What is Vendor Due Diligence?

Comprehensive vendor due diligence will help you get an objective view of business relationships and give you confidence in developing strategies and making decisions. In this article, we will analyze the peculiarities of this procedure.

The concept of the vendor due diligence

The collection of information about the companies with which the company interacts is an integral process of economic activity. Truly confidential data cannot be obtained legally by anyone and is known only to a strictly limited circle of people. But in many ways, companies themselves actively inform the environment, talking about themselves, their products, and services, in order to attract customers and strengthen relationships with partners.

The information field, formed due to the connection of companies with the audience, allows in a short period to find out the features of the organization of interest, understand the model of cooperation with it and determine the potential opportunities and threats of interaction. The consequences of transactions with dishonest counterparties may adversely affect the company’s activities. To ensure commercial security, prudence should be exercised and an assessment of the potential counterparty and persons responsible for signing the contract should be carried out.

Vendor due diligence is designed to protect the company from entering into unprofitable agreements. Commercial security is one of the foundations of business continuity. Even a small company at the initial stage should take care of developing a security and control system in order to be sure of information and corruption protection at the further stages of economic activity.

Vendor due diligence is an essential risk assessment tool that provides complete objectivity of information and allows for extensive verification of available data of legal entities and individuals.  This procedure is an essential element in ensuring comprehensive security and, along with other organizational measures, is aimed at achieving the following goals:

  • building a good reputation;
  • reducing the risk of overdue accounts receivable;
  • reducing the risk of refusal by the tax authorities
  • reducing the risks of counter and simultaneous tax audits organized for the counterparty.

How does it work?

The algorithm for checking the counterparty for reliability is to collect as much information about him as possible and, based on it, make a decision on cooperation. Therefore, there is a real need for automated due diligence reports that can disseminate this important information faster and at a lower cost. In this case, a virtual data room can help to simplify and automate this due diligence procedure. If users want to make informed decisions about all their customers, third parties, transactions, and investments, the information they receive must be meaningful and effectively integrated into existing workflows.

Virtual data room provides the following possibilities:

  • carrying out an unlimited number of checks on counterparties loaded into the system, as well as saving data about them for later playback and comparison;
  • it is possible to set up automatic tracking of changes in data about the counterparty;
  • providing audit results in the form of customizable reports;
  • a secure collaborative workspace and file-sharing.

Based on the results of the vendor due diligence, the data room service generates a detailed report signed with an EDS, which can be submitted to the heads of the customer organization. Up-to-date data on the integrity of persons on the side of the vendor will protect the company from external and internal illegal and deliberate economically inexpedient actions. By getting to know its business partners better, the company understands their needs, motivations, and integrity, and determines their ability to open up new business opportunities.