Evaluating the Financial State of Your Service Provider

A special outsourcing report in ComputerWorld includes an article on evaluating the financial status of your service provider, something we've brought up before in these entries. One technique for judging the solidity of your provider that we've advised is tuning into earnings reports, which are frequently available with a phone call.

But “Outsourcing's fiscal red flags” also offers this excellent advice: Get your CFO involved in evaluating the numbers, since you may not be conversant with the accounting-speak used. If you're dealing with a publicly-traded company, the numbers are easier to obtain. If it's a privately-held organization, then have your CFO talk with the SP's CFO to get at the metrics that can tell a reliable story.

The article offers four metrics provided by consulting firm RampRate to target in a financial evaluation:

  • Liquidity. How well can the provider meet its short-term obligations?
  • Capital structure and solvency, specifically debt to equity.
  • Statement of cash flows. Look beyond EBITDA.
  • Overall size and profitability, revenue and customers, as well as gross margin.

The story's worth reading because you'll get specific guidance for each area.