Vendor Due Diligence

Hoteliers are responsible for making sure supplier service systems are Y2K compliant.

By Staff -- HOTELS Magazine, 3/1/1999

As the recipient of external services and systems such as telecommunications,

banking and foodservice supplies, hotels run the risk of service disruptions

if vendors are unable to deliver products and services as a result of

Y2K-related issues. To avoid this potential nightmare scenario, once

an inventory is complete, it is incumbent upon hoteliers to contact

each vendor in writing to investigate the status of their Y2K initiatives.

The Right Approach

"The problems we see are informal contact of vendors with no documentation

of the issues," says Jeff Randolph, senior manager, real estate

and hospitality consulting practice, KPMG, New York. "A lot of

hotel companies start by creating a very onerous letter

generated by the legal department. This approach ends up getting a limited

response."

The second and more useful approach is a general letter that doesn't

assign liability and simply addresses Y2K issues. This approach, says

Randolph, tends to produce much more information from ongoing suppliers

or equipment manufacturers who want to remain a vendor of choice.

For hotels that have completed a proper inventory of their equipment

and suppliers, Randolph recommends developing a coded system for tracking

vendor responses to your Y2K queries. Code options include: manufacturers

and suppliers who have given an adequate response stating no time or

date dependency and no Y2K issues; those who have responded by recommending

certain steps for fixing hardware or software; those who responded by

saying Y2K work is in progress; and those vendors who have given no

response at all.

Who's Responsible

So just who is responsible for repairing Y2K-related equipment and

services? For hoteliers who own their equipment, they are ultimately

responsible for making it Y2K compliant. This makes it even more critical

for hoteliers to followup initial query letters and document manufacturer

responses.

When it comes to services, it is more incumbent on the provider to

overcome Y2K issues. But hoteliers can stay ahead of the game by interviewing

suppliers to find out how they track inventory, schedule deliveries

and discover what degree of automation they have that might not be Y2K

compliant.

If equipment is leased, make sure you look at the cendor contract and

see if there is a general clause to see who guarantees operation of

equipment past Dec. 31, 1999. Then react accordingly.

Suppliers with Y2K-related issues tend to be those with automated systems,

especially those related to security, telecommunications and building

management, while suppliers such as those who deliver food tend to have

systems that are not date driven and pose less of a Y2K risk.

Liability Issues

Liability for incidents related to Y2K issues is always a concern.

Randolph cites two main objectives for hoteliers: resolve noncompliance

or provide a degree of protection against lawsuits by proving a good

faith effort to investigate the issues with suppliers.

Any effort made to protect yourself from liability is always contentious

because as suppliers of facilities, hoteliers can be found accountable

for the function of equipment such as elevators, fire alarms and booking

services. On the other hand, it can also be proved suppliers have a

legal duty to mitigate potential losses by taking reasonable steps to

prevent them.

Factors that determine if a supplier is liable may include:

• The existence of any agreement between the supplier

  and buyer limiting the scope of liability, for example

  the timeframe in which claims for defects may be

  made, or the range of defects covered.

• The need to demonstrate the supplier knowingly sold

  a defective product. It will probably not be sufficient

  to argue they ought to have been aware of the Y2K

  problem. More likely, it will have to be demonstrated the supplier

  actually knew there was a Y2K problem without disclosing it.

• If supplier liability can be demonstrated, they could (depending

  on the law of the country concerned) be under a legal obligation to

  repair or replace defective goods; accept a proportionate reduction

  of the purchase price; or pay direct or consequential damages.

This all leads back

to the idea if you don't have confidence in suppliers,

you have to make a greater effort into making sure they

are prepared. If not, be prepared to make your own contingency

plans.