Managing Reputational Risk in Procurement
The term reputational risk is broad: it includes any 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.
Any event or factor with the potential to cause an existing or potential customer to see your brand or company in a negative light is considered a reputational risk. When you consider procurement and your supply chain, the potential for reputational risk is astronomical. A supplier may use corrupt business tactics, or a factory could have bad labor conditions.
Managing reputational risk in procurement, therefore, is not just a good idea but a business mandate. Here’s how to understand the different layers of reputational risk and mitigate these risks in procurement.
Understanding reputational risk
There are three types of reputational risk for which companies must be prepared:
- Direct - a risk that results from the action of the company
- Indirect - a risk that results from the actions of the company’s employees
- Tangential - a risk that results from the actions of a partner or supplier
The procurement function carries both indirect and tangential risk. These classifications, while helpful, don’t capture the wide scope of risk that procurement actually brings to the table.
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 They can include incidents that harm the company directly, like the public failure of an outdated product that singles out the organization’s leaders as being behind the times, or a mistake by a supplier that delays a critical product launch, causing embarrassment in the press and resentment among customers.
Reputational risk is so prevalent in procurement because of the sheer number of third-party partners that procurement teams need to vet and manage. Even at a mid-sized organization, taking the time to properly investigate every supplier becomes impossible. And, since procurement routinely prioritizes savings above all else, few teams are able to dedicate the resources to thoroughly investigate every element of the supply chain.
Benefits of managing reputational risk
Managing reputational risk in procurement isn’t just about avoiding disaster. By taking proactive steps to mitigate risk, procurement teams can actually benefit from better supplier relationships, save money, and gain deeper customer insights.
Managing reputational risk in procurement requires a shift in priorities. Once leadership recognizes that some of the indirect and tangential risks inherent in the procurement function are more costly than performing deep due diligence, procurement’s role will shift. Procurement teams gain new license to 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 a scandal could cause.
Deeper vetting results in not only less risk, but also better relationships. Procurement risk management requires building strong supplier-buyer relationships that are mutually beneficial. It can cause you to simplify your supply chain to those partners who are most trustworthy. With fewer relationships to manage, procurement will be able to work more efficiently and find ways to optimize spend.
And, finally, taking a proactive approach to mitigating risk requires interacting with customers. Simply by preemptively polling customers and asking for feedback, you may acquire some new insights about your company. For example, if customers perceive your products as “cheap,” this information can play a factor in how you steer your procurement processes to counteract that impression and acquire better-sourced materials.
5 Steps to Manage Reputational Risk
Reducing reputational risk in your supply chain starts by mapping the potential for risk-related incidents, and then improving your sourcing process to minimize those risks.
- Map and prioritize your risks
Start by auditing your supply chain to understand where third-party risk exists. Identify all of the potential risk scenarios and prioritize those which are most likely to unfold. Pay specific attention to those reputational risks, rather than geopolitical risk, natural disaster, or financial market risk — things over which you have minimal control.
- Evaluate your due diligence processes
Next, audit your vetting and due diligence procedures to see where there’s room for improvement. Many companies limit their due diligence to those activities mandated by law. See if there is room to include vetting for more specific, reputational risks — things like sustainability, fair labor practices, or contract violations that could cause you to experience delays in delivering your product to the customer. How do your vetting processes account for these types of risks?
- Put into place tracking and monitoring
“It’s one thing to include contractual clauses to avoid, like modern slavery risks, and quite another to verify that those standards are being applied. To do this, put in place compliance, tracking and monitoring processes that detail how business is actually being conducted,” wrote Export Development Canada.
Work closely with your suppliers to set forth key performance indicators as well as ways to verify and regularly measure these metrics.
- Find cost-savings elsewhere
If your leadership team is against dedicating more time and resources to due diligence, find ways to save elsewhere. Using a strategic sourcing platform like Fairmarkit can help procurement teams run a smooth, streamlined sourcing event with automation throughout. This gives procurement professionals more time to investigate potential partners, instead of routing paperwork and managing approvals.
- Be transparent
As you implement your new approach, be transparent with suppliers and customers about your goals. This is a good chance to collect feedback from customers in order to anticipate and course-correct any negative impressions they may have of your brand. Customers also are more likely to trust companies that give insight into their efforts to be good global citizens. The more you can show you’re putting effort into fair business practices, the more willing people will be of reputational risk in the future.
It may not be possible to eliminate all reputational risk. But, with these steps, your procurement team can improve its operations while doing its part to protect the brand (and the bottom line).
To learn more about other types of risk, check out our blog, The Source.