The due diligence you collect on a vendor is only as good as the analysis performed. Due diligence is one of the most critical activities in third party risk management because let’s face it, your vendor isn’t going to openly divulge all their dirty laundry.
There are two types of due diligence that we should all be aware of:
- Initial Due Diligence – This is when you analyze the vendor and verify that they will meet your organization’s needs prior to entering an agreement. This helps identify risk and determine if the vendor meets your strategic and financial goals.
- Ongoing Due Diligence – This is when you continue to monitor and analyze the vendor relationships that your organization has already contracted. The frequency is dependent on the criticality and risk level of the vendor, but ongoing due diligence should be performed on all your vendors as things can change at any time.
Effective vendor due diligence can help your organization solidify the right vendor partnerships.
5 Reasons Why You Need to Do Vendor Due Diligence
Here are five particular reasons why vendor due diligence is so important:
- A lack of due diligence exposes your organization to incredible risk.
- It’s a regulatory expectation. All the major regulators expect due diligence to be performed on all third parties (and sometimes even fourth parties!).
- You may discover risk that would have gone otherwise unnoticed. If you have subject matter experts perform thorough analyses and don’t succumb to a check-the-box mentality, due diligence can really protect your organization.
- It’s a best practice. Simply put, it just makes good business sense.
- You may realize that there is a better vendor fit for your organization. With proper due diligence, you can discover issues that lead to you selecting a different vendor or even walking away from a current one.
At times it may be challenging to obtain a document from a vendor. I’d suggest if you don’t get a key item, in the agreement be sure to establish a clear contractual commitment for them to provide.
To bring it all home, due diligence helps you with selecting a vendor, ongoing vendor monitoring, structuring better contracts and preventing unwarranted risk to your organization and customers. It’s a critical step in the third party risk lifecycle that you frankly can’t skimp on.
Make it easier to perform due diligence with this checklist. Download your copy.