5 benefits to managing reputational risk in procurement

February 26, 2020

A good reputation is one of those assets that can take decades to develop whether we’re speaking about an individual or an organization, yet it is something that can be shattered instantaneously if the wrong piece of information leaks out to the public. This can prove to be especially costly to companies, as the precise amount of revenue lost due to a compromised public opinion can be difficult to quantify, and some of the essential steps required to rehabilitate a company’s reputation can also come with a steep price tag attached to them.

Obviously, the preferred method of minimizing reputational risk is through preemptive measures. These procedures can take a variety of forms, but the overarching principle guiding their form and function should be to maintain the integrity of the company’s brand, and uphold the trust and goodwill that customers feel toward it. Also, not all of these methods are necessarily defensive, since trust-building practices can also benefit the business in ways that are not directly linked to managing public perception.

This brings us to procurement. With every partnership agreement negotiated by your procurement team, another company’s reputation and business practices are being affixed to those of your organization. Therefore, procurement should be especially diligent while performing its investigative activities prior to inking agreements, because each contract approved by procurement brings with it the potential for an outside vendor’s misdeeds to negatively influence the standing of your company.

With this in mind, here are five clear benefits to managing reputational risk in procurement.

1. It will change your perspective on procurement’s function.

It is unbelievably tempting to reduce the role of procurement down to the acquisition of products and services your company needs at the lowest possible price. After all, it drastically simplifies the process and aims the decision-making procedure straight toward numbers that are easy to digest, and likely to gain approval from the upper reaches of the company. And, if your performance is ever subjected to a review, you can easily defend your record by pointing out how you selected the least expensive option at every step of the way.

However, what happens to your decision-making mindset the instant upper management appoints you as a custodian of your organization’s public reputation, and you are charged with maintaining the value of your company’s brand so that it can continue to earn money well into the future? Chances are, you will evaluate each potential supplier more thoroughly, become far more cautious about signing contracts, and weigh the risks for recouping pennies from lower per-unit costs against the potential loss of hundreds of thousands (or even millions) of dollars that your organization might suffer if one of your suppliers is caught up in a scandal that drags your company down alongside it.

Frankly, this supplier-vetting strategy may be more challenging to explain to executives concerned with immediate costs, but adopting the role of brand protector will not only change the way you do business, it is likely to save your organization money in the long run.

2. It prevents disasters that are even more difficult to manage.

If you fall into the camp that views the consideration of factors other than price as an intrusion on the true purpose of procurement, it would be difficult to fault you. After all, cost-based selection measures are easy to understand, and opting for the lowest price permits you to point to the identifiable savings you’ve secured for your employer.

The flipside to this, of course, is the process of attempting to manage a catastrophe linked to a poorly-made vendor selection. Odds are, your company does not have an in-house catastrophic-communications team ready to roll in the event of an emergency, and these teams of specialists are very expensive.

Yet, this expense may be nothing compared to two other costs. The first cost is connected with rehabilitating a brand that has been figuratively dragged through the muck of a scandal resulting from dealings with a disreputable third party. The second has to do with the revenue lost from being perceived as a tainted company, and having former customers that now want nothing at all to do with you in the future. It is difficult to quantify precisely how much money has been lost due to a negative public perception, especially if you’re still providing a product or service superior to that of your customers.

The lesson to be learned is that it is far easier to expend a little more time and money on the front end to investigate suppliers, or to purchase a slightly more expensive product from a reputable supplier, instead of having to cope with the  back-end costs and uncertainties of dealing with a scandal-plagued supplier that offers a price that’s too good to be true.

3. It protects your brand from unnecessary attachments.

Is it better to do business with a single trusted supplier, or is it better to form partnerships with multiple suppliers if those additional suppliers offer a less expensive product? Well, that all depends on several factors, but if you usually do business with one supplier and you acquire a second supplier, your risk of exposure to a scandal perpetrated by a partner’s actions just increased by 100 percent. Scary to think about, isn’t it?

Obviously, this doesn’t mean that attachment is a bad thing. On the contrary, some business partnerships are absolutely critical for achieving success. Just remember, the more partnerships your organization forms through the acquisition of suppliers, the more relationships you’ll need to form, develop and manage. All prices aside, mitigating reputational risk is far simpler when you’re dealing with five suppliers instead of 50. In light of this, before you invite a new vendor to partner with you, make sure it’s an essential partnership, and make sure they have been properly vetted.

4. It teaches you to view suppliers through new lenses.

Speaking of properly vetting your suppliers, once you realize they hold your reputation in their hands, it will add a host of new criteria to the methods you use to evaluate them.

Once procurement assumes the role of guardian and performs an honest threat assessment of each new vendor, a variety of incidental criteria suddenly becomes important. How long has your potential new supplier been in business? Do they have any long-term clients who can vouch for the quality of their services? Has the owner of the company ever been featured in the press for any problems—business or personal—that might raise red flags about the caliber of the people steering your partner’s operations? Would any of the past activities of those people cause your customers or other allies to view your brand differently if they knew you were conducting business with them?

If any of these questions would be important for you to ask if you were discharging your duties as brand protector, then these questions should be important to ask right now, because the potential damage caused by not answering these questions honestly could be disastrous.

5. It helps you to regularly engage with your customers.

Many companies eschew public relations tasks and focus solely on product development as if it could somehow be responsibly performed without input from customers. Ultimately, people vote with their wallets, but there are various forms of polling that can be conducted in order to determine how they might choose to cast their monetary votes. Procurement can lead the charge in creating corporate habits tilted toward customer engagement by making reputation management a focal point. After all, reputations are based on the opinions of others, and no opinions of your organization affects your bottom line more than those of your customers.

Simply by preemptively polling customers and asking them, “What do you think of our company?” you may acquire some insights about your company that you never would have been privy to from inside of your company’s corporate bubble. If customers think your products are “cheap,” this information can play a factor in how you should steer your procurement processes to counteract that impression and acquire better sourced materials.

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