For those of us in the IT industry, the debate about third-party due diligence ended two years ago when the Department of Justice (DOJ) prosecutors and members of the Securities and Exchange Commission staff publicly pronounced that the use of channel partners was the biggest risk to IT companies, “bar none.”
Of course, the risk is not limited to IT companies. Increasingly, enforcement authorities recognize the importance of conducting adequate due diligence on third parties, regardless of industry.
As a result, companies and organizations of diverse backgrounds may contemplate any number of challenging decisions in developing a third-party due diligence program. Such programs can take many forms, and the costs of the due diligence can range dramatically depending on the location of the third party and the type of information a company wants to obtain.
In developing a due diligence program, it helps to start by determining which third parties should be screened and how to do so. The DOJ has made it clear that compliance programs can and should be risk-based. That means a company needs a defensible methodology to identify higher-risk third parties and should spend more time and effort screening those that meet its particular criteria for high risk. The process also needs to fit with a company's particular business model and processes. One size does not fit all because the number and role of third parties differs from business to business, as do the risks involved. A company with a dozen key partners or vendors will have a different program than a company with hundreds, thousands or even tens of thousands.
Once the right program design is determined, the design team can turn to the looming question of who will pay for the program. Should it be legal? Internal audit? Or should the due diligence be charged to the business as a cost of doing business with third parties? Budget and cost conversations are often challenging, and managing those challenges should be something that is anticipated in the project plan. Regardless of who pays, the business should support a strong due diligence program as an important cost of doing business.
Because all third parties do not present the same risk, having a process with different levels of diligence often makes sense. For example, some third parties are cleared for contract at the first stage of due diligence, while others may require additional research. In certain instances, gathering all publicly available information on the third party may be enough, while in other cases, conducting enhanced due diligence consisting of on-site visits, review of financials, and other in depth inquiry will be required.
Many due diligence red flags can be mitigated, but if the risk profile of a third party is too high and cannot be mitigated, companies must be ready to either reject or terminate the third party. By the same token, if a third party refuses to complete the due diligence program or otherwise address due diligence concerns, it also should be terminated or rejected. Third parties that successfully complete the due diligence program should be screened again within a few years.
As with any compliance program, you should look for ways to improve your third party due diligence program by reviewing industry trends, benchmarking with a wide range of companies, and conducting a formal annual review of the program. Getting started can be tricky as the business adjusts to a new process. However, once implemented, due diligence can and should be a normal part of doing business that everyone values. After all, having confidence in the partners with whom we do business is not only important for compliance, it also makes good business sense.