Due Diligence Best Practices

Blog post Chad Whitney 2018-02-23

If your job is to conduct due diligence - whether into a real-estate property, an investment fund, or a borrower - then you are well aware of the manual steps that can bog down the process. Long MS Word and Excel questionnaires can be redundant and difficult to manage. Using blank questionnaires with no intelligence requires recipients to repeatedly fill out the same spaces with the same information. Tracking and monitoring the status of multiple requests over email is overwhelming. The list of frustrations goes on and on.

The good news is that manual due diligence is no longer the only option. Advancements in cloud storage, software-as-a-service, and predictive analytics make this the perfect time for a due diligence automation solution. Here are five due diligence process best practices based on our experience with many customers.

What is Due Diligence

Due diligence is the research or exercise of care that a reasonable business or individual is typically expected to perform before entering into any agreement or contract with another party or performing an act with a specific degree of care. It is a method of systematically analyzing and mitigating potential risks and liabilities associated with a company or investment decision.

Due diligence has several applications for companies, as it is an essential tool for risk management, regulatory compliance, onboarding process, and more. Cybersecurity due diligence, for example, is the assessment of the governance, methods, and controls used to safeguard information assets, sensitive information, digital intellectual property, and customer data.

Compliance due diligence is the process of performing a thorough investigation, audit, or study of a company’s compliance with governmental and non-governmental regulatory agencies. It simply aims to determine if a corporation is adhering to the regulations it should.

On the other hand, vendor due diligence refers to examining third parties throughout background check, onboarding, and continuous monitoring stages to identify the risk these business partners bring to your company and manage them. Third-party risks are especially alarming today, where almost every business depends on a digital or physical supply chain.

Financial due diligence is an investigation into a company’s financial performance. Current due diligence, like an audit, is carried out by outsiders who want to get a better knowledge of the company’s financial condition and future possibilities. Financial due diligence also seeks to find flaws that may not be obvious from the financial statements.

Through these due diligence checklists, companies can ensure knowledge about their overall landscape in various areas to make informed decisions in the best interest of their stakeholders. The due diligence report also streamlines the mitigation process prioritizes “red flags” and high-risk activities.

Best Practices for Due Diligence

There’s no “one-size-fits-all” solution to due diligence, as it can be used for many applications. However, some due diligence trends and best practices can help you get the most out of these activities and provide more useful due diligence data to protect your company.

Best Practice #1: Digitize your Due Diligence Process

There’s no room for a paper due diligence process anymore. Aside from the waste factor, a paper questionnaire cannot be accessed from anywhere, and its data can only be factored into analytics if it’s manually entered into a computer. Plus, paper is the antithesis of a modern due diligence process. CENTRL allows users to upload paper-based questionnaires, thus bridging the gap between paper and software.

Due to a lack of visibility, a prominent third-party base frequently loses vital information. Consequently, most firms are unaware of other business units collaborating with the same third party. As a result, it is critical to maintain a unified third-party information system and keep third-party in control.

Searching for third-party agreements, assessment results, background checks, and other facts will be aided by business details, financial state, certifications, contracts, location, linked business units, roles, and duties.

Centralized third-party information enhances access to information and specifics concerning negotiations and risk mitigation efforts.

Best Practices #2: Treat your 3rd party as a partner, not an adversary.

Provide questionnaire recipients with the same software as you allowing them to respond directly to your diligence software’s process. A shared system will enable recipients to assign questions internally, collaborate, and have approval workflows and audit trails.

Best Practices #3: A standardized evaluation process

Due diligence process software has three key benefits to a high-quality standardized evaluation process. First, it anticipates the needs of your firm; you can assign specific answers or questions to domain experts within your company. Second, you can create a standard grading scale, which enforces standardization. And third, for objective Yes/No and multiple-choice answers, you can automate the scoring removing the possibility of human error.

Best Practices #4: Eliminate the need for email

Keep clarifications, issue resolution, and other communication contained within the application. One of the most annoying parts of conducting two-party due diligence processes across email is the uncontrolled flow of back-and-forth information without a specific context. Using CENTRL solutions, all communication is captured, allowing you to resurrect conversations by topic. In other words, there will be a complete communication trail attached to questionnaire questions, sections, or other content.

Best Practices #5: Monitoring, reporting, and analysis is vital

You need a way to monitor your 3rd party’s progress, create various reports, and deliver a thorough and accurate analysis.

As the number of third-party vendors grows, one of the best techniques is to do due diligence based on the related risk categories. Risk tiers can be calculated by stratifying third-party data based on segmentation scores or risk profiles. This procedure aids in the streamlining of due-diligence activities on a third-party basis.

Organizations may reduce due diligence costs by setting unique rules or criteria for each third party while simultaneously ensuring that strategic third-party relationships are effectively tracked.

Due to the resource requirements of this work, companies should automate it and base it on well-defined algorithms for scheduling third-party monitoring operations. This consistent intake of information can aid in further analysis of third-party data and enable enterprises to take action adequately.

How CENTRL Can Help You Implement Due Diligence Best Practices

ODD360 is a multi-party operational due diligence software used by investors and managers to produce a better operational due diligence process experience. ODD360 has a user interface that is extremely easy to use and powerful automation and analytics. It gives Managers a simple, straightforward, and quick way to respond to Due Diligence Questionnaires (DDQ) or Requests For Information (RFI).

ODD360 increases consultant productivity and enables them to give a better solution to their clients, allowing them to retain clients, create additional revenue, and differentiate themselves in the market.

ODD360 significantly increases productivity and enables consultants to provide a more comprehensive solution to their clients, allowing them to retain, generate increased revenue, and distinguish themselves in the industry.

Click to learn more about CENTRL’s due diligence process software, or contact us to request a demo!

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