Jeff Judy

Jeff's Thoughts - July 27, 2016

What's in your Vendor Contracts?

A few years ago, I was working with an intellectual property law firm on a software project when an interesting story came up. As you would expect, these attorneys specialized in copyrights, trademarks, patents, in the ownership of creative content.

They had had a web site for some years and decided to change vendors, to move to a different web developer. And that's when they discovered that they did not own the content on their own web site! The content was, after all, a creation of the web developer, and their contract did not explicitly assign that material to the law firm.

It was an embarrassing story for an intellectual property firm to share, but a powerful lesson in the hidden business risks that may lurk in vendor contracts. And most of the institutions I work with have quite a few of these contracts.

After all, the biggest banks can afford to have their own staff dedicated to maintaining their web site. But most of the smaller- to medium-sized institutions farm that out. And that's just the tip of the iceberg.

What about financial statement spreading and other credit analysis tools? Small business credit scoring? Documentation? Portfolio risk assessment tools?

In the financial services industry, I often observe, we get paid to manage risk. Most of the time, that means credit risk. But prudent management of business risk, of non-credit threats to your business health, is just as important ... and is all too easily overlooked.

There are several important questions you need to be able to answer to manage the business risk associated with the use of vendors:

These are practical issues for any business that is highly reliant on vendors for key activities of doing business.

But in financial services, the stakes are higher. Industry regulators are starting to take an interest in the risk buried in these vendor relationships. And creative legal minds are always looking for leverage to serve their clients in a serious dispute with your institution.

If you are cruising along on the assumption that there's nothing in those vendor contracts that can hurt you, or if you are reassured by the fact that "there's never been a problem," you could be carrying business risks that will generate some ugly surprises down the road. It is time to review those contracts, and while you are at it, to consider tightening up your vendor management process.