and mission. With this in mind, organizations must also take the time to vet their vendors thoroughly and ensure they are still aligned with their values, goals and strategies.

Sizing Up Your Current Vendors? Do Your Homework

It might seem overwhelming and time-consuming to reassess your organization's current vendor relationships, but taking a calculated approach by evaluating crucial factors to ensure you receive optimal value for your investment is non-negotiable.

A strategic evaluation looks at factors ranging from a vendor's financial stability and track record to its compliance with regulations and industry standards. It is crucial to determine the vendor's ability to support your company's goals and objectives even during an economic downturn.

By carefully considering these fundamental factors, you can make informed decisions and mitigate potential risks, ultimately setting the stage for long-term success.

• Financial Stability and Creditworthiness: Are your current vendors financially stable and resilient enough to weather rougher economic patches? Assessing a vendor's financial health is crucial to ensure they can meet their obligations and deliver products or services as agreed when the economy lags. Start by reviewing their financial statements, credit ratings, revenue and profit history and other relevant financial information. Public records searches into any recent legal actions or filed liens can also provide helpful in forecasting a vendor’s potential reliability.
• Past Performance and Track Record: How have your vendors performed during past recessions and economic challenges? Are you confident they can adapt to changing market conditions and meet your evolving needs? Has the quality of services or materials you receive diminished in any way through shifts in the economy? Do they continue to comply with the terms and conditions of your agreements? Past performance is a valuable indicator of a vendor's ability to endure economic challenge. It would help if you inquired how your vendors navigated any challenges that arose during previous moments of economic difficulty. In addition, actively measuring and tracking your vendors’ and suppliers’ performance will help to detect any rising problems early.
• Contract Terms and Pricing Flexibility: Are your payment terms with vendors flexible enough to manage your cash flow during the recession? Cash flow management is critical during a recession, and companies must ensure their payment terms with vendors enable you to manage finances effectively. It's also essential to carefully review contract terms and pricing, including any penalties or termination clauses.
• Supply Chain Management: How well do your vendors manage their supply chains, and do they have contingency plans for potential disruptions? As the efficiency of a supply chain disruption can make or break success, you must comprehensively understand how your vendors ensure a consistent flow of goods and services, minimizing the impact of unexpected events and maintaining their competitive advantage.
• Compliance With Relevant Regulations and Industry Standards: Your vendors should comply with relevant regulations and industry standards, such as data privacy, labor law, and environmental regulations. This helps to ensure the vendor's practices are ethical and in line with the company's values and standards.

Reminder: Your Vendors' Reputations Affect Your Reputation

In today's interconnected world, an organization's reputation can be influenced by numerous factors, including its approach to cybersecurity and its commitment to environmental, social and governance (ESG) frameworks. A robust cybersecurity posture and a well-defined ESG strategy can enhance a company's reputation and foster trust with stakeholders, while a lack of focus in these areas can have the opposite effect.

However, when pursuing these goals, it is easy to overlook one crucial area that could severely impact them: your vendors. When vendors do not share the same cybersecurity goals and ESG values as your organization, it can lead to negative consequences that harm not only your company but also its reputation. Inadequate security measures and a disregard for ESG principles can put sensitive information and systems at risk, leading to data breaches and reputational damage.

Cybersecurity

Securing sensitive information and data is of utmost importance for organizations. One of the key ways to do so is by ensuring that their vendors have implemented appropriate cybersecurity measures. You can start by reviewing your vendor contracts thoroughly, including specific cybersecurity and data protection language. Your organization can also regularly assess vendor security practices, including on-site inspections.

Your organization may want to consider requiring vendors to undergo a SOC 2 compliance audit because it comprehensively evaluates the vendor's information security controls and practices. It also proves the vendor's commitment to information security and helps companies make informed decisions about their partners, reducing the risk of data breaches and reputational damage.

ESG

To maintain an organic approach to sustainability and meet continually evolving regulations, organizations must partner with vendors committed to aligning ESG initiatives. Doing so brings better products, services and production processes to the market and creates an environment of mutual respect and understanding between both parties.

To ensure this happens, third-party ESG risk assessments are becoming increasingly valuable. By using these external assessment tools, companies can be confident that their suppliers are held to the same standard for ESG issues as they hold themselves accountable. In addition to the satisfaction of having a supply chain suiting your values, there's also added security from potential reputation harm or operational disruption caused by any ESG-related issues in a supplier's practices — not to mention any regulatory penalties further down the line.

Next Steps

Do you need help designing a system of controls that can significantly improve your ability to manage and monitor your vendors effectively? At CBIZ, our team of experts analyzes for red flags and conflicts of interest. Customized data analytics and risk scoring methodology give our clients the insights to make supplier decisions that help protect against risks. For more information, contact us today.

Copyright © 2023, CBIZ, Inc. All rights reserved. Contents of this publication may not be reproduced without the express written consent of CBIZ. This publication is distributed with the understanding that CBIZ is not rendering legal, accounting or other professional advice. The reader is advised to contact a tax professional prior to taking any action based upon this information. CBIZ assumes no liability whatsoever in connection with the use of this information and assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect the information contained herein.

CBIZ MHM is the brand name for CBIZ MHM, LLC, a national professional services company providing tax, financial advisory and consulting services to individuals, tax-exempt organizations and a wide range of publicly-traded and privately-held companies. CBIZ MHM, LLC is a fully owned subsidiary of CBIZ, Inc. (NYSE: CBZ).