Third Party Woes: Critical Vendors Feel the Squeeze

Third party and vendor management has always been tricky, but today it is a whole new level of challenging. At RapidRatings, we have a front-row seat to this drama, thanks to our massive database of private companies. These include the critical vendors that the world’s largest enterprises and banks rely on.

At the root of the issue is higher costs. Higher costs are impacting everyone, but the smaller private companies forming your critical vendor base are taking the worst beating. Why? It’s a three-part issue:

1. Wage War

Increasing wages and contract worker costs are driving national inflation. Jobs across all industries have seen their paychecks skyrocket in the past two years, mostly thanks to post-pandemic workforce shifts.

This means high wage costs are a universal pain, but your smaller vendors feel it most. They have less wiggle room, fewer benefits to compete with, and smaller talent pools. Add in pricier contract workers (with net payment terms of 10 days, no less!), and many vendors find themselves unable to come up for air.

2. Payment Purgatory

In 2008, banks and financial institutions started asking their vendors to wait longer for payment. Fast forward to today, and those same institutions are extending terms again. As their costs rise, they are slowing payments to hoard cash.

These private vendors often wait six months before receiving payment for services rendered. This wrecks their cash conversion cycle (turning invoices into actual cash), straining their ability to keep their operations moving.

3. Loan Labyrinth

Private companies, faced with longer payment delays and pressure from high wages, are already strapped for cash. Now, many must secure much needed capital elsewhere.

This leads us to the final nail in the coffin: higher interest rates and stricter lending standards. The Fed is holding interest rates steady to continue to fight inflation. This raises the cost of capital for private vendors, putting more pressure on costs.

On top of that, stricter lending rules make it harder to secure new loans to keep up with higher costs.

These factors combined create lethal risk levels for private vendors.

RapidRatings' Data for the Computer Technology Sector Paints an Alarming Picture

Take a look at the Computer Technology sector, which represents many vendors for financial institutions:

  • Private companies in the Computer Technology sector have seen a decrease in financial stability. FHRs, which indicate short-term default risk, have remained stagnant with an average growth of 0.2% last year. However, Core Health Scores (CHSs), measuring medium-term operational efficiency, have dramatically fallen by 11.6%.
  • Private companies have experienced a significant 26.9% decrease in EBITDA in 2023. This is a clear indicator that their cash reserves and assets are dwindling under the pressure of higher costs.
  • In contrast, public companies in this sector have thrived. In 2023, public companies witnessed a 5.4% increase in FHRs and a 2.3% increase in CHSs.

The Bottom Line

  • Your critical private third parties face unprecedented challenges, driven by rising wages, delayed payments, and tightening credit conditions.
  • This is a ticking time bomb for your third party resilience.

At RapidRatings, we can help you avoid financial risks by showing you which of your critical vendors are strong and where risk lurks. This gives you time to proactively manage and mitigate third party risk.

RapidRatings' proprietary financial health data and insights help you:

  • Look into the financial health of your critical vendors.
  • Identify potential risks early on.
  • Develop mitigation strategies.
  • Strengthen your relationships with your vendors.

Work with RapidRatings today to navigate the challenges of modern third-party and vendor management. Learn more about our Vendor Risk Management Solution.

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