Indemnification: Are You—And Your Clients—Really Protected?
If you've done business with many large corporations, chances are you've been asked to sign an indemnification agreement. A fairly standard best practice at Fortune 1000 companies, indemnification agreements are typically used by end-buyers to ensure the distributor is taking financial responsibility in the event there is a product safety incident.
While the concept behind indemnification agreements is understandable, they fail to address one crucial question: How do indemnification agreements protect the end-buyer's brand?
Clearly, I'm not an attorney and my comments are not to be misconstrued as legal advice. With this in mind, however, my experience with indemnification agreements is that they do absolutely nothing to protect brand value. Why? Because even with these documents in place, headlines about a "Big Corporation Having Product Recall" can flood the media, and stories that provide all the juicy details of the risk being presented by the product live on the Internet forever.
Take State Farm, for example. The company's brand was dealt a big blow when stories such as "State Farm Recalls Promotional Bears Over Hazard" from Reuters hit the wire in 2009. And everyone remembers the glassware debacle McDonald's experienced in 2010 as reported in this LA Times story, "McDonald's To Recall 12 Million 'Shrek' Glasses, Citing Cadmium Health Risks."
As a result of taking a front page hit, a corporation's brand equity suffers. Consumers question the safety of doing business with the company. The corporation loses customers. The distributor, after not getting paid for the order and being on the hook for the product recall costs, loses the corporation as a client. The supplier is vilified. Maybe they all have the financial resources to survive, but the real damage is done—regardless of having indemnification agreements in place.
Unfortunately, the damage goes beyond the immediate parties involved. Often times, corporations respond by taking a hard look at the effectiveness of using promotional products and the value our industry brings to the marketing mix. Would you continue to use an advertising medium that just landed you the lead news story? Or would you hold everyone "guilty by association," reducing or shutting down promotional products spend with all your distributors?
Indemnification agreements will continue to be a common best practice for Fortune 1000 companies, but they have little if any value in protecting your customer's brand. Wouldn't it make more sense to avoid these recalls altogether via control and management of our supply chains? By implementing a proactive comprehensive compliance program, you can have the processes and procedures in place to avoid having product safety issues in the first place. Not only does this solution protect your customer's brand, it protects yours, too.
Brent Stone is executive director - operations for Quality Certification Alliance (QCA), the promotional products industry's only independent, not-for-profit organization dedicated to helping companies provide safe products. A Six Sigma Black Belt, Stone has more than 25 years of in-depth supply chain management experience with extensive expertise in process design, development, improvement and management. He can be reached at firstname.lastname@example.org or visit www.qcalliance.org for more information.