Vendor due diligence: a practical guide and checklist

Are you considering due diligence when you choose your vendors?

In a modern business environment, there are more and more factors to consider before choosing a vendor to work alongside you.

How effectively you manage your vendor relationships determines how much value you can gain from them, as well as how much risk you take on. This begins with how you research and decide which vendors you’re going to work with. 

But what does this process look like? Read on to find out

What is vendor due diligence?

Vendor due diligence is the process of assessing a vendor, supplier, or third party to gauge any potential risks they could introduce to your business. 

This process usually involves looking into the financial and operational stability of the vendor, cybersecurity concerns, operational risks, supplier concerns, and more. These findings are then summarised in a report that can be used to gain a better understanding of a business situation and put you in the best place when it comes to vendor management.

The due diligence process generally involves several aspects, including contract review, vendor-completed assessments, and gathering external intelligence.

In 2024 with increased cybersecurity risks, following a thorough vendor due diligence process is part of vendor management best practice. Vendor due diligence ensures that you can onboard a new vendor quickly, without compromising on risk management.

How should you approach vendor due diligence?

How you approach this process is entirely up to you and will depend on the nature of your vendor relationships. There are three main approaches to vendor due diligence that we explore below.

1. In-house vendor due diligence

Many, especially small to medium-sized and scaling, businesses internally manage vendor due diligence. However, this process needs to be well managed to ensure it doesn’t waste anyone’s time. Some businesses may choose to bring in a risk-management platform to help them manage the process, but this will depend on their risk appetite. 

The key to success with this approach is to make it as simple as you can for vendors themselves to respond to assessments. This should also be part of an accessible audit trail for future assessment validation. 

2. Outsource vendor due diligence

A fashionable option, particularly for larger businesses, is to outsource third-party evidence collection and vendor due diligence checks. This naturally frees up your time and business to just review the evidence and make an informed decision - though this is a high-cost option. 

An external service provider, usually a consulting firm, will have the resources to accurately report on a vendor and verify them. The services they offer usually include, but are not limited to, questionnaire distribution and response collection, documentation and evidence collection, threat intelligence verification, risk mitigation management, and virtual validation testing and reporting.

Conducting an in-house vendor due diligence assessment is the cheaper option. However, if it's a high-cost vendor that will offer a lot of value to your business, an external service provider may be needed for the expertise and resources necessary to make an informed decision on risk. 

3. Shared vendor due diligence

The final option is to take a combined approach to vendor due diligence. This is when part of the process is handled by an outside vendor and an internal business working hand in hand. 

There are existing vendor due diligence intelligence networks that allow companies to work with them and their third parties to assess risk and mitigation. Network members and vendors share resources and risk content to streamline risk mitigation. 

This approach gives your business access to risk scores and content backed by industry-standard questionnaires. 

What are the benefits of vendor due diligence? 

This may seem like an unnecessary and time-consuming process, however, there are numerous benefits to undertaking vendor due diligence no matter which side you’re on. 

If you are outsourcing vendor due diligence, some of the benefits for your company might be: 

For the seller 

• Identify risk. Financial, commercial, and operational risks can all be identified in one report.
  
  
• Set expectations. People know exactly what to expect from your business.
  
  
• Set valuation expectations. As a seller, a vendor due diligence process will show you the areas or issues that may affect valuation in advance.
  
  
• Increase in control. You have access to more information about the sale and greater comfort that the numbers are correct. 

For the buyer 

• Objective decision-making. For the buyer, being presented with objective information on a vendor allows them to make a more informed decision.
  
  
• Higher efficiency. This reduces the time it takes for a vendor to be onboarded and a transaction to take place.
  
  
• Ownership. There’s more clarity in who owns the process when it comes to vendor negotiation and management. 

Simple vendor due diligence checklist 

If you do decide to go through the vendor due diligence process, a checklist is the best place to start. The specific components of the checklist, as well as the exact details included for each, will depend on your organization. 

A standard checklist typically addresses these areas:

Basic company information

This may seem like an obvious starting point but without making sure you have documentation that proves the company is legitimate, you’re going nowhere. This information will help you determine if an organization is compliant with the laws and regulations of your jurisdiction. 

Vendor basics you should research include: 

• Basic information about the CEO, executives, and Board 
• Business certificates and licenses, in the UK this information can be found on Companies House, and in the US it can be located via the Securities and Exchange Commission (SEC) and is known as EDGAR
• Location, which should be confirmed by an onsite visit 
• Character references from external companies 
• An overview of the company's corporate structure

Financial information

To choose a vendor, you must be aware of its financial status, particularly its tax obligations. This is a crucial step in the due diligence process. Below are some factors for you to consider: 

• Tax documents
• Loans and liabilities
• List of major assets 
• Compensation structure

Third-party risks

According to a survey by Astra, around 80 per cent of organizations they served in 2023 experienced data breaches caused by a third party. So looking at third-party data risks is key when conducting a vendor due diligence survey in 2024. Here’s what to look out for when it comes to third-party risk: 

• Compliance reports such as SOC 2 and ISO 
• Data breach history
• Security awareness test results 
• IT systems diagram 

Operational risks

Another aspect you need to consider is whether the vendor you are evaluating is in a strong place operationally. Threats to operations include things like a SaaS provider outage that could lead to an issue on your end or an inability to deliver your product as promised. When looking at operations it’s important to consider:

• Employee code of ethics
• Markers of employee culture such as employee retention rates, working practices, and bias
• Outage plans 
• Business continuity plans 
• Past litigation and settlements

Reputational risks 

A significant vendor is likely to be closely associated with you and your product. This means you need to consider who you partner with. Equally, corruption or political vulnerabilities could be dangerous for your business reputation, especially with information so accessible on the internet.  Make sure you consider the following when you take a new vendor on board: 

• Check the vendor name against key watch lists such as your local sanctions list
• External and internal processes relating to risk 
• Any negative mentions in the news
• Negative complaints on review sites 
• Company and employee litigation history

Key takeaways for vendor due diligence 

If you flag any risks during this due diligence, you’ll need to discuss these carefully with your internal stakeholders and consider every outcome for your business. Having this knowledge will allow you to proceed with caution when deciding whether to work with them. 

In our experience, it's factors such as the quality of our investors, our robust data protection and security measures, and our customer case studies that make us a trusted choice for businesses looking for a contract lifecycle management (CLM) vendor.

Need help managing relationships with vendors?

If you’re looking to improve the way you manage your vendor contracts, you could benefit from Juro’s all-in-one contract management software. Our collaborative AI-enabled platform brings all your contracts into one workspace, giving you real-time insights into your vendor agreements. 

To find out more about how Juro can enable your business to manage vendor relationships more efficiently, fill in the form below to book a demo.