Vendor Due Diligence Best Practices: 8 Key Points to Follow

Over the years, across industries Vendors, have played a crucial role in helping businesses plan, execute and deliver quality products and services. Today, companies are leaning more towards outsourcing the majority of their day-to-day operations to vendors and third parties and keeping themselves focused on creating strategies and performing core business activities. 

Though vendors can help companies with a lot of operational activities, they also come with a lot of risks and threats that might put the employer company in jeopardy. Consequently, vendor due diligence best practices have become an essential and standardized procedure for every company dealing with vendors and third parties.

Vendor risks are diverse in nature. That means the industry your company operates in and the type of vendors you are dealing with will define a vendor due diligence checklist for your use case.

What is Vendor Due Diligence and How does it work?

The practice of selecting, screening, evaluating, and verifying vendors or suppliers that a company does business with is known as vendor due diligence. Just like Customer Due Diligence, companies perform vendor due diligence on their onboarding vendors and their counterparts in order to assess and verify their financial, reputational, and operational health. 

Typically, a vendor undergoes due diligence before being onboarded. Contrary to some beliefs, vendor due diligence isn’t a one-time process. It’s ongoing. Implementing vendor due diligence best practices enables a detailed audit of a given vendor to prevent or mitigate associated risks.

The risks associated with a vendor are diversified in nature and might occur at the various stages of the vendor lifecycle. Therefore, it is always in the best interest of companies to perform periodic due diligence activities on their vendors and keep the associated risks at bay. 

Vendor Due Diligence Best Practices 

While different companies may have varying processes for vendor evaluation and onboarding, there are common guidelines and vendor due diligence best practices that every risk analyst or procurement manager should follow:

Here are some best practices that you can follow to onboard a vendor onto your company –

1. Obtain all the vendor’s information

The process following the vendor due diligence best practices starts with the basic step of collecting all relevant information about the vendor’s company. Through these collected documents you will be able to understand the vendor’s authenticity and ensure that all compliance requirements and standards are being met or not. 

Companies can also gather information from available open sources and perform reference checks in order to validate the information provided by the vendor. Collecting all the relevant documents and information will help you to maintain transparency with the vendor and understand the business environment. 

2. Implement a robust vendor vetting process

The vendor vetting process is crucial to establishing transparent communication between the two parties. Companies need to have a set of questionnaires for the vendors. A due diligence questionnaire will give you a clearer picture of the vendor’s reputation and health and any kind of risk involved.

3. Evaluate all Financial Information

Assessment of the financial information from your vendor is one of the most important steps, as it tells a company whether the vendor is financially stable and up to date with the relevant taxes and licenses.

Moreover, having a sound knowledge of financial infrastructure will help your company to predict the future costs of working with that third party. It is also important to validate all the financial documentation provided by the vendor to ensure, there is no room for any litigation risks.

4. Review the Operational Risks

Vendors in a supply chain have access to confidential customer information. In case of a data breach in the supply chain, the company is accountable to mitigate the situation and maintain operational harmony throughout the supply chain. 

In these kinds of situations, every vendor or third party involved in the supply chain needs to have a strategy in place to maintain business continuity. 

Having this plan in place will help the company to regain operations workflow and maintain coordination between third parties. Understanding supplier functions in the supply chain will help your company prepare for any type of forthcoming risks and mitigate them before they make any impact. 

5. Analyze any legal risks

Vendors with a bad reputation and imposed litigations tend to partner up with a successful organization in order to keep hidden from legal actions from statutory authorities and impact the organization’s reputational health at the same time. These kinds of vendors are easily filtered out if you have a vendor risk management program in place. 

Partnering with a company allows vendors to gain access to sensitive customer information. This makes the company vulnerable to non-compliance threats and legal risks from disputed vendors. That is why it is crucially important to identify and assess any sort of legal risk involved with the onboarding vendor to keep your company’s reputation harm away. 

6. Evaluate the possibilities of Cyber Threats

As dealing with a vendor involves sharing lots of confidential data, evaluation of the cyber security health of a vendor is a healthy practice. Even if your organization is bulletproof from any possible cyber threats, it is a vital step to assess the vendor’s capability of risk mitigation in the situation of a cyber attack. 

It is best practice for a company to analyze the anti-cyber threat programs and compliance status of the vendor to address any kind of risks of cybercrime.  

7. Categorize Risk Profiles

Every vendor comes with different types of risks. With a due diligence process, companies can categorize vendors based on their risk profiles. An enhanced due diligence system helps an organization to decide how to deal with each vendor based on the level of risk tolerated and the confidentiality limits. 

Moreover, with a streamlined vendor due diligence process you can easily identify any forthcoming risks by analyzing the due diligence reports and alleviate the risk based on the flag raised at different risk levels. 

8. Maintain a Regular Monitoring activity

As mentioned earlier, running due diligence on your vendors is a continuous process where vendors need to be monitored in real time over required frequencies. As the threat landscape is constantly changing, companies encounter various threats at different stages of the vendor risk lifecycle. 

It is important for companies to have an effective risk management program to keep an eye on emerging threats from vendors and third parties. 

Leveraging AI-based software like SignalX can automate and streamline the Vendor Due Diligence Best Practices, making vendor onboarding easier and more secure.

As a result, vendor onboarding becomes much easier and risks are mitigated at early stages by generating consolidated vendor due diligence reports. Having a  regular monitoring system can be implemented to raise red flag alerts whenever any risk is detected. 

Why Vendor Due Diligence with SignalX?

Having the most comprehensive automated vendor due diligence solution, we help you streamline and your end-to-end due diligence workflow and implement the vendor due diligence best practices. With our 26-parameter risk scorecard and risk rating solution, you can keep a 360-degree view of onboarding vendors. 

In the world of AI and automation, with SignalX’s vendor due diligence solution, you can ensure that your company always stays compliant, reduce vendor onboarding TAT, and most importantly keep a regular eye on the risk factors and mitigate them early on. 

Want to improve your vendor due diligence process and shield your business from risks? Book a meeting with us to find out how our vendor due diligence best practices can be integrated into your business strategy.

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