Carrying out supplier due diligence is an essential part of any outsourcing process.
It allows both parties to understand exactly what is required under the outsourcing arrangement, evaluate the costs and practical aspects of service delivery, and establish whether the two parties will be able to work well together at a cultural and organisational level.
The extent of a due diligence exercise will be governed by the cost of the services being procured, the criticality of the services to your business and the risks involved if the services were not performed or performed negligently. However, regardless of the size of your business, there are some fundamental steps you should follow.
Know what you want
You must be clear at the outset what you are trying to achieve.
This will help to identify exactly what you need from your supplier, not just their service offering but also their values and the way they work with their customers. Don’t underestimate the importance of the cultural fit between your organisation and that of your supplier when establishing a long-term business relationship.
Consider the importance of the service to your business. What is the risk to the business if the appointed supplier performs poorly or not at all? The more critical the supplier’s services to the operation of your business, the greater the need to conduct a thorough due diligence exercise.
Thinking through what you want your supplier to deliver will help you to draw up an accurate, detailed specification.
Consider, for example:
- Why you need the services and your likely future requirements
- How your current supplier (if any) is performing
- How many staff provide the services. Will TUPE be an issue?
- What dependencies might the supplier want from your organisation?
- Is any aspect of the service subject to regulation?
- What, if any, data needs to be shared with the supplier?
- What is your budget?
- Will any third party contracts be required to enable the supplier to provide the services eg software licences, leases, maintenance agreements?
- Where will the services be provided? Will the supplier need a lease, or rights of access to one of your properties?
- What are your reporting requirements?
- Are there any tax, funding or structuring issues?
An incumbent supplier should be able to give you much of this information.
Exploring the Market
Once you know what you want from a supplier, draw up a shortlist of potential candidates via a “Request for Information” document (RFI). This briefly outlines the goods and/or services required and requests information relating to suppliers’ capabilities and competencies.
Investigating your prospective suppliers
The following checklist will enable you to assess potential suppliers’ capabilities and fit with your organisation:
- Identity – know who you’re dealing with: is the business legitimate and does the individual you are negotiating with have authority to bind the supplier?
- Financials – check the supplier’s financial record. An operating loss, or significant loss of revenue over recent years, may indicate an underlying problem.
- Delivery of Goods/Services – does the supplier’s proposed method of meeting your requirements fit with your existing practices? How do they propose to overcome any challenges? Can they deliver the promised services for the quoted price? How does their proposal compare with others?
- Quality – a supplier willing to offer generous service levels shows confidence in their service quality. Establish the supplier’s credentials and/or standards’ accreditations.
- Pricing – compare each supplier’s pricing proposal. Are they offering additional free services/discounted ancillary services? However, remember that best value for money doesn’t necessarily mean the lowest price.
- Assumptions – check whether the supplier’s pricing or proposal depends on any assumptions which could alter at a later date.
- Staff – comparing the supplier’s staff turnover levels with industry norms. Is TUPE likely to apply? How many staff will be needed and how will the supplier deploy them?
- Age of the business – longevity may inspire confidence but a younger company may be entrepreneurial and innovative in its approach and attitude.
- Track record – ask for feedback from other customers (you may know some). This allows you to form an idea of how the supplier operates within a business relationship and how it deals with an exit strategy. General background research can be very revealing.
- Mystery shopper – calling the supplier without identifying yourself can tell you a lot about how it really operates.
- Communicate with your prospective supplier – meet your potential suppliers at their offices. Not only is it an effective way of seeing if you can work together but also gives you a chance to see their premises, inspect samples of service deliverables or witness demonstrations on how the services would be performed.
The quality of the suppliers’ proposals will depend on the quality of your invitation to tender. Therefore it pays to invest time in ensuring you really know what you need before asking for responses.
Risk assessment and management
Carrying out a co-ordinated risk management process is an important part of due diligence and will help to identify and mitigate any risks inherent in appointing a particular supplier.
After appointing your supplier, produce a risk register detailing relevant risks and how to minimise/mitigate them. This can be referred to throughout the relationship.
Appointing data processors
You may need to share data with your supplier. Under the General Data Protection Regulation (GDPR) which comes into force in May 2018, businesses must use data processors who are fully aware of, and comply with, the GDPR. Failure to comply will attract a fine of 4% of turnover or €20m (whichever is greater). This article outlines what you need to do: https://www.wrighthassall.co.uk/knowledge/legal-articles/2017/06/26/gdpr-what-should-data-controllers-be-considering-w/.
Due diligence, although not fail safe, is the best way of guaranteeing not just a good service delivery fit but also a good cultural fit. If you do your homework properly you will secure a contract with a supplier with whom you can build a lasting relationship.
If you need any help with either choosing a supplier or drawing up contractual terms, please contact Lindsay Ellis, Partner at Wright Hassall LLP, on 01926 884680 or firstname.lastname@example.org.