May 07, 2012 | Sourcing Strategy
The shortlist of potential suppliers is identified. Due diligence is about to start. Anxiety is building to make a selection, maintain a schedule, “pull value forward,” leverage existing relationships with a supplier, or some other business urgency. What can be done to expedite the program? Too often, a decision is made to jump from the shortlist of three or four suppliers directly to one, and then start negotiating the contract. Has this happened in your company? Are the risks of skipping the due diligence and competitive negotiation process understood?
Due diligence is a core activity in a sourcing program. In sourcing efforts that are substantial enough to justify a work plan, three risks are greatly increased if the finalist decision is made too quickly without appropriate due diligence.
Risk 1: Not Knowing the Solution Details
The due diligence process enables your company to fully understand the details of the proposed solution (including the product, service or combination of both). This mitigates surprises that may occur after contract signing. Performing the competitive due diligence helps you understand different approaches that provide your company better insights to further refine requirements and ask better questions of the suppliers. It also helps you understand the “related” services or products that may be part of the solution, such as how services or products are transitioned, delivered, managed, etc. vs. just the core items for the product. The competitive situation and due diligence process exposes more of the “how” the solution is done and managed vs. just the “what” the solution is. Jumping to supplier selection prior to working through the details can create the situation where the supplier indicates it will “work out the details and complete due diligence with you after signing,” which increases risk to your company. One great risk is because the solution is not fully understood and defined in a contract, then the product or service and pricing may vary greatly from expectations.
Consequences of Not Knowing Solution Details
This misalignment can mean missing business requirements and your business case. Suppliers recognize their upside to your company jumping to a solution without the due diligence – this frequently increases the value for the supplier because many items will be out-of-scope of the base solution (resulting in charges for extra features or services that you may have thought were included). Suppliers may also assume your company is under pressure to get the agreement signed, which increases their motivation to be less clear until after contract signing when they are the only company you are working with.
Benefits of Performing Due Diligence to Overcome Risk
Due diligence allows development of deeper understanding and alignment on what will be delivered. It also mitigates the risk of variance that can occur after contract signing. The competitive nature of having a shortlist of suppliers participating in due diligence enables you to understand different approaches to the solution and helps ensure you are getting the approach that best fits your business needs and budget. We will cover two more risks concerning internal buy-ins and negotiating positions in the following post.
GEP is a global leader in providing strategic sourcing services help enterprise procurement teams deliver bottom-line savings and greater value from their spend. To learn how GEP can help you with due diligence and negotiation in sourcing, contact us today.