Due Diligence: Examining Vendor Partners

• Author: David A. Steiger
• Pages: 99-125

The last several chapters have emphasized the need for extensive analysis

and planning to enable the client company to develop a clear understand-

ing of its objectives, the deliverables needed to obtain those objectives, and

the risks that must be avoided or, at least, taken into account. At this point,

contingency planning, executive buy-in, matching of strategic goals to a

particular business structure, and selection of a suitable location for the

offshore project should be complete. Now you are ready to select a vendor

or business partner to help convert this planning into reality. In this chap-

ter we will be discussing this issue in terms of “vendor selection,” but the

same basic principles apply to “partner selection” as well.

While dealing with the Soviets during the Cold War, President Ronald

Reagan popularized the saying “Trust, but verify.” In this post-Cold War,

global economy, the operative advice when choosing a vendor or business

partner now might be “Verify, then trust.” As discussed below, a number

of factors will allow you to verify that the entity you are considering is

capable and shares your values enough to be compatible with your strate-

gic direction. Unlike in personal relationships, in the realm of vendor due

diligence, “opposites”—in terms of company values—rarely attract and

should be avoided at all costs.

According to the Financial Services Roundtable, the types of risk a rm

must examine when considering overseas vendors are similar to those in

the domestic arena:

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Chapter 6

Due Diligence: Examining

Vendor Partners

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due diligence in the selection of a service provider; validation of

controls and recovery capabilities; the denition of contractual,

service-level, and insurance agreements; and, the denition of man-

agement requirements, oversight, and the ongoing process of verifying

that contractual obligations are being met.1

Still, you are not dealing with the guy down the block. “Extensive diligence

on the outsourcing vendor cannot be overemphasized,” says Samir Gandhi,

of Sidley Austin. “You must know who you are dealing with.” Some ques-

tions Gandhi routinely asks include the following:

Can the vendor meet your expectations? Can they dedicate the neces-

sary resources to your project? How economically viable is the vendor?

Will they be around 3–5 years from now? What kind of turnover does

this vendor have? What kind of training do their people have? Who are

the vendor’s clients? Who do they no longer work for? Is the vendor

working for your competitor? There are “control of technology” issues

as well. What business knowledge is lost in the process of implement-

ing this arrangement? How comfortable are you with your technology

being placed in the hands of third-party providers? What happens to

your technology and know-how if they are no longer around?

Allen Bargfrede, formerly of Orbitz, agrees. He tells of working on one deal

with a U.S. shell entity owned by an Indian company. The assets all resided

in India. Bargfrede went to outside counsel to obtain a guarantee from the

Indian corporation. He concludes that “someone has to go and physically

see the vendors’ facilities and meet with people. You need to drive to the

facility, see that it exists and kick the tires.” IBM Consulting Services advo-

cates that such visits provide a view not just to organizational structure and

technology utilized but also “a glimpse at the level of professionalism and

1. I P I, H S  S I I? A A  D

P  S  B P O F  I, F S-

 R 11 (2005).

CHAPTER 6100

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