The risk of service suppliers

Roger OakdenGlobal Logistics

Services are growing.

A recent news article concerned a real estate agency supplying services to a telecommunications company. The work was to represent the telecom company in selling surplus property.

Nothing surprising about the arrangement, except that the head of property investment at the telecom is involved in a business venture with the head of the real estate firm. So, a potential conflict of interest situation has become bad headlines for the large telecom, but is unlikely to affect the small supplier.

Suppliers that provide outsourced and contracted out services become representatives of the principal company, therefore business is becoming more aware that outsourcing an activity does not mean outsourcing responsibility. Importantly, this fact is influencing governments in writing laws and regulations, especially where third party activities impact consumers.

Your business may have well established procedures for analysing potential risks associated with suppliers of goods (and hopefully their sub-contractors). But is there a similar approach for joint ventures, logistics service providers, suppliers of other services (such as labour hire), sponsorship of charities and NGOs, agents, consultants and contracted specialist staff?

Risk approach to services

How many service contracts do you have? You are likely to find that services can be as open to ‘maverick’ buying by divisions and departments as are materials and components  purchases. Therefore the extent of contracts, agreements and handshakes and how the relationships are managed is often not clear.

To improve the situation requires a four step approach. First, identify service suppliers by ‘category of spend’, which are structured to suit your business; examples can be: IT and telecoms; logistics services; marketing services; travel and entertainment and facilities.

Second, identify the potential risks within each category and weight the risks based on their possible financial and reputation impact on your business. Identify by high, medium and low impact. This enables a comprehensive catalogue of risks to be structured.  Third, assign these risks  to sub-categories based on a set of criteria; for example in the marketing services category, high impact will likely be product advertising services, medium impact is market research services and low impact could be promotional ‘giveaways’.

Finally, plan the business relationships. Only the sub-categories with a high impact are considered for a complete sourcing plan covering, say, the next three years. This includes assigning the level of responsibility and escalation authority, together with the due-diligence process to address the potential risks. Medium impact sub-categories will have an abridged sourcing plan for up to 18 months and low impact sub-categories will have a tactical plan for the next 12 months.

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About the Author

Roger Oakden

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With my background as a practitioner, consultant and educator, I am uniquely qualified to provide practical learning in supply chains and logistics. I have co-authored a book on these subjects, published by McGraw-Hill. As the program Manager at RMIT University in Melbourne, Australia, I developed and presented the largest supply chain post-graduate program in the Asia Pacific region, with centres in Melbourne, Singapore and Hong Kong. Read More...