Every day, organizations around the world use due diligencequestionnaires(DDQs) to evaluate potential business partnerships and gain a better understanding of the way various third-party vendors conduct day-to-day operations. These questionnaires help organizations investigate potential business ventures or partnerships to confirm they are making a good investment before entering into an agreement with a third-party.
Unfortunately, there is no ‘one size fits all’ questionnaire, so it is crucial that organizations carefully consider which type of questionnaire will provide the most informative data and allow them to make the best business decisions. Below, we explore the meaning of and best aspects to cover in a DDQ, as well as outline 6 examples of successful questionnaires that your business can leverage to pinpoint vendor risk.
What is a due diligence questionnaire (DDQ)?
A due diligence questionnaire is a formal assessment made up of questions designed to outline the way a business complies with industry standards, implements cybersecurity initiatives, and manages its network. In most cases, a DDQ is used before a merger between two businesses to create transparency and confidence in the venture. Due diligence questionnaires can also be used bi-annually to ensure agreed upon business standards are continuously met by vendors.
Why do organizations issue DDQs?
DDQs are issued to simplify and condense the transaction of important information as well as efficiently collect data and streamline the disclosure process. They are designed to surface details and hidden information that otherwise would have been overlooked and prove to be most beneficial when addressing the following categories:
Mergers and acquisitions
Due diligence questionnaires are an essential part ofmergers and acquisitions. Before any transaction is complete, a business must confirm that the investment is beneficial and will pay off in the future. Outlining a vendor’s security, personnel, legal matters, compliance, current contract obligations, and financial history, a DDQ supplies important data that can be used to help decide between potential partners and reveal pertinent vendor security risks.
Investments
DDQs are equally as useful for investments. Typically highlighting core business credentials, these questionnaires explore topics and include details on company founders, client and supplier information, competitor analysis, and copyright. For example, a stakeholder may conduct a DDQ to ensure a potential business venture is worthy of investment. The DDQ will allow the stakeholder to better assess if the investment is worth the money, time, or even the potential risk it poses before any binding legal action is taken.
Vendor due diligence
Vendor due diligencecan include both proactive sell-side due diligence and third-party risk assessments.
Proactive sell-side due diligence is when a company plans to sell its business and predicts that multiple parties will be interested in buying. In this situation, they would conduct proactive vendor due diligence and also investigate risks within their own company. Then, when the company is ready to sell, this information can be provided to potential buyers without the hassle of having to complete an individual DDQ for each interested buyer. This process speeds up the sale significantly and can result in faster acquisition of the business.
Athird-party risk assessmentmanages risk within supplier partnerships. No matter the vendor, there is always a level of risk associated with conducting business with another organization — this could include financial, operational, reputational, and cyber risks. Since vendors will likely receive access to your business network, it is important to cover all bases before granting secure access and permissions. Thevendor due diligence questionnairestands to examine risk by retaining information on data security, human resource policies, financials, and references. Organizations can then use this information to set requirements that the vendor must uphold in order to meet the standards of the business relationship.
What are the 5 aspects to cover in a DDQ?
Acquiring the proper information and data from a vendor will prevent your business from signing contracts with hidden liabilities and will help to streamline the onboarding process. Below, we outline the top five most important aspects to cover during a vendor evaluation:
1. Cybersecurity posture
It is crucial to understand the ways cybersecurity is implemented into a vendor’s business practices. As the world grows increasingly digital, vendors need to uphold cybersecurity best practices and network protection plans that correlate with industry standards. Questions concerning cybersecurity practices may include: asking if the vendor has participated in avulnerability assessment, if they have implemented an information security awareness program, or if they have an IT team prepared to handle hacking attempts or system breaches. Insight into these questions will allow businesses to better assess a vendor’s security posture and determine where cybersecurity risks may lie.
2. Business continuity and disaster recovery plans
Has the vendor you’re investigating developed a formal or well-documentedbusiness continuity plan? Not only does this secure longevity for the vendor’s business, but it also demonstrates that the company has a plan and procedures set in place in the event of a network disaster. Your due diligence questions should provide insight to their disaster recovery plan and solution. Does the vendor have a structure to identify critical IT systems, an outline of steps needed to restart or recover networks, and employee emergency training guidelines? A disaster recovery plan ensures that critical data is protected in the event of a system failure or breach and must be a topic covered in your DDQ.
3. Regulatory compliance
Ensure that the vendor maintainsregulatory complianceby following state, federal, and international laws and regulations that are relevant to their industry. When a business fails to comply, they expose themselves to a series of potential lawsuits, financial liability, and reputational risks. The last thing a business wants to do is be associated with a vendor who doesn’t comply with industry standards. Since the regulatory environment is constantly changing, questions that review the way the vendor monitors for these changes and implements them into their compliance programs should be a top priority.
4. Data and information security management
Sensitive dataand information are some of the most important assets to an organization. Confidential employee data, bank account information and access to confidential files all run the risk of a breach if managed improperly. Therefore, data protection should be prioritized and managed closely. Businesses should address the systems of data management a vendor has in place to ensure the security of sensitive information.
5. Network management
Businesses must receive full transparency into the methods and procedures a vendor follows to maintain network security in order to avoid any surprises in the future. Your DDQ should include questions about the vendor’s level of visibility into their network, whether they are utilizing advanced monitoring and reporting tools, and the structures they have in place to ensure their network is managed in the most optimal way.
What is an example of a successful due diligence questionnaire?
Due diligence questionnaires can easily get convoluted and cluttered with overlapping concerns and questions that could have been conjoined. Organizations have found it useful to create a standardized due diligence questionnaire template to cater to the kinds of investigations they perform regularly.
A questionnaire template saves businesses time and makes analysis of future vendor compliance easier since quarterly or bi-annual questionnaires use the same template.Examples of a successful due diligence questionnaire include:
1. PRI hedge fund DDQ
Principles for Responsible Investing (PRI) is an international organization that was founded by investors to promote the incorporation of environmental, social, and corporate governance factors into the decision-making process of investments. They’ve created their ownDDQ checklist, along with other investment tools, and offer a clear overview of their process on how the questionnaire was developed. The checklist highlights four main categories that focus on policy, governance, investment process, and monitoring and reporting.
2. MISC business relationship DDQ
MISC business relationship DDQcan be classified as the moral questionnaire, as it ensures organizations comply with their ethical standards. MISC has a zero-tolerance policy against bribery and corruption and has a strong commitment to risk management. Their DDQ highlights their expectations and the documentation that they require for compliance.
3. INREV investor and consultant DDQ
The in-depthINREV DDQis committed to sharing knowledge, advocating for best practices, and establishing transparency throughout the non-listed real estate investment industry. Their template is highly organized and easy to use, focusing on how to best assist investors and consultants throughout the due diligence process. It gives insight into strategy, management, risk processes, and projected performance outcomes. With the provided information, investors can determine if the proposal is best suited for them.
4. Environmental and social governance DDQ
Theenvironmental and social governance DDQfocuses on the responsibility of environmental and social governance and provides assistance for general partners looking to identify risks and best policies within an investment. Businesses can use this DDQ example both before and after an investment to single out potential threats or issues to the company that will likely require further attention.
5. ILPA DDQ
The Institutional Limited Partners Association (ILPA) DDQ is a well-thought-out and continuously updated questionnaire that covers an array of real-world issues and questions. Constructed using questions from other questionnaires in the industry, the ILPA focuses on and covers fourteen critical areas from investment strategy, to the alignment of interest, to diversity and inclusion. A complete list of the covered aspects can be found in theirDDQ example.
6. SecurityScorecard’s service provider due diligence checklist
SecurityScorecard’s concisedue diligence checklistsimplifies the process of developing a DDQ and allows businesses to set up a structure and outline to follow before entering into a partnership with a provider. The checklist suggests following these steps for gathering necessary data:
- Take inventory of your service providers
- Collect information on each service provider including:
- Information about general risk
- Information about cyber risk
- Classify your service providers from highest to lowest risk by asking the following questions
- Analyze your own business risk
This checklist can be personalized to the needs of your business and can provide you with basic vendor information that can be used to inform partnership decisions. However, you choose to utilize the checklist, uncovering potential risks before acquiring them is the most important outcome of a successful DDQ.
How SecurityScorecard Atlas facilitates the questionnaire process
SecurityScorecard Atlasis the industry’s only completely integrated security ratings and vendor assessment solution, providing businesses with vendor assessments that are faster, more accurate, and provide unparalleled security. Instead of facilitating a questionnaire process and analyzing vendor risk on your own, Atlas does it for you. A centralized platform combined with machine learning, Atlas aligns the responses from your business’s questionnaire withSecurityScorecard Ratingsto provide instant access and transparency into the level of cybersecurity risk that each potential partner poses. In addition, Altas can compare service providers’ questionnaire responses from past to present, streamlining your business’s risk assessment process.
Constant management of third-party risk can be difficult, however, with SecurityScorecard’s Atlas platform, businesses will be able to see how continuous security monitoring can give their business the proper answers and guidance they need to make the best business decisions every time.
