Businesses often rely on third-party vendors for critical operations. Without proper due diligence, you can expose your company to various risks such as compliance violations, fraud, or supply chain disruptions.
As a result, ensuring access to reliable and accurate data is essential. In this guide, we’ll explore how to source reliable data for vendor due diligence, key data points to consider, and how automation can streamline the due diligence processes.
What is vendor due diligence?
Vendor due diligence, or supplier due diligence, is the process of assessing potential and existing suppliers to ensure they meet your company’s legal, financial, and operational standards.
This process helps you identify risks associated with your suppliers, such as financial instability, legal issues, or reputational concerns, before entering or continuing a vendor relationship.
Why do you need vendor due diligence?
Vendor due diligence helps mitigate risks related to supply chain disruptions, regulatory compliance, and financial information. By running thorough vendor due diligence, companies can prevent forming partnerships with unreliable or non-compliant businesses that could harm their operations or reputation.
It does not matter if you’re evaluating a new vendor or reviewing an existing one. The vendor due diligence process is essential to minimize risks.
Types of vendor due diligence
There are two types of vendor due diligence:
- Initial vendor due diligence. Conducted before contract signing, this is a background check to assess potential risks and determine if the vendor aligns with your strategic, legal, and financial objectives.
- Ongoing vendor due diligence. Performed regularly after contract signing, this ensures documents stay up-to-date and helps identify changes in operational risk or performance.
Effective due diligence ensures solid vendor partnerships and ongoing risk management.
How often should you perform ongoing due diligence?
As a rule of thumb, you should perform ongoing due diligence checks regularly for moderate- and low-risk vendors. The frequency could be once a year or once in two years, depending on the risk level of the vendor. If you’re dealing with a high-risk vendor, then the due diligence process should be more frequent.
Aside from the regular checks, here are 3 triggers that should signal an immediate vendor due diligence process all over again.
Regulatory changes
Any time new regulations affect your industry or the vendor’s, conducting vendor due diligence should be a priority. New laws or guidelines could impact the vendor’s ability to meet compliance requirements, making it critical to reassess the relationship and risks involved.
Performance issues
If you notice a decline in a vendor’s performance, such as delivery delays, quality issues, or communication breakdowns, it’s a clear sign to conduct a thorough due diligence review. These performance problems could indicate deeper underlying risks that need to be addressed.
Contract renewal
Before renewing a vendor contract, it's essential to re-evaluate the vendor’s risk profile and performance. This helps ensure that the vendor is still a good fit for your organization and that any changes in their circumstances have been taken into account.
Following these frequency guidelines will ensure that your vendor due diligence process is always timely and efficient. This will allow you to mitigate risk before any potential significant damage.
Why does data quality matter in vendor due diligence?
The quality of the data you rely on during vendor due diligence is fundamental to the success of the evaluation process. High-quality, accurate data allows you to make informed decisions. On the other hand, unreliable data could lead to poor decision-making, exposing your company to unnecessary risks.
Additionally, inconsistent or outdated information can lead to incomplete evaluations, leaving critical information unnoticed.
Key data points needed for effective vendor due diligence
To perform effective due diligence, focus on collecting and analyzing key data points. Here is a proper vendor due diligence checklist:
- Firmographic data. See the vendor’s basic information such as company name, industry, location, headcount, founding date, and more
- Financial stability. Review financial statements, credit scores, and any signs of financial instabilities.
- Legal compliance. Check for any legal disputes, regulatory violations, or sanctions.
- Reputation. Look for reviews, testimonials, and third-party ratings.
- Operational capability. Assess their ability to meet your demands in terms of capacity, quality, and timeliness.
- Supply chain risk data. Perform supply chain due diligence to identify any risks they might introduce into your supply operations, such as geopolitical issues or over-reliance on high-risk suppliers.
This data will ensure that the vendor is trustworthy and reliable in terms of their business operations, legal compliance, data security, and reputation.
Red flags to look for
As part of your vendor evaluation, it’s important to know common red flags that might indicate a potential issue. Some red flags to watch for include:
- Inconsistent or inaccurate data. Discrepancies in financial or operational records could be a sign of deeper issues. If possible, check the vendor's history in terms of financial track record.
- Legal or regulatory problems. If a vendor has faced frequent lawsuits or fines, this is a strong risk indicator. Evaluate vendor risk by checking relevant law enforcement lists.
- Poor reputation: Negative reviews or feedback from other businesses should not be ignored. They indicate the vendor's capabilities, or lack thereof, and help identify areas where other third-party relationships failed.
- Unclear or overly complex ownership structures. This could indicate a lack of transparency or potential for fraud.
- Dependence on high-risk suppliers. Vendors heavily reliant on suppliers from regions with high geopolitical risks could introduce additional instability into your supply chain. Gain access to vendor relationships and run proper risk assessments at an early stage of consideration.
- Data security gaps. Your vendor selection process should include not only financial risks, but also data breach-related incidents. Ensure the vendor adheres to appropriate information security practices to minimize the risks of losing confidential data and sensitive information.
If you notice at least one of these red flags during vendor due diligence, it may be a good idea to re-evaluate your choice and see if you can find better options.
How to source reliable data for vendor due diligence?
Sourcing reliable data for vendor due diligence involves using a combination of public and private data sources. Here are some best practices:
- Use a data provider. Third-party vendors like Coresignal collect public web data from a variety of sources. This data includes employee data, company profiles, financial data, workforce trends, and more. This helps you build a comprehensive profile of vendors by tapping into alternative data sources that reveal valuable insights about a company’s operations, workforce, and more.
- Request documentation directly from vendors. Financial statements, legal documentation, and references can help verify the accuracy of the information you collect.
- Consult industry-specific databases. Certain industries have databases specifically designed for due diligence, such as compliance records or safety ratings. With Coresignal, you can also access industry-specific data, making it a reliable source for insights into vendor performance and stability.
- Conduct interviews or on-site audits. When possible, direct interviews or audits can provide insights that data alone cannot capture, offering a clearer picture of a vendor's operational risks and financial health. You could also prepare due diligence questionnaires.
By combining these methods, you can ensure a thorough and reliable due diligence process. Leverage data solutions like Coresignal to help assess vendors with a similar corporate charter.
Using data APIs to automate vendor due diligence
Automating vendor due diligence using data APIs can significantly streamline the process by providing real-time updates and reducing manual input.
One powerful solution is Coresignal’s Company data API, which allows you to access up-to-date company data, such as firmographics, headcount trends, and industry information. This API enables businesses to:
- Pull fresh company profiles. Access detailed data, including financial performance and employee information, directly from Coresignal’s vast database of over 86 million public company records.
- Automate data enrichment. Use the enrichment feature to enhance existing vendor information, ensuring all data remains current.
- Monitor vendor changes. Stay updated on any shifts in vendor profiles through daily updates, allowing a continuous risk management process.
With APIs, you can integrate vendor due diligence into your workflow, ensuring continuous monitoring and timely decisions without the need for manual intervention.
Conclusion
While finding a new vendor could prove to be a difficult and tedious task, it’s essential to put the needed effort into it. Make sure to follow the vendor due diligence checklist to uncover hidden risks, enhance risk management, and ensure a smooth business continuity of your third-party vendors.
