Vendor due diligence is a term used to describe the process a company goes through to determine if a potential business partner “checks the boxes” to be deemed worthy of providing the service(s) desired by said company from a reputation, strategic, compliance and transaction standpoint. While almost all financial institutions have some process in place for evaluating third-party vendors, what happens after all the boxes are checked? Are they just another approved vendor, or are they a trusted business partner? Only time and experience with the vendor will tell.
First, let’s find out what boxes need to be checked, identified by the Office of the Comptroller of the Currency (OCC 2001-47), which is used by most financial institutions.
- Strategic risk is the result of poor business decisions, ineffective implementation of operations, or lack of expertise in their field by a third party, ultimately meaning the return on investment is lower than expected.
- Reputation risk is associated with the risk to earnings or capital if the third party has negative publicity or conducts itself in such a way that current or potential customers don’t want to do business with you because of your association with the third party.
- Compliance risk is the result of products, services, or systems of the third party that do not meet regulatory or legal requirements resulting in violations, fines, and sometimes even mandated suspension of business.
- Transaction risk arises when there is a disruption in business stemming from problems with a third party’s service or product delivery. This can be due to many reasons, including fraud, error, or technology failure.
Now, let’s assume that all the boxes are checked, and you’ve agreed to enter into a contract with a vendor. What happens next, and how do you truly evaluate your business partner? Here are some questions to begin asking to determine if they are adding value to your relationship.
- Problems, questions, and/or concerns are inevitable to arise at some point. Are they available when you need them? Who’s your point of contact, and are they accessible?
- Are you comfortable with your agent or contact and their knowledge of the situations that may occur?
- Do they use “common sense” when making decisions, or do they look for reasons to take the path of least resistance?
Unfortunately, the service of your vendor after the vetting process often isn’t what you expected or what was promised. In fact, it can be downright unacceptable as compared to your standards and what you demand of your response time for your customers.
At Golden Eagle Insurance, we take pride in providing the service level and expertise within the scope you should expect from all business partners.
Check out our article: Tips for Negotiating Long-Term Vendor Contracts for Lenders
At Golden Eagle Insurance, we take pride in providing the service level and expertise you should expect from all business partners. You may want to read our article about How to get Maximum Benefits from your Collateral Protection Partners.