How to Properly Screen Vendors
The wrong vendors can cause a business to spiral into losses (from regulatory fines, reputational damage, etc.), whereas the right vendors can set it up for success. This brings us to the question: how do I differentiate between the right vendors and the wrong ones?
The answer: By screening your vendors thoroughly before you get them on board.
The vendors you’ll pick will become an extension of your business. They would be deeply embedded into your business operations, and have access to sensitive company data. Collaborating with a third-party will also expose you to the ripple effect of outcomes – positive or negative – that they would experience down the line. With the right vendor sanction screening systems in place, your workplace will no longer be vulnerable to the risks of working with unscreened vendors.
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Types of Screening + Key Factors to Consider
Screening your vendors the right way can protect your business, your employees, your stakeholders, and your customers. Here are some of the most important types of vendor screenings to consider for your business:
Environment, Health, and Safety (EHS) Screening
Leaders wanting to grow and maintain a sustainable business prioritize an integrated environmental, health, and safety management system.
Regardless of the type of third party you’re collaborating with, it is critical to run an EHS screening. For example, in the United States, this helps you protect your business from vendors who may not be in compliance with regulations from EPA (Environmental Protection Agency) and OSHA (Occupational Safety and Health Administration).
As a leader, you must know how well your vendors manage their financial obligations. This is where the need for a comprehensive financial screening comes in. It helps glean the following valuable insights about the third party you do business with:
- Years in business, company background, and general information
- Industry comparisons, total assets and liabilities, and net worth
- Financial and banking information
- Net profit after taxes and quick and current ratios
- Payment records and due payment experiences
The financial health of your vendors will make or break the way your business grows. By performing a financial screening, you can ensure your organization receives timely deliveries and doesn’t get in trouble just because the third party unexpectedly goes out of business.
When associating with a vendor, your company must protect itself from instances of money laundering, fraud, terrorism, and identity theft. The price of doing business with a sanctioned entity can cost you more than legal fees and a fine; in the day of consumer activism, doing business with a sanctioned entity can turn your organization into a pariah. Ignorance is not an adequate defense.
Regulatory screening will ensure your business doesn’t work with restricted organizations or individuals. Some of the US federal databases for regulatory screening include:
- OFAC’s Specially Designated Nationals List (SDN)
- GSA’s (General Services Administration) Excluded Parties List System (EPLS)
- OIG’s (Office of Inspector General) List of Excluded Individuals/Entities (LEIE)
The importance of your vendors adhering to relevant industry laws and regulations cannot be stressed enough.
An unstable vendor can fracture your growth before you can realize it. To keep legal liabilities at bay, maintain stable finances, mitigate unforeseen illegal actions, and remain in federal compliance, it is critical to complete a comprehensive legal screening process.
This includes diving into past vendor activities such as a decade-long history of bankruptcy filings, liens, history of federal, state, and county tax liens over the past 7 years, judgments, and more.
IT and Cyber Security Screening
According to data, about 59% of companies experienced a data breach caused by one of their vendors.
Compromised cyber security and IT management can lead to lost customers, reputational damages, declining revenue, and increasing costs to remedy the situation. This is why organizations must be proactive in analyzing how their vendors manage their IT security controls. Make sure your screening process deploys the power of automation to constantly assess and monitor third-party security risks.
Measuring Compliance Standards
The right vendors always prioritize ethics and compliance before everything else. Measuring these standards can become the difference between whether your company is in safe hands or remains unaware of the impending risks of noncompliance.
How ethical is your vendor’s relationship with their clients? How are their employees trained to manage information? Where do they store their clients’ data? Who manages their security risks?
Before getting a vendor on board, request a written protocol of how exactly they maintain their compliance and ethics standards. If you get vague and inconsistent answers, you might want to look elsewhere.
Quality Control and Assurance
Quality control and assurance relate to ensuring that the products and services you deploy in your business come from reputable sources. This screening opens the window to:
- How well your vendors run their organization
- How effective is their internal product quality control
Quality assurance screening involves evaluating a vendor’s financial position, running on-site inspections, and gauging how well they train and assess their employees.
How to Build a Valuable Vendor Screening Program?
A successful vendor screening process demands a systematic approach to assessing areas of business that may have a direct impact on your organization. Just like your new hires, your new vendors must journey through a series of screening checks so you can trust their ability to deliver the products and services you need. Here are three tips to build a valuable vendor screening program:
Know Who You’re Working With
Who are the best third parties that offer the services you’re looking for? What is their size and what are the products they offer? Do they offer training? Do they deploy integrated systems for security and efficiency? Are they currently working with businesses like yours? You don’t have to work with the first third party you speak with regardless of how trustworthy they may seem. Instead, answer these questions to choose the ones that will become your partners in growth.
Assess their Key Contacts
When considering a vendor, let them know you’d like to speak with a few of their clients that are from similar industries and running sizable businesses. Understand how potential vendors deploy their communication strategy, solve problems, maintain compliance, and more. Make sure you perform comprehensive research and go the extra mile to ensure you don’t end up with an unstable or disreputable third party.
Run Vendor Workforce Screening
Your vendor’s workforce becomes the extension of your own workforce. This is why it’s critical to ensure your vendor’s employees are people who have the necessary backgrounds, legal work authorization, and licensing to work as contractors or subcontractors for your company. Vendor workforce screening dives into areas such as the employee’s employment verifications, credentialing, criminal history, employment exclusions, driver records, and more.
A Final Word
The perfect time to find out who your vendors really are is before you enter into a services agreement with them. A thorough vendor screening program is the best way to ensure your organization brings in trustworthy partners. Performing vendor due diligence and fostering third-party accountability doesn’t have to be difficult.
Giovanni Gallo is the Co-CEO of Ethico, where his team strives to make the world a better workplace with compliance hotline services, sanction and license monitoring, and workforce eLearning software and services.
Growing up as the son of a Cuban refugee in an entrepreneurial family taught Gio how servanthood and deep care for employees can make a thriving business a platform for positive change in the world. He built on that through experience with startups and multinational organizations so Ethico’s solutions can empower caring leaders to build strong cultures for the betterment of every employee and their community.
When he’s not working, Gio’s wrangling his four young kids, riding his motorcycle, and supporting