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Why a Reference is No Substitute for Due Diligence in Vendor Selection

bigstock-Business-Man-With-Checkboxes-47587384It’s more than a bit disappointing when incomplete and impractical advice dominates the Web – and no there’s no better example of this than the plethora of helpful tips for choosing a vendor. No doubt, these articles are well intended. But the simple fact remains that many businesses follow the advice and in many cases end up selecting an unsuitable vendor and ultimately paying a hefty price for the selection. One of the most common pieces of advice around vendor selection espouses the “earth shattering insights” that businesses will uncover when speaking with vendor references. But after a thorough inspection and review, a hearty second thought should be given to vendor references and perhaps ultimately replaced with a mindset of due diligence.

Why are Vendor References so Popular?

At the end of the day, vendor references are so popular for two main reasons. First, they provide a simple way to make a quick decision for a prospect. In our quick fix society, most prospects simply don’t have enough time to dive under the hood of a potential vendor and thoroughly check out the engine. We’ve been trained to think that speaking with others familiar with the potential vendor will provide a sufficient comfort level and ultimately predict future success. Second, vendor references are extremely popular with vendors because they allow for a very controlled inspection. In other words, vendors can choose their best and most loyal customers to provide a reference, thereby all but guaranteeing a positive interactive and ultimately a warm and fuzzy feeling for the prospect.

The Argument for Putting the Breaks on Vendor References

Knowing that most vendors (translation – nearly all vendors) are going to provide a positive reference, one could easily argue that speaking to references is simply a waste of time. Rarely do vendor provided references give any insights into challenges that can take place within the relationship. Furthermore, even when “tough questions” are used with a vendor reference, such as asking them to explain a challenging time that was experienced with the vendor, the response will not necessarily provide the level of depth and insight necessary as the reference is presumably still enchanted with the vendor. But perhaps a more politically correct response is to supplement vendor provided references with other information that can provide more valuable information than a potentially slanted and controlled source. And it’s important to note that there could be some interesting information gleaned from speaking with references. However, there are far more valuable ways to get the information needed to make the best decision. At the heart of vendor evaluation, a potential prospect is trying to determine which vendor will provide the best overall “fit”, which vendor will provide the best performance, which vendor will provide the best overall value, and which vendor will be able to meet its unique and divergent needs. And the mix of importance of each of these factors will be different for each business, so determining what is most important in the selection process and then validating those factors becomes vital to success.

Get Smart and Replace Vendor References with Due Diligence

Due diligence is a common terminology used in the business brokering industry and refers to the process of a potential buyer of a business performing a number of intricate steps to assess whether or not to buy the business. Usually, the due diligence process is very involved and includes a thorough review of all aspects of the business, from accounting and financial to personnel and strategic planning. In other words, it’s a very detailed analysis because the stakes are very high. Similarly, the stakes are extremely high when using a vendor. And while a detailed analysis of the financial history of a vendor may not be necessary or practical, certainly taking the approach of getting as much information about any potential vendor is not only the smart path but will also lead to the greatest likelihood of success. Remember, businesses are going to put their best foot forward, so they’re going to showcase the aspects of their business that will provide the greatest level of comfort for a prospect. But raving reviews, a solid Better Business Bureau report, and a fancy website won’t necessarily determine success. It’s the responsibility of the prospect to try to find any potential risk involved in using a provider. Using a “due diligence” approach to vendor selection helps to change the frame of reference of the selection process – from crossing off a checklist to thoroughly inspecting.

Due Diligence in Action – A Few Examples

What does it mean to perform due diligence in the vendor selection process? At the heart of the process is both thorough inspection and creativity. One way to completely revamp the vantage point of the old and worn out vendor reference is to instead as each potential vendor for some examples of “lost customers” and reasons why these customers were lost. This will help get to the heart of the truth about times when the vendor experienced difficulty with a client and what they did to overcome that going forward. Another example of a replacement for vendor references is to complete a checklist of the most important traits that a vendor must encompass and then use this as a scorecard. Yet another creative way to determine future success is to sample the service in some way, shape or form. Actual interactions will provide first hand experience, and there are a lot of creative ways that this can be accommodate.

Ultimately, the vendor selection process has changed immensely. There are so many more resources at the disposal of vendors that help them put their business in the most positive light possible. The prospect looking for outsourced service must evolve with the times as well. Gone are the days of relying upon strategically placed vendor references. Businesses can gain the power back by using a more methodical, due diligence approach. While it may take more time to vet vendors, it will save a mountain sized headache in the future.