Study Finds Suppliers and Customers Disagree About Risk

Most companies have tightened up their internal due diligence procedures over the past few years, but many remain unclear about how to test and evaluate the due diligence of potential suppliers.

That's a big concern because, as research from the international legal practice Norton Rose Group shows, suppliers and their customers can often have very different perceptions of risk.

For example, the Norton Rose Group's new survey found that customers rate reputational damage as a primary risk, but suppliers rank it only a secondary risk. On the other hand, suppliers see service performance failure as a primary risk, while their customers view it as a secondary risk.

In addition, nearly half (49 percent) of the customers polled felt suppliers should manage political/jurisdiction risk. But, only 8 percent of suppliers consider it their responsibility.

This disconnect leaves customers exposed to risk. And yet, the majority (65 percent) of companies in the study admitted that they do not conduct detailed due diligence on the incoming key personnel provided by their supplier.

"As many organizations have found to their cost, there is no one-size-fits-all' solution for risk management and it should never be seen as a box-ticking exercise customers need to visit a potential supplier, test their technology and speak to other customers of that supplier," Mike Rebeiro, group head of technology and innovation at Norton Rose Group, explained. "The majority of customers assume that their suppliers will have done the necessary due diligence on their own staff and do not see the need to repeat the exercise. This is surprising given the impact a single rogue employee can have on the reputation of a business and all associated organizations, as underlined by the scope of the Bribery Act 2010."

The survey, which analyzed a wide range of current outsourcing practices and trends, also revealed that:

Most (58 percent) suppliers have no dedicated risk manager, and only 51 percent of suppliers keep a written risk record for projects.

65 percent of companies do not conduct detailed due diligence on the incoming key personnel provided by their supplier.

The vast majority (87 percent) of customers cited cost reduction as a motivating factor for outsourcing. The same percentage (86 percent) of suppliers cited cost reduction as a motivating factor for their customers' outsourcing.

62 percent of suppliers expressed a view that the global financial crisis had resulted in harder price negotiations.

The full report, titled Outsourcing in a Brave New World, is available here.

TAGS: Finance
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