It is worth the time to vet potential business partners prior to signing a contract in order to reduce
risk exposure and prevent future problems. The degree and depth of research on a potential vendor will hinge on the types of services they provide and their access to sensitive information. A little due diligence at the outset can prevent problems later such as:
- Possible fraud/abuse
- Financial losses/service disruptions due to unmet contractual obligations
- Potential damage to company’s public image or reputation with customers
Vendor Evaluation Checklist
- Basic Documentation: corporate status, licensing information, insurance certificates.
- Length of time in operation: The point is not necessarily to eliminate a newer company or start up from consideration (in fact they offer some distinct advantages), but this needs to be taken into account in the overall evaluation.
- Vendor Referrals: You wouldn’t hire an employee without checking references (we hope!), nor does it make sense to hire a vendor without checking them. Don’t treat this as a formality. Contact references prepared with specific questions (open-ended are best).
- Ability to Perform the Services: You need to make sure that the vendor in question has the appropriate resources, knowledge, equipment, personnel and experience to perform the services at the level and capacity that you need. If the Vendor is planning on sub-contracting out some of the work that is something that you will also want to know in advance.
- Create a clearly defined list of needs: This will aid you and potential vendors to better coordinate business needs. Save your vendor research as a back-up in case it becomes necessary to look for an alternate/replacement service provider.
Security Measures
Depending on the nature of your business and the manner of the duties for which a vendor will be hired, it may be prudent to evaluate the potential operational security risks. If a vendor will have access to money or sensitive data then you will want to verify:
- Employee screening practices: Do employees undergo a pre-employment and random e-criminal background check and/or drug screening?
- Vendor Security Controls: password protection and method of destroying data
Vendor Financial Stability
If a vendor is publicly traded, then information relating to its financial state can be gleaned through public records. When dealing with a private company, plan to thoroughly examine the vendor’s financial and payment practices. You can look at things such as:
- Bankruptcy, Lien, Collections, and Judgment Check
- Better Business Bureau reports
- Background checks on the vendor & management team
- Government Watch Lists
Red Flags that a company is in financial distress:
- Resignation of the chief executive officer or other key positions
- Layoffs
- Restructuring announcement
- Unusually low price (desperate for sales)
- Debt to income ratio
- Stock sell offs from executives