Top 10 Tips For Customers Running Supplier Due Diligence Exercises

  • Mark Elkington
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During any significant IT service procurement process, there should be a due diligence exercise to allow bidders to access enough information for them to produce firm quotes that can subsequently be relied upon during contracting. This is often a step in the process that is overlooked or poorly planned for. Failure to run a successful due diligence exercise can leave bidders quoting prices that are ‘subject to further due diligence’ leading to significant additional costs post-contract award when there is no competitive tension to reign-in the vendor’s demands.

The following top 10 tips will help customers who are running bids avoid the major pitfalls of this important part of the procurement process:

1) Schedule due diligence before the bidders produce their quotes

Due diligence should be scheduled before responses to the RFP so that initial quotes are as accurate as possible and any decisions based on RFP output have maximum validity. The last possible point that due diligence could be scheduled is before a BAFO to ensure that the final quotes are accurate. If due diligence is scheduled after BAFO then this will adversely affect any subsequent negotiations or, in the worst case, result in uncontrollable cost increases after the contract has been signed and there is no competitive tension.

2) Allocate enough time in the plan

Due diligence exercises are time consuming for both the bidders and the customer. Often due diligence is shoehorned into a plan and not considered as a core element of the procurement process. This creates the risk that bidders will not commit to firm pricing as they have not completed due diligence to the satisfaction of their own internal governance standards. Barkers recommend allowing 4 – 8 weeks for due diligence, depending on the complexity of the service/s being let.

3) Careful co-ordination is required

Due diligence should not be an opportunity for bidders to run amok across the customer’s organisation. The activities of multiple bidders need to be carefully co-ordinated in terms of access to data, people and systems. During due diligence, this role is often allocated as a full-time task to a member of the project team.

4) Set-up and populate a data room prior to due diligence starting

A data room is a centralised area (usually virtual) where all documents are stored and can be accessed by bidders. Setting up the data room and ensuring that bidders have the correct access can be problematic and more time-consuming than envisaged. Completing this task before due diligence starts can prevent delays to bidders gaining access to the data and the likely resulting requests from bidders to extend the due diligence deadline.

Data is often more difficult to obtain than originally thought. This data gathering process should be started early by asking bidders what data they will require and preparing that data ready for the exercise.

5) Ensure that the data provided is accurate

The bidders will rely on the quality of data provided to produce their quotes. If the quality of data provided subsequently proves to be poor affecting the costs of the successful bidder, then a cost increase will be demanded from the customer with no competitive tension to moderate the demand.

In circumstances where the data is known to be poor quality, then this should be made known to the bidders and a pricing mechanism agreed so that any amendments have a pre-agreed price impact. In circumstances where the data is missing, then estimates should be issued to all bidders to ensure that all quotes are produced on the same basis and, as with poor quality data, a pricing mechanism agreed so that any amendments have a pre-agreed price impact.

6) Where possible, bidders should collect their own data

Bidders will often have their own, preferred, approaches to extracting data, often by processes such as running scripts on systems. This is a better option for the customer because the bidder can be made responsible for the quality of the data they collect. As such, this should be encouraged where possible. Where collecting data requires access to systems, this is likely to require a review by the customer’s InfoSec Team.

7) Schedule access to your Subject Matter Experts (SMEs)

As part of due diligence, bidders will often wish to interview customer SMEs. In most cases the bidder will record the output of the interview and provide it back to the customer so the information can be validated and the bidder is then able to rely on it when quoting. As SMEs generally have day jobs, it is important to schedule their time in advance to support the due diligence process. Bidders should be engaged early to advise which SMEs they are likely to wish to interview.

8) Review bidders’ requests for additional information

Bidders tend to have an insatiable appetite for data. There can be a long stream of requests for additional data as the process progresses. These requests should be tightly managed through a formal, centralised, process. Even when the process is tightly managed, it is important to review the bidders’ requests for data and challenge these where it is not clear how it relates to the price of their service. Pushing back in this way will reduce the ‘nice to have’ data requests which have a low impact on price and may require a considerable effort to provide.

9) Monitor bidders’ progress

Although each bidder will be monitoring and managing their own progress against the deadline, it is useful for the customer to gain weekly reports from each bidder on their progress. This allows the customer to understand if one particular vendor is running behind and requires specific help, or all the vendors are running behind and there is a risk to the process timeline.

10) Ensure that bidders are prepared to issue firm pricing

The ultimate objective of due diligence is to ensure that all bidders offer firm pricing that can be relied upon once contracted for. Prior to conclusion of due diligence, all bidders should be polled to ensure that they can confirm they will successfully complete due diligence and that firm pricing will be offered. If not, then any gaps should be identified and filled or, alternatively, pricing mechanisms for amendments resulting from such gaps are agreed. Confirmation by the bidders should be formalised with a signed ‘terms of award’ attestation.

At Barkers, we specialise in IT procurement, find out how we can support your organisation.

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Author: Mark Elkington