seven secrets for saving
on outside vendors

Cost-cutting is a painful reality during this downturn, but some businesses could be turning manageable pain into fatal trauma.

If you were falsely charged with a crime, you probably would not shop for a lawyer solely on cost. You would choose the lawyer who will keep you from going to jail! The same rule applies when buying other professional services. Sometimes hidden costs make the cheap option the most expensive.

Here are seven secrets where companies may at first believe they are saving money on outside vendors, but in the end may end up bleeding cash.

1. training
trained help delivers better results, free of legal liability

Choosing less experienced or poorly trained vendors – whether computer network, telephone system, advertising/marketing or other professional services – may prove costly at best and the end of your business at worst. Besides the cost in downtime or less than stellar results, you may be liable for errors that gain the attention of regulators, customers or employees. Vendors likely to meet your needs are those with long histories, industry-specific training, pertinent educational degrees and understanding of applicable regulatory compliance issues.

2. technology
inferior systems increase costs, risk competitive edge

Using out-of-date technology, proprietary systems or shunning new ways altogether will not only prove costly, but give your competitors a leg up. Technology is interwoven between companies these days. Most printers, publishers and other media, for example, can accept only certain digital files from software and systems uncommon at most businesses. They will charge extra to fix files or you will pay more to have jobs done over. Further, open source technologies may prove best when constructing Web sites, enabling substantially lower hosting and operational fees over time.

3. online security
data breaches harm reputations, bottom lines

The news is filled with companies deep in expensive litigation over their vendors’ breaches of confidentiality, failure to secure customer information and more. Ask your vendors for proof of state-of-the-art server protection and guards against such threats as footprinting, port scanning and security vulnerability. COCO+CO., for example, retained an outside auditor, SecurityMetrics^®, to conduct regular tests and ensure the company meets security requirements for Site Certification.

4. intellectual property
‘free’ web art costs small firm $46,816.00

Those “free” or low-cost photographs your assistant found on the Web could mean the shuttering of your business. Corbis, a company that owns rights to many photographs found on the Web and in advertising, recently won a $20 million judgment in federal court against companies that used its photography without paying proper copyright royalties. In another instance, Masterfile won $46,816.91 from a small Asian food dealer whose Web designer used eight photographs without permission. Even the once reputable low-cost stock photography firm, iStockPhoto, was found selling 25 unlicensed photographs to customers who are now facing copyright infringement claims. Although it sometimes seems to cost more, COCO+CO., for example, vigorously vets intellectual property dealers to protect client partners from infringement suits.

5. compliance
promotional raffle leads to jail time

How would you like to face jail time and fines for having a simple “free raffle” at your business? Even if you don’t take a dime, it can happen if you violate any of the myriad state and federal rules governing advertising of such promotions. Be sure your vendors are trained in laws governing consumer protection, customer information, opt-out lists, “Do Not Call” registry, fax laws and more.

6. employment law
‘independent contractors’ cost FedEx extra $27 million

If your vendor is not incorporated, you may be liable for all kinds of added costs from Workers’ Compensation insurance to overtime pay. FedEx agreed in December to pay $27 million, including $14.5 million to 203 drivers who were misclassified as independent contractors and $12.5 million in attorney’s fees. In Vizcaino v. Microsoft Corp., the software giant was found liable for FICA, FUTA, withholding taxes, 401(k) plan contributions and discount stock sales to “freelancers” later determined to be “employees” by the Internal Revenue Service. Many low-cost or “freelance” advertising and Web designers may be deemed employees if your business doesn’t meet any one of 20 tests used by the government. Whether employees or vendors, these people must be covered by proper Workers’ Compensation insurance. Under the law, no contract can relieve you of the liability you face if one of these people becomes injured while working on your time. COCO+CO., a Massachusetts corporation, provides full Workers’ Compensation insurance for all staff.

7. economic resiliency
will your vendor weather the storm?

During the height of the last recession a local business hired an “ad agency” that not only claimed experience in the business’ sector, but showed samples to prove it. After placing a deposit of thousands of dollars on the agency, calls to the firm went unanswered and then the telephone number was found disconnected. The agency could not weather the storm and closed its doors. A quick look at state records online would have shown this vendor had a propensity for closing when the going got tough and reopening under new names later. It also turns out that while the samples were real, they came from another advertising agency.
 
If you think you can’t be so easily fooled, consider AT&T and American Express. During the 1980s each received a call from someone (actually a college student in his dorm room) who claimed to have the other company as a customer and thought they might all do business together. When AT&T and American Express asked for meetings, the student “borrowed” vacant office space, filled it with rented furnishings and asked all of his relatives and friends to “staff” the office for a day. The two iconic American firms took the bait and turned over enormous sums of cash to the student behind the scheme.

True professionals bring experience and expertise to the problems they are expected to solve. The lowest cost solution may not be the best.

Submit your comments to creative@cocoboston.com.

more vendor secrets

Once you find the correct vendor, put time and effort into making the relationship work. You’ll receive the results you seek and possibly gain a new customer or two.

Vendors are:

Potential clients. The out-of-date practice of trying to intimidate vendors into reducing invoices under the “it’s business” mantra will be long remembered. Instead, treat vendors with dignity and respect and you may gain a new and lucrative customer.
“Influence” people. Show them you are serious and determined and they will put your name in front of others you might not normally reach.

Vendors are not :

Banks. Most don’t have huge reserves of cash and can’t finance your business. By the time you receive an invoice, the vendor has paid its employees and purchased supplies on your behalf.
Mind readers. Recognize your contribution to communications problems. Try to make a decision once and then announce it clearly. If you must change your mind, consider there may be cost increases if earlier work must be scrapped and replaced. In some organizations “information is power,” but withholding vital data from your vendors will just harm you.

If you can’t afford something at Wal-Mart, you don’t put it in your cart. Similarly, if you cannot afford a service, don’t ask for it. If it turns out you are temporarily short of cash, explain the situation honestly. Chances are the vendor has been in the same boat and will be understanding. Making phony excuses, sending unsigned checks or disputing bills will be seen for what they are and make you look foolish.

Remember, loyalty and trust are two-way streets.

Submit your comments to creative@cocoboston.com.