Not all due diligence should be rated equal
Due diligence should always be risk-based and tailored to the appropriate risks represented by the third party relationship. Lots of the items collected in due diligence are fairly routine and, while they will require review, aren’t too time sensitive or require specialized attention. While that is true, sometimes there are elements of due diligence that are more important than others. In this case, I’m referring to financial risk.
Financials are incredibly important. There’s no getting around it – your financial institution simply must know the financial health of a company with whom you’re going to do business. At the very least, you want to establish this before you enter into contractual terms with the company… even if you’re not going to refresh that look every year or so, please do so at the outset. After all, you want to make sure they’re going to be around to support you.
Timing is everything
More regularly, you’ll find that mature vendor management programs require a regular periodic review of at least their Critical or High Risk third parties. In fact, many companies time their entire due diligence cycle around the release of financial information so that you’re always going to have the most recent financial information.
Who reviews the financials?
Depending on the size and sophistication of your third party management team, perhaps the person reviewing the financials is a business analyst or CPA in that group or perhaps it falls to your CFO to review selected financials. Either way, the process should be clearly documented ahead of time and ownership and timing clearly understood.
Where do I get that kind of Information?
For public companies, it’s easy to get the financial information; for smaller or privately held companies, you may need to establish the need to review financials in the actual contractual arrangement. Many successful third party programs even set up news alerts for the release of financial information (and also all sorts of other news).
What do I really need to know?
An in-depth financial review is imperative – if possible, over time, you should look at the company’s business trends – is their financial health stable or are there areas of concern you need to pay particular attention to? Are there items that require additional attention? If so, call them out and discuss and document the concerns. In a business relationship, the last thing you want is an unfortunate surprise.
When it comes to financials, what you don’t know really can hurt you! Plan ahead and set up a documented timetable and a process. Financials truly are at the heart of a good bu$ine$$ relation$hip.