The study was sponsored by Expense Management Solutions, Inc., a management consulting firm that is a leader and innovator in strategic sourcing and supplier relationship management strategies, and the Sourcing Interests Group, a professional organization representing sourcing and outsourcing professionals from the world’s leading corporations. This article will take a closer look at risk categories and obstacles to risk management, and it will conclude with some recommendations to help organizations improve their supplier risk management program.

Participants were then asked to distribute a total of 100 points across the risk categories, effectively weighting the categories to reflect their relative importance (Figure 2). The contrast between the responses to these two questions provided some valuable insights.

The financial strength and viability of the supplier is the top concern, both in terms of the number of survey participants that reported it as a factor used to measure supplier risk, and in the weight assigned to the category. This is not surprising given the volatility of the economy and credit markets. In addition, questions around financial viability are standard requirements in most RFPs and the due diligence processes required for contract approval.

Below the question of financial viability, however, it is apparent there is a contrast between the use of risk categories and their relative importance. For example, the next most prevalent category used to measure risk is "anticipated volume of spend," selected by 69 percent of survey respondents. Yet, in terms of relative importance, "the operational risk of the product or services" scored almost twice as high, indicating that although fewer companies use the category, those that do believe it to be a much more important measure of risk for their organizations. By category weight, "level of access to personally identifiable data" also ranks above "anticipated level of spend," though it was reported to be used as a measure of risk by only 51 percent of respondents versus 93 percent for "financial strength/viability of supplier" and 69 percent for "anticipated volume of spend."

Supplier Risk Management Challenges and Opportunities

As the service providers in a wide variety of industries have expanded their geographic presence and their service offerings, contracts for services from IT, HR, and finance to corporate real estate and facilities services, engineering and manufacturing, R & D, and more, have grown in size and scope, drastically increasing the value at risk and the complexity of the relationship.

In recent years, awareness has developed that relationship management, the management of strategic business relationships, is critical to achieving the anticipated value of contracts for outsourced services. Within the next couple of years, the most successful companies will develop internal centers of excellence around relationship management competencies and best practices.

A new generation of technology is providing companies with a platform to manage an entire portfolio of complex relationships on a global basis and in real time. As these extended enterprises take a comprehensive look at their relationships, the potential value at risk and the many factors that contribute to that risk are coming into clear focus. The current global recession and economic downturn provides a stark backdrop to a realization that was already well under development.

Expense Management Solutions’ position is that supplier risk management is critical to managing an extended enterprise, and 95 percent of the companies in the survey agree. So, if companies agree that measuring and managing supplier risk are critical activities, and know that they are not doing enough, what is keeping them from achieving their goals? The answer, illustrated by the chart in Figure 3, is found in the fundamental building blocks of people, process and technology. Companies don’t have the human resources, the skill sets or sufficient technology to meet their needs.

While many companies are assessing and managing risk in their most critical supplier relationships, there is a desire to do more. Where do you start? Returning to the supplier risk management model in Figure 4, note that risk management activities are fed by information gleaned from supplier risk assessment and supplier relationship management activities. Development of supplier risk assessments or profiles will help you to segment your suppliers, target specific areas of concern, and allocate resources to effectively manage risk in your supplier portfolio.

A risk assessment questionnaire (RAQ), should be developed that identifies and weighs the risks that are most relevant to your organization. Each company’s RAQ will be different, and although there may be different RAQ’s for different business units or functions within a company, they should be standardized within those segments to ensure a valid comparison.

Depending on the size of your company or the complexity of your extended enterprise, even this initial step can prove daunting. However, it is possible to overcome the obstacles of "lack of human resources" and "lack of skill sets" by implementing standardized processes and using new, affordable technology.

For example, Expense Management Solutions has used the Hiperos R.Portal™ platform, a software-as-a-service solution that does not require a costly software installation, to build and automate the distribution, collection and analysis of RAQs. Based on pre-determined rules, RAQ scores are used to segment the supplier portfolio and launch plans designed to mitigate risk in supplier relationships. This cost-effective approach is helping companies to quickly build and implement supplier risk management programs.

For clients that use the same Hiperos platform to manage their supplier relationships, data from performance scorecards feed into the established risk assessment matrices, adding another important dimension to ongoing risk analysis.

There are enormous opportunities for companies that are committed to incorporating supplier risk management into their extended enterprise. As the global economy emerges from its current downturn, those companies that configure their extended enterprise to effectively manage complex relationships and mitigate risk will be positioned to thrive.