Vendor Credentials- High or Low Risk?

The following is an article reprinted with permission from the upcoming Summer 2008 edition of The WWR Letter: 

Vendor Credentials- High or Low Risk?

By: Sara Donnersbach, Esquire

Verifying a vendor’s credentials, as well as those of its principals, is essential before providing an outsider access to business assets, facilities and workforce. In today’s business environment, failing to screen and monitor a vendor can result in huge consequences. When choosing a vendor, look for the vendor that can not only solve today’s problem, but one that won’t increase or create problems by being a high risk vendor. Choose a vendor that will still be around next year.

Before hiring a company to provide goods and services, verify the prospective vendor’s performance, criminal record and financial standing. Failing to do so, and failing to monitor these things at future intervals, can result in fraud, unsatisfactory work and lost time and money.

When considering long-term needs, look at the stability of the vendor. For example, if the vendor company is a one-man-shop, there is essentially no stability. When considering team-based vendors, be mindful of their financial stability. Many service companies have cash-flow issues that can impact their customers. Ask prospective vendors for proof of their financial stability.

Another aspect of stability is turnover rate. On any given project, the vendor team members should rarely change. Re-teaming or starting with a new resource costs time and money, so turnover is extremely important. When reviewing prospective vendors and monitoring present vendors, ask for updated references and ask questions about turnover.

A final aspect of long-term stability is abandoned projects. Ask the prospective vendor about any projects that have ended badly or that were abandoned. Some will be forthcoming with information; however if told it has not happened, do some research when calling references.

Key things to check for, from business vendors and their principals:

• Businesses: corporate status, financial and credit information, bankruptcy history and judgment record, insurance certificates, W9 tax documentation, licensing, government watch lists and conflicts of interest.

• Principals:  Social Security number and identification verification, background check, credit history, professional licensing, government watch lists and conflicts of interest.

There are specific, measurable benefits to screening a prospective vendor and monitoring present vendors. Doing so provides more control and accountability. Vendors are encouraged to abide by set work and ethical standards. The review process provides the truth about a vendor’s and potential business partner’s capabilities, financial health and reputation. While there is an administrative cost, this process, too, can be outsourced. 

Sara M. Donnersbach is a Partner in the Specialty Collections department of the Cleveland office. She oversees the Governmental Collections Practice Group, the Healthcare Practice Group and the Utility Service and Damage Claims Practice Group. She can be reached at (216) 685-1039 or sdonnersbach@weltman.com.

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One thought on “Vendor Credentials- High or Low Risk?

  1. I agree wholeheartedly with the notion that “verifying a vendor’s credentials, as well
    as those of its principals, is essential before
    providing an outsider access to business assets,
    facilities and workforce”.

    Credit unions have a fiduciary responsibility to
    their shareholder’s to ensure that any third
    party vendor providing services to them or their
    member’s be of the highest quality, stable and
    financially solvent.

    Having worked with a number of credit unions who
    have dropped their guard in this manner, the
    repercussions are many: lawsuits, decrease in
    new member sign ups and financial challenges that
    strain or reduce net income and dividends.

    No where is this issue of due diligence more
    prevalent than in the auto industry.

    One credit union in the music industry is still
    smarting from an auto dealership vendor who not
    only cost them much in lost revenue by switching
    their members to alternative financing (a big no-
    no) but by putting members in more car than they
    could afford, left the credit union with score of
    repossessed vehicles needing to be remarketed at
    severe value losses.

    And the red ink will probably continue to run
    into the hundreds of thousands through the end of
    2008.

    Had the credit union officials who approved this
    vendor been thorough in their investigation of
    the vendor, likely that vendor would not have
    affected the credit union so extensively.

    So, as a vendor that services the credit union
    community, it is important that we provide full
    disclosure of our credentials at the time of
    soliciting a credit union’s business. Whether
    the officials directly ask for it or not.

    Protecting the membership and financial health of the credit union by requiring full credentials is
    not only prudent, legally savvy but also good
    business sense.

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