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In this blog article, Simon Cornwell, co-founder of Vermilion Software, explains why asset managers should demand more from vendors when taking up client references during the vendor due diligence process. 

With spring in the air, you may well be considering your summer holiday. Booking that all-important hotel accommodation can make or break a vacation and firms like TripAdvisor, Inc. have become an invaluable source of information. Unlike Wikipedia (which is more of an attempt to provide truth), tripadvisor.com allows users to express their opinions and experiences and in turn allow readers to make educated decisions. Customer reviews are the only ranking system they use and customers use whatever criteria they like. Look up any hotel or attraction and you’ll find ratings and most important, reviews. These reviews are usually more interesting than the rating since they reveal bias and often details that validate the rating. Of course, you have to take some (usually extremely good) experiences with a pinch of salt, but there is generally a consensus. Read the various reviews and you’ll be pretty certain what you’re getting into.

The key to tripadvisor.com is that you get to choose the reviews that you read – not the vendors. Imagine for a moment, though, that the hotels could choose the reviews that were published on the site. They could delete any opinions that they disliked and could actively promote the ones they favoured. Site traffic stats would go through the floor. Buyers and eventually vendors would abandon the site in droves, muttering ‘It’s all rigged now…waste of time’ and ‘No one believes us any more’, respectively.

Yet in the financial software world, vendors invariably do just that – they select the references that they wish investment management firms to speak to during the vendor due diligence process. Every deal always involves the prospect seeking to have a confidential discussion with another company (usually one in the same vertical industry or approximately the same size) in order to gain confidence. All vendors do this and it can win or lose a selection process. Yet is it credible to let the vendor choose the firms that the asset manager may speak with – and what are the best questions to ask?

I believe that vendors should offer a long list of ten clients to prospects (new and old) and encourage the prospect to choose up to five references. I would also advocate giving the prospect a list of questions to ask those clients. These might include:

  • What is the vendor like to work with?
  • Why did you select the vendor over the competition?
  • What is the vendor’s development strategy?
  • Does the vendor have a credible product roadmap?
  • How good were the technical consultants?
  • What is the vendor’s ‘aftercare’ like?
  • Is this just another ‘closed deal’, or will you be part of a company partnership going forward?
  • Would you select them again, second time around?

The point is that real due diligence should go way beyond ‘did-the-project-finish-on-time-and-was-it-on-budget’-type questions. Inquiries, interrogations and requests should challenge the vendor concerning their underlying culture and strategy.

Perhaps one day we will see a ‘TripAdvisor’ for financial software vendors. Until then, don’t take just one person’s word on how good a vendor is – seek many different opinions. These conversations can take just 10-20 minutes, when your partnership should last 10-20 years. And pose the most searching questions, as you would for your summer holiday.

Bonnes vacances!