Why managing reputational risk is a procurement challenge

February 19, 2020

It is frequently said of reputations that everyone has one, but that none of us truly has possession of our own reputation. This is because a reputation is an aggregate of the thoughts other people have about us, along with the opinions that other people have toward us. Therefore, while we can take steps to manage our reputations and the reputations of the companies we work for, we have to remember that improving reputations means taking steps to maintain the pleasant thoughts others have towards us and changing the minds of those who hold negative opinions of us.

A reputation—as a concept—is further complicated by its transferability. Frequently, entire organizations are both positively or negatively influenced by the actions and reputations of the individuals who lead them and work for them, or by the perceived reputations of the companies they choose to partner with. All of this works collectively to make a company’s reputation a very difficult commodity to manage, and a very delicate asset to protect.

Although “reputational risk” lacks a single accepted definition, elements of it that seem to be universally acknowledged include the potential for a direct or indirect threat to an organization’s reputation to have an eventual negative influence on that company’s financial bottom line. In other words, any event or factor with the potential to cause an existing or potential customer to worsen their opinion of your company’s products or brands could be classified as a reputational risk.  

Another point about classification: The capacity for a procurement team to damage its company’s reputation is considered to be both indirect and tangential. This is owed to the fact that damaging actions of in-house procurement teams are considered to be “indirect,” and the misdeeds of outside suppliers are considered to be “tangential.” Semantics aside, the potential for a procurement team to devastate its company’s reputation is staggering, because being viewed as an ally of a company in the midst of a scandal, or of an organization dealing with its own reputational issues, can be seen as wrapping your company in all of the negativity attached to the outside entity.

If you work for a public company, managing reputational risk is essential. Reputation Institute released information suggesting that intangible factors account for 81 percent of a public company’s market value, and the public perception of a company’s reputation is a major factor in that market-value equation. While Reputation Institute primarily monitors the reputations of large organizations, you should never believe that it isn’t essential for small-to-medium-sized businesses to engage in preemptive reputation management practices as well, because the damaged reputation of your small business can suppress your best negotiation efforts with the allies you are angling to acquire.

Reputationally damaging events take many forms. They can include incidents that harm the company directly, like the public failure of an outdated product that singles out the organization’s leaders as being behind the times, or a personal scandal at the executive level that paints the C-suite in a villainous light and brands the company as “evil” in the eyes of its customers. No matter what the source of customer resentment might be, the end result is never good for the disgraced company, and the fallout can sometimes be financially ruinous.

A procurement team may not be preoccupied with potential predicaments like these, but there are situations they should be mindful of. If the procurement team hammers out a contract with a supplier that turns out to be producing its products through the use of corrupt tactics—like illegal child labor conducted in inhumane conditions—a portion of the ownership for that scandal is likely to fall into the lap of the procurement teams. Whether it is fair or not, the public may assume your organization knew about the problematic working conditions of the supplier you opted to purchase products from, and that you approved of those conditions through your decision to partner with them. Therefore, the procurement team risks much by failing to properly research every element of a potential supplier’s business processes before deciding to partner with them.

Even if your suppliers aren’t engaged in anything as shameful as child labor practices, they can still tarnish your company simply by failing to deliver shipments at their contractually appointed times. Certainly, your organization will suffer from some lost revenues and potential financial penalties as a result of missing targets and losing out on sales opportunities, but that damage might be nothing compared with the long-term fallout and reputational damage caused by such calamities. Moreover, while some level of financial loss may be recoverable thanks to the clauses that are commonly included in vendor agreements, attempting to rehabilitate a spoiled reputation is a far more complicated matter.

One of the reasons it can be so simple for procurement teams to stumble over these issues is the fact that procurement routinely prioritizes savings above all else. Honestly, who wants to argue the counterpoint as to why an organization shouldn’t partner with a supplier that prices its products far less expensively than the next best option? Furthermore, procurement teams are often overworked, and thoroughly investigating every element of a supplier’s business practices takes tremendous time and effort.

Ultimately, cost-savings can not always be the priority for procurement if reputational risks are going to be minimized and avoided. This sort of all-encompassing attitude stems from having a company-wide alignment on long-term goals that upholds the long-term protection of the brand as a top priority, and then requiring that this mindset is present in all of the procurement team’s dealings. One way or another, procurement leaders need to make sure nothing is taken for granted when evaluating vendors because the health of their companies and the livelihoods of their coworkers are being wagered with every contract signed.

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