How to survive when your suppliers go bust

With the recession continuing to decrease the stability of outsourcing firms and other suppliers, enterprises should make sure they are prepared for any risks resulting from a collapse.

The neglect by CFOs towards the managing of contracts is all the more alarming considering this year's demise of Indian outsourcer Satyam and the panic caused amongst its top global clients as a result.

The $1 billion accounting fraud exposed at Satyam led to the likes of Coca-Cola, insurance firm State Farm and National Australia Bank taking their IT projects away from the outsourcer, presumably through well planned contingency plans.

The fact that the majority of Satyam customers stuck with the firm may well have been down to the swift way the Indian government dealt with the problem by replacing the board and helping it find a new owner.

But sceptics may be excused for thinking that many may have found it too complicated to jump ship in the first instance because they never had a proper plan B.

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David Skinner, a partner at legal firm Morrison and Foerster, and a specialist in technology contracts, confirmed there was neglect when it came to allocating resources to contract management.

"There is short termism among financial directors," Skinner said. "They are the first to demand cost-cutting and contract renegotiations, but often don't see that outsourcing and other contracts need long-term investment on the client side."

"You often have junior people on the client side working with B and C level people on the supplier side," he added. "If you have 30,000 a year people trying to manage 80,000 a year people there is going to be an inbalance. More senior people are required to manage strategic contracts."

Picking a fight

Skinner said there had been a recent increase in clients "picking a fight" with their suppliers over existing contracts with the aim of reducing their costs, with clients often citing previously highlighted problems.

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