Vendor Due Diligence
Find out what vendor due diligence means, why it’s important to facilities management, and how you can conduct an effective due diligence process.
Jonathan Haney
Senior Director, Marketplaces
What is Vendor Due Diligence?
Vendor due diligence is the process of assessing potential third-party vendors before entering a business relationship. This process involves evaluating the vendor’s business practices, financial stability, legal compliance, reputation, and operational capabilities. The goal is to uncover hidden risks and ensure that the vendor meets your organization’s standards before you sign a contract.
Vendor due diligence is especially important in facilities management. That’s because a vendor’s performance can impact equipment safety and functionality. In this sense, vendor due diligence is a critical aspect of any facility’s third-party risk management procedures.
What’s Involved in The Vendor Due Diligence Process?
Background Checks
Research the vendor’s history, market reputation, and track record. Use the information you find to determine whether or not they have past performance issues that could indicate a potential operational risk.
Financial Analysis
If possible, analyze the vendor’s financial information to verify their stability. Reviewing their financial health helps you predict their long-term viability and ensure they have the necessary resources to meet your facility’s needs.
Legal Compliance
Verify that the vendor adheres to all relevant laws and regulations in your region including labor, environmental, and information security standards. You must also confirm that they follow industry-specific compliance requirements you may have. A vendor’s compliance violation will become your compliance violation if left unchecked.
Risk Assessments
Identify the potential risks related to the vendor’s operations in the early stage of your engagement. Then, develop in-house strategies to mitigate risk, such as diversifying suppliers and implementing additional measures to protect sensitive information.
Reference Checks
Conduct reference checks by contacting other organizations that have worked with the vendor. Many organizations are more than willing to share that information, whether or not they had a good experience. Ask about the vendor’s service quality, ability to meet deadlines, responsiveness, and any other issues that are important to your company. Companies who have a similar corporate charter may be particularly helpful.
The Importance of Vendor Due Diligence in Facilities Management
Ensure Quality Services
Effective vendor due diligence helps managers ensure that vendors can deliver the high-quality services required for facility operations. Having these insights will increase a manager’s confidence in the new vendor.
Protect Your Facility’s Interests
Thorough background checks help identify potential problems before they arise. A problematic vendor may cause financial and legal issues that could reflect poorly on your facility. If a vendor appears to have a bad track record, your facility can choose another provider that can offer services that you need.
Maintain Compliance and Safety
Adequate due diligence ensures that vendors follow all necessary safety and compliance protocols. Vendors who can meet the appropriate level of compliance for your facility will protect occupants and reduce your reputational risk level.
Support Relationship Building
The vendor due diligence process can lay the foundation for successful vendor relationships. That’s because you will begin your engagement based on trust and transparency from both parties. Knowing your vendor is secure will also help your team feel less guarded if they need to share confidential data.
Challenges in Conducting Vendor Due Diligence Processes
Resource Intensiveness
Conducting vendor due diligence can be time-consuming and requires dedicated resources. Companies may find it challenging to allocate the necessary monetary and human resources without impacting regular operations. Utilizing automated tools and outsourcing certain tasks can help reduce some of the resource burden.
Access to Information
Gathering all the necessary information on a vendor can be difficult, especially if the vendor is not cooperative or if international laws complicate information access. Leveraging third-party databases and establishing clear communication channels with due diligence questionnaires for vendors can improve information access.
Evolving Standards
Keeping up with changing regulations can be challenging. Companies must stay on top of the latest regulatory guidance to ensure they can perform vendor due diligence correctly. Try subscribing to any informational mailing lists from any relevant regulatory bodies if possible.
Best Practices During The Vendor Due Diligence Process
Develop a Standardized Process
Create a vendor due diligence checklist and integrate it into your vendor management program. Ensure this due diligence checklist is consistently applied every time you begin a new vendor relationship. Having a pre-established process reduces the risk of oversight and can help your team save time.
Leverage Technology
Implement software tools to help make the due diligence process more efficient and organized. These tools can help you manage documentation, track progress, and maintain a digital record of all activities. Technology can also make it easier to quickly retrieve needed information for analysis.
Continuous Monitoring
Regularly reassess existing vendors to ensure they continue to meet your standards. Ongoing monitoring helps you identify issues early and address them promptly.
Collaborate With Stakeholders
Involve legal, financial, and operational teams to get a well-rounded view of each vendor. This type of collaboration ensures that all possible risks and benefits are considered before new vendors are selected.