How to protect your firm from suppliers going bust:
1. A proper parent guarantee - some parts of the supplier's group may be stronger than others so ensure that you have a financial and performance guarantee if necessary.
2. Identify the exact legal and financial status of the contracting entity. Does it have any assets?
3. Make sure you have triggers in the contract so you can take actions before it is too late - waiting for insolvency is way too late. So have rights to consider termination or to take actions based on credit rating, possibly profits of the company or various other factors.
4. Make sure you can have a direct relationship with key sub contractors so that problems with the head contractor do not necessarily mean that the overall service fails. So step in rights are needed and the ability to allow the sub contractor(s) to take over the head contract.
5. Always have a plan B. Can you take the service back in-house? Is there another supplier out there? Do you still have some retained knowledge? Are there staff who can be transferred back to you?
6. Once there are signs of any difficulties, start knowledge transfer and prepare to activate the contingency plans.
7. If you are convinced that the supplier is about to file for administration then consider delaying payments - there is no point in paying for a service that is about to stop.
Source: Morrison and Foerster
