Looking at Risk in a New Light: What to Do About Tariffs

Author(s): Frank Sewell

Introduction

Risks from vendors come from many different categories. In the article Looking at Risk in a New Light: The 6 Pillars of Vendor Risk Management, I cover the six different categories of vendor risk: financial, strategic, reputational, operational, security, and regulatory. Each category discussion focuses on potential risks within its realm, but there are many that traverse categories that we can cover separately. In this article we will discuss the risk of tariffs and some preparations your organization can undertake.

Organizations should pay attention to the forces that vendors are subject to (tariffs, demand, supply chain disruptions, etc.). In today’s world, those factors put pressure on existing relationships and renewals that need addressing as early as possible in the vendor lifecycle.

Info-Tech Insight
Though tariffs are primarily imposed on goods, not services, everyone buys stuff, so they tend to affect everyone.

In general tariffs, and the potential for them, raise costs throughout organizations. Everyone buys food, coffee, and equipment. This raises overall budget concerns even if individual services may not be directly affected. Vendors, just like everyone else, are having to adjust their budget expectations to accommodate the potential increases, and you are their potential revenue stream. As a consequence, they will need to readjust their projected revenue from each “customer” (e.g. you) in order to keep their profit margins and operational budgets stable.

Don’t wait until a surprising uplift hits you at renewal.

Adapting to change

An old Sicilian proverb says, “things change.” Is your organization flexible enough to adapt to changing risks in the market? With the constant information feeds on potential tariffs, world disasters, and conflicts affecting the markets today, vendors are changing their strategies as well. Starting the conversation early on the market changes gets you to the table faster.

When COVID hit, I knew the market had changed. Within days I started conversations with my critical vendors to explain our new position and limitations. Getting to them before others did opened beneficial conversations, both between me and the vendors and internally among the vendor organizations, to establish new baseline expectations of their potential revenue with my organization. Because I got there first, I got the earliest and most beneficial deals.

Tariffs, or more precisely the potential impacts of tariffs, are somewhat different, but the advice is the same. Get there early. Until the markets decide the effects, the impacts are speculative at best. As an example, start negotiations there. Consider flexible options such as one-year flat renewals, but with the option to renegotiate after for multi-year discounts once the market picture becomes more stable. During COVID, I coined the phrase “playing COVID Monopoly” as a means of illuminating to the vendors that nothing was off the table, and we were going to get creative.

Be prepared for aggressive negotiation tactics using the aforementioned as justifications for price hikes. Know what is actually happening in the markets and how vendors are being affected. I once had a sales rep try to explain to me during COVID that the project managers’ costs rose by 30% due to the chip shortage. When I asked him how many chips each PM needed to function, he backed off that worrisome explanation. When you enter into the discussion, have some items prepared to counter foolish arguments.

Be prepared

Review the agreements of your critical vendors to ensure that you have adequate protections in place (price caps, transition services, etc.).
Have a plan to negotiate with the vendor before they bring you to the table and try to overwhelm you.
Understand your environment and focus on opportunities to consolidate, replace or reduce vendors.
Learn what is happening in the vendor space. Are they being regulated? Is an investment firm positioned to take them over? Do they manufacture items that rely on tariffed goods?
Understand where you are in the vendor’s lifecycle and how to use your relationship with them to maximize gains and prevent issues.
Recognize your levers of influence in the negotiations: What do you bring to the table, what are the consequences (if any) of interactions, and what does the vendor need from you?

Knowing all your options will open levers for you to negotiate with so that you can proceed in an informed and confident manner.

Summation

The environment today is one rife with uncertainty and a certain amount of trepidation. Working to clear up ambiguities about your position with vendors will enhance your outcomes for negotiations. Getting in front of the issue and laying out a plan of action to weather the uncertainty until a more stable picture emerges will give your organization the confidence to work with your vendors on solutions that all organizations (including the vendors’) are facing today. It is almost always better to be proactive than reactive in negotiations, so put together a plan and start having conversations today.

I highly recommend starting a conversation with Info-Tech on how best to plan around the coming challenges. Our contract review and price benchmarking services can identify protection gaps in your renewals and offer ways to maximize the value of your contracts, and our vendor management specialists can help you formulate the best practices on managing the vendor lifecycle.

References

The Assignment Clause: Why It Matters | Info-Tech Research Group

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