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Vendor Management: What Are Vendor Due Diligence Reviews?

2 min read
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Not only is it a regulatory requirement but it’s also a sound business practice to conduct due diligence on all vendor relationships that provide the organization with a product or service.

So, What Are Due Diligence Reviews?

Simply put, due diligence reviews are the process of reviewing all available information about a third party.

FDIC Financial Institution Letter 44-2008 defines the due diligence process further with “Comprehensive due diligence involves a review of all available information about a potential third party, focusing on the entity's financial condition, its specific relevant experience, its knowledge of applicable laws and regulations, its reputation, and the scope and effectiveness of its operations and controls.”

Due diligence reviews must be based on the level of risk associated with outsourcing a particular product or service. These reviews are critical to an organization’s success as with each review you may discover risky findings and you’ll also have an opportunity to mitigate the risk. If you neglect to complete a detailed review, the risk may go unnoticed for a period of time, or worse, be completely missed altogether. In turn, this could cause a negative ripple effect on your organization and customers.

4 Types of In-Depth Due Diligence Reviews

  1. Financial Reports – Understanding your vendor’s financial posture and performance is crucial. To do this, it’s important to review the annual 10-K report (available for public-traded companies) or a statement of financial condition.

  2. SOC ReportsSOC audit reports help you further understand the steps your vendor has in place and how the vendor performing against those controls, along with the controls you must have in place in your organization in order to complement these controls.

  3. Business Continuity and Disaster Recovery Plans (BC/DR) – BC plans help your organization verify the vendor’s products, operations and services continue to be delivered in an acceptable manner as outlined in the service level agreement. The Distaster Recovery Plan ensures the vendor has a plan in place should a disruption occur that impacts business operations so that business can continue as usual.

  4. Cybersecurity Policies and Procedures – These documents help you better understand the vendor’s access levels to your sensitive information, how they store it, their incident response plan and how quickly they’ll notify you should a breach occur.

There are many, many more documents that should be reviewed (e.g., articles of incorporation, consumer complaints, certificate of insurance). Due diligence should never be “one and done” or a “check-the-box” exercise. You must request updated due diligence and perform a thorough analysis during the initial vendor vetting phase and as part of your periodic updates of the documents. Remember, the risk posed may be constantly fluctuating with certain vendors, so it’s important to keep a close eye on your vendors for areas of concern.

By understanding what due diligence reviews are and why you must complete the analysis, you’re more likely to comprehend the magnitude of importance and continue to request and analyze each document in a timely manner. Always remember that performing the appropriate level of due diligence in a timely manner can help protect your organization from unnecessary risks.

Download our infographic now for a fun and helpful way to remember the importance of vendor due diligence reviews for vendor risk management.

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