Vendor Health Check : When Your IT Vendor Catches Financial Flu

The current economic climate means more insolvency and many IT vendors will

face financial difficulties. Even financially strong vendors may be looking to

rebalance their portfolios to cut less profitable product lines. Technology-rich

but cash-strapped smaller vendors will make prime acquisition targets. But what

happens to their customers? End user organizations need an early-warning system

for potential vendor failure, as well as a back-up plan, in case they lose

support.

Gartner has identified five steps that end-user organizations should take:

Step 1: Establish a Policy of Periodic Vendor Health Checks



Periodic financial and technical reviews should be an ongoing part of

relationship management with key vendors. It may be appropriate to have

protection clauses so that the prime vendor takes responsibility both for its

own components and original equipment manufacturer (OEM) technology.

After a vendor has acknowledged financial problems or is acquired, users

should expect periodic updates on financial progress and which personnel are

staying or going. For publicly traded companies, the balance sheet tells

investors how much money the company has, how much it owes, and what it has left

over for shareholders; the income statement is a record of the companys

profitability and the cash flow statement shows where the company is spending.

Step 2: Assess the Risk



End users should establish some criteria for assessing the criticality of

the vendor to the ongoing operation of their major systems and the daily

operation of their businesses such as the percentage of IT budget spent with a

particular vendor, how much revenue it helps generate and whether it is

customer-facing. Most of the cost of doing business with any vendor is paid

upfront in selection and implementation costs so if the vendor is still

servicing day-to-day needs, end users should wait for a month or two before

taking any action and use the interim to implement fall-back plans.

Step 3: Assess the Impact



Temporary insolvency is not necessarily the end, but end user organizations

need to assess four possible outcomes:

• The vendor is able to obtain refinancing or negotiate a loan to continue
  
  in business
• The vendor is acquired by a third party
• The company may be liquidated to pay-off its debts. This outcome does not
  
  necessarily mean the end of the technology because this may be one of the
  
  assets to be sold
• The company ceases to trade and any software that it has created is,
  
  thereafter, unsupported

Step 4: Assess the Skills Base



No matter whats the eventual outcome, there will be some disruption in the

short-term. User organizations should assess the ability and willingness of

internal IT to support the software and how quickly or easily it could move

support to another vendor. If they do not have the skills and rely on the vendor

or a third party, they should consider obtaining them through contract labor, if

available.

Step 5: Develop Mitigation

Strategies



With most technology, the costs to install, train, and maintain are more

significant than the acquisition costs. The closer to end-of-life, the more

feasible it is to keep the software going while it lives out its useful life. An

exit strategy should include legal and financial strategies for obtaining source

code and a plan and schedule for keeping the software running through an

interim. In addition, users should have a list of selection criteria for a

replacement vendor and understand the transition responsibilities. Users should

create a schedule of expectations for the vendors recovery that extends for the

next twelve months.

End user organizations have committed hundreds of thousands, even millions,

of dollars worth of their resources, along with critical business data to

software vendors. Given the economic climate, it is imperative that they assess

the financial health of the vendors in which they have invested the most and

whose software and services they count on to run their business.

Debra Logan



The author is VP and distinguished analyst, Gartner



maildqindia@cybermedia.co.in