4 Steps to Effective Third-Party Due Diligence- Blog

If you’re like most businesses, you have a host of third-parties that you depend on to support your core business functions. Third parties may include suppliers, distributors, resellers, local agents, joint venture partners, and so on.  As organizations benefit from multiple connections, they also face the challenges of managing the vast network of third-party spread across geographies. Many of these third parties have access to your internal network, some are directly associated with your clients, while some are highly crucial for your production process. All these factors put third parties in a position from where they can directly affect your business as well as reputation. Hence, it is required to perform due diligence prior to hiring a third party. This article outlines four steps for an effective third party due-diligence process.

Step 1: Identify the Right Supplier: For any business, having the right supplies is critical. This holds especially true for manufacturers, who depend on their suppliers for quality materials and tools to produce top-notch results for their own clients. Meeting your production timetables takes a toll if your suppliers take forever to get you the supplies you need to start work in the first place. Your supplier should also be able to take your product and service to the market to the right customer and in the right quantity. A few things that you should consider while screening a supplier could be:

  • Checking their past history with other clients
  • Average wait time for an order to be fulfilled
  • Consistency in delivering products and services on time
  • Certifications and valid documents

Step 2: Geographical & Demographical Assessment: High-speed internet has become so easily accessible around the globe, that many entrepreneurs assume the world to be one big homogeneous market and project their business to scale accordingly. Many-a-times, this leads to the businesses’ failure in addressing the real cultural, economic and political differences. In order to avoid the most common mistake of overestimating a particular market’s potential, do not base the results on your domestic context. When dealing in a financially volatile foreign market, it is always wise to be prepared for large and frequent economic swings. Fluctuations in currency exchange rates can eat on your profits. The cost of doing business in any market is largely dependent on local transportation, energy, technology, and financial services. You have to be mindful of all these factors in order to let your supplier chain get affected in the least possible way.

 Step 3: Download A Business Information Report: Business information report helps you conduct due diligence checks and enable faster decision making without additional risk. You can use this detailed report to help mitigate potential business risks by assessing a company’s operations, financial performance and public filing records. CRIF’s business information report helps in buyer and supplier risk assessment which includes identifying active suppliers, identifying suppliers that can pose the greatest risk to their product launches, expansion plans or projects, etc. A typical business information report from CRIF provides basic supplier company information such as business registration details, legal forms, and address apart from the financial information. It also consists of a supplier risk assessment rating to understand the risk level of the supplier. Bank details such as accounts, loans along with name, address and branch of the bank used by the company and other historical details about the management. All these details help you build a clear image of your client so that you have a better understanding of what you are dealing with.

Step 4: Review Your Due-Diligence Process Regularly: Companies focus so much on the initial screening process that they forget the importance of continuous monitoring of their third parties. There is nothing worse than an effective “initial” review of the due diligence process without any follow up. Commit to recurrent reviews with stakeholders to ensure that your due-diligence process is always aligned with those needs over time.