Often in the midst of all the rush and excitement about the new project you're looking to roll out or the new product you're acquiring, businesses miss out on a crucial component - vendor due diligence.

Vendors carry a gamut of unforeseen risks that could affect your business or derail the project that you are looking forward to. Vendor risks could be as critical as the ability of the vendor to stay solvent during the contract period, or even as simple as non-compliant tax situation making it difficult for your finance team to claim tax credits on the transaction. And worse, sometimes given the way businesses are structured, you may not even know who you're really doing business with. It is easy today for businesses with tainted reputation to be back in the market with a different name. All said, at the end of the day, we always look forward to successful implementation of our projects and a highly supportive and compliant vendor to get the job done.

Why vendor due diligence?
A diligence exercise puts you in a better position to negotiate with vendors, onboard vendors quickly and ensure that your project is successful without exposing your business to avoidable risks. A thorough vendor analysis and qualification process need not be time consuming at all. Yet businesses often don't implement a solid vendor selection and verification process.

1. Poor compliance history is often a sign of poor management caliber
With startups and small businesses competing with the big ones in the market today, you would certainly receive proposals for any requirement you may have, be it infra, an IT project, or professional services, from small to medium sized businesses offering their services at highly competitive prices. This does come with a certain set of risks. A well established large vendor will certainly have better processes and compliance, but a smaller one will likely be hungry to deliver a delightful service or solution at a lower cost, but carries the risk of potential mismanagement and compliance issues. However, it is pretty easy to understand how professionally a vendor runs his business, small or big, by researching their state of compliance. Top level compliance checks should include Incorporation details, MCA compliance, Economic Defaults, Solvency, Historic Insolvency Incidents, past name changes and GST compliance. A more detailed check should include promoter background, ultimate beneficiaries and economic defaults in connected companies. Poor compliance history is always a sign of potential mismanagement.

2. Your vendor's financial strength is key to their sustainability and your negotiation power
The govt. of India makes available a pristine source of Balance Sheet and P&L data of all companies incorporated in India called the MCA, the regulator that is responsible to maintain a record on all incorporated companies, their financials and promoter details. The govt. makes this data available for you to use to help you understand who you're doing business with. The know-how of accessing this source has largely been limited to Chartered Accountants and Company Secretaries. However, as a corporate compliance or corporate legal team, you can directly access these files on any target all by yourself, if you're not going through a CA or a third-party service like Zaubacorp or Corpdata.

Looking into your vendor balance sheets shows you the fiscal health of the company, and gives you an understanding of their appetite to undertake the the project given your budget. A quick financial ratio analysis gives you an in-depth understanding of the liquidity position of the vendor and profitability. Doing business with a vendor with poor liquidity will be a cause of concern, so are economic default incidents by the vendor and its management.
 
3. Good vendor reputation helps you develop a sense of comfort
A well oiled and proven large vendor offers a sense of comfort. With small businesses stepping up their game, customer referrals go a long way in evaluating their capabilities. Ask referrals and testimonials as part of your diligence processes. A cursory Google Search check is mandatory these days. Adverse news / signals in the media and social channels should sound caution. Any full-stack due diligence service provider will offer an adverse media screening service. Unfortunately, all it takes is a few forms for any business to change its name and re-enter the market. A thorough MCA check helps you figure this out very easily.

4. Highly litigious vendors are always looking for trouble
No one likes highly litigious vendors. As simple as that. Today, it is very easy to get a quick snapshot of the litigation history of any given vendor and its promoters. Almost all court and tribunal data is available online. A good due diligence partner can run checks across all the high courts, tribunals and the supreme court in a under a few hours. Yes litigations occur all the time, but highly litigious entities can be a pain to work with, and are better avoided. Adverse litigations or criminal complaints on the company or its promoters are to be watched out for.

5. Lastly, don't get in trouble with the regulators
Transacting with Sanctioned Parties is like shooting yourself in the foot. The Govt. strictly requires all regulated businesses to validate their counterparties against the UN Consolidated Sanctions list. Even if you're a non regulated business, doing business with a Sanctioned Party could put you on the radar of various agencies and regulators across the globe and could potentially cause business disabilities in the future, particularly when you are expanding into markets that have strict compliance requirements such as the UK, USA or the EU. It takes not more than a few minutes to run a high level check against available sanctions lists, if not all at-least the UN consolidated list which is the only sanctions list recommended by the RBI.

Politically Exposed Entities are often subject to additional scrutiny since they are susceptible to be bribed. Regulators often scrutinize PEPs to understand the source of their funds. If your vendor is owned and operated by a PEP, you may want to take additional precautions by having water tight service contract, proof of service delivery, tax compliant transactions so that you don't get hounded by the regulators 5 years down the line.

Putting a well oiled Vendor Information Program in place.
Fortunately, the government of India makes available a ton of data for you to run comprehensive checks on anyone you're doing business with so that your business is protected. The data from regulators are noisy and can take a great deal of effort when sorting through manually. For most businesses, it is a good practice to re-run vendor verification once every six months. Regulated businesses may require a more routine updation of vendor profiles. Thankfully, we have automation and AI to do the mundane job for you so that you can focus on the project you're looking to execute and not spend hours slogging through vendor compliance data.

Talk to us today to learn how we enable Corporate Compliance and Legal teams streamline their vendor onboarding process and put in a place a water-tight easy to use due diligence automation and reporting software. Click on the chat icon on the screen to schedule a demo.