5 Tips to Improve Your Vendor Due Diligence Process

5 Tips to Improve Vendor Due Diligence

Vendor due diligence is essential to any third-party risk management program. However, no two due diligence processes are the same. Efficient TPRM teams streamline their vendor due diligence workflows to onboard vendors faster and monitor third-party risk post-contract more efficiently. But how? 

Many of today’s TPRM programs learn the hard way that their vendor due diligence processes make it difficult to understand their third-party risk. The most common mistake is made in pre-contract due diligence when teams fail to collect enough information on their vendors. This has a ripple effect on ongoing monitoring processes. Teams cannot accurately scope the depth and frequency of future assessments without a complete picture of a vendor. 

This blog will review the two stages of vendor due diligence, then provide tips for avoiding inefficient processes. Implementing these best practices can help you develop better due diligence questionnaires, make data-driven decisions and streamline third-party risk management. 

Pre-Contract Due Diligence and Ongoing Monitoring

There are two key steps in the vendor management process where due diligence applies: pre-contract and ongoing monitoring.  

Pre-contract due diligence occurs in the early stages of vendor onboarding. During this period, a vendor is evaluated based on the value of its services and the risks they pose. This stage includes discussions with the vendor’s sales team, internal integration and value proposition discussions and early contract negotiations.  

Ongoing monitoring is the process of continually assessing and evaluating a vendor’s risk for the duration of the relationship. This process helps the organization to understand risk beyond a point-in-time assessment.  

Vendor Due Diligence Best Practices

Several factors can influence the quality of an organization’s due diligence processes, such as limited resources and manual TPRM tools.  

Regardless, third-party risk teams can improve their vendor due diligence process with these five tips:    

  1. Develop a complete picture of the vendor: Gather as much information on the vendor before negotiations begin. Review the vendor’s historical data to understand past security or service disruptions. Review their current policies and procedures to understand their security priorities. Research the organization’s Ultimate Beneficial Owners and key stakeholders. First impressions are important; a red flag at this stage will give an easy out before making a contractual obligation.
  2. Assign the vendor a risk rating and criticality tier: Based on your initial research and the responses from a vendor risk assessment, determine the level of inherent risk the vendor poses. Next, assess the vendor’s residual risk by evaluating their role within your organization. Will the vendor be responsible for important, customer-facing processes? Will they have access to confidential data? What controls are needed to ensure the vendor handles this data securely? Questions such as these can help determine the level of risk the vendor relationship poses once integrated into your organization. Consider validating vendor risk ratings with external content such as cybersecurity ratings, financial health data and watchlist ratings. 
  3. Collect valuable data during vendor risk assessments: One of the primary tools for ongoing vendor due diligence is a vendor risk assessment. To get the best results from vendors, scope questionnaires relevant to the vendor’s service type and risk areas. This will increase the likelihood of quality responses from vendors that can illuminate key risk areas. Additionally, requiring vendors to complete redundant or irrelevant questionnaires can create vendor fatigue, resulting in poorly completed responses. Vendors will appreciate the attentiveness to the relationship, and your team will benefit from easier response evaluation.  
  4. Develop preferred and undesirable responses for vendor assessments: Create a set of preferred responses for your vendor risk assessments. These can be mapped to specific question sets in your master template to help your team to contextualize a vendor’s responses. Similarly, establish a set of undesirable responses that can flag issue areas in a vendor risk assessment. Preferred and undesirable responses enforce objectivity in the vendor due diligence process and eliminate guesswork.  
  5. Develop a schedule and cadence appropriate to a vendor’s criticality: Scheduling vendor risk assessments on a set cadence will help to prevent assessment backlogs. Additionally, it can help to prevent vendor fatigue by focusing your team’s resources on the riskiest vendors. Not every vendor will warrant the same level of attention: determine the cadence for these assessments with the vendor’s criticality tier. 

Learn MoreDownload ProcessUnity’s free best practices guide for a nine-step process to create a rational due diligence program.   

How ProcessUnity Vendor Due Diligence Software Can Help

ProcessUnity Vendor Risk Management provides TPRM teams with an automated vendor due diligence solution to enforce objectivity in their pre-contract and ongoing monitoring processes. Within ProcessUnity’s Vendor Risk Management platform, teams can create effective assessment questions, evaluate risk based on company policies and integrate external content to accelerate risk reviews. To learn more about ProcessUnity vendor due diligence software, click here.