Conducting due diligence on local partners: Why and how

As development goes local, foreign aid donors are slowly pivoting away from some familiar partners and taking chances on new ones. Prime international contractors are also being urged, through donor policy and specific contract provisions, to subcontract project components to local groups. This is in many ways very exciting as local organizations bring a unique set of competencies and qualifications such as the ability to understand local development challenges, connect with local communities and influence project design early on. While donors and global implementers are already reporting success in forming trusted partnerships with local organizations, there are also some horror stories. Fraudulent or bogus nongovernmental and civil society organizations and underperforming or unethical private sector partners are a reality in most emerging markets, threatening international development projects all over the world. “Partnering with local organizations to implement development projects is critical, but there is certainly some risk inherent in contracting local groups,” explains Devex Director Pete Troilo, who has led due diligence projects across Asia. “The best way to mitigate the risk is to screen and get to know your potential partners and vendors.” Conducting professional due diligence is common in most industries. Many banks, manufacturers, energy firms, and other commercial enterprises and foreign investors have integrated due diligence into all pre-investment and operational decision-making. They conduct these formal reviews to confirm a potential partner organization’s capabilities, investigate their standing and reputation, and uncover any anomalies, conflicts of interest, or misrepresentation. The international development community — which operates in some of the world’s most difficult environments — is beginning to catch on. Private sector implementers stress to Devex that while due diligence remains a new concept within their organizations, management teams are buying into the practice, recognizing that a couple of thousand dollars spent up front before a partnership is formed can save millions of dollars down the line. They also find that conducting due diligence in emerging markets is an ongoing process that requires regular attention and updates, particularly as projects are carried out and funds are disbursed. Frequently, prime contractors are held accountable for the misdeeds of local subcontractors, which could spell disaster for winning future donor-funded projects. For donors, reports of money being spent on corrupt or incompetent local organizations can infuriate taxpayers back home and sacrifice future engagement. Today, the stakes are higher than ever as more and more development contracting happens at the local level. Here are some of the areas that donors and global implementers should assess when conducting due diligence on local partners and vendors: - Technical and operational capacity. Examine whether or not the organization has the relevant technical expertise/staff and a track record of comparable projects. Verify their client history. Review their mechanisms for consulting with beneficiaries throughout all stages of programs and projects. Investigate any history of bankruptcy, civil or criminal litigation. Confirm a system of checks and balances within the governance structure. Assess leadership and staff development practices. Nicole Barnes, RTI International’s senior director for international business development and marketing, says that small and midsize NGOs face a common set of human resources challenges. Barnes says many of these organizations fail to properly develop and train staff members, which leads to three or four superstars getting called on to do most of the work and burning them out. When this risk is detected, she recommends discussing the issue with leadership to determine how to implement a staff development plan that builds strength across all divisions and levels of the organization and distribute work more sustainably. - Financial standing and health. Examine the organization’s financial records and credit standing, including bank account balances, outstanding loans, debt obligations, leases, etc. The organization should prove that it has experience managing grant or subcontract funds, functional accounting systems and processes, mechanisms for fraud control, such as a separate bank account for grant funds, multiply signatory requirements for bank accounts and internal processes that encourage fraud reporting, and medium-term financial projections for the organization. - Environment, health, safety and social responsibility. Confirm that the organization complies with health and safety laws and regulations. Investigate the organization’s labor policies and ensure that they do not discriminate against women and minorities in hiring and promotion, and reject child labor. Inquire about evaluation mechanisms that track the environmental impact of the organization’s activities and initiatives to improve environmental performance such as adopting green technology and best practices. Confirm that the organization invests in internal employee welfare and social responsibility programs. - Policy and cultural compatibility. Confirm that the organization’s cultural values are aligned with your own and policies are in place to support those values. Understand the management styles and ethics of key staff. Investigate any association with tobacco, firearms and narcotics industries or links to groups that are involved in illegal, subversive, violent, unethical or corrupt activities. - Reputation. Check for any negative media attention or public accusations of malfeasance against the organization and its leadership. Examine political positions and connections. Confirm that the organization and its leaders are viewed positively in the local community. Consider how the partnership may reflect on the reputation of your own organization. Here are some information gathering and investigative tactics to effectively conduct due diligence on local partners and vendors: - Conduct in-depth media searches on the organization, including in local languages. - Interview executives and key staff. - Conduct site visits. - Consult the diplomatic and foreign business community in-country. - Check references, including clients, beneficiaries, suppliers, donors, etc. - Pull all available government records, including tax filings, business registration, permits and licenses. - Review financial statements, annual reports, sustainability reports, etc. - Review program evaluations from previous donors and partners. - Check sanction and debarment lists of major aid agencies. - Reference resources such as Dun & Bradstreet, Lexus-Nexus and Factiva. - Hire a third-party due diligence or investigative firm. While donors and global implementers should exercise caution when any red flags emerge, there are situations when it will be justified to proceed with the partnership despite some weak areas. Some local civil society and nongovernmental organizations simply cannot comply with requirements in the same way international partners can, but still have partnership potential. Dan Collison, head of program support for Save the Children, explains that operational weaknesses are not always or automatically a reason to reject the partnership, but instead might indicate an area for capacity strengthening and risk management. Collison adds that this process of identifying areas for improvement should be collaborative. For Save the Children in Sierra Leone, a formal Partnership Assessment is conducted before any new partnership is formed. Findings gleaned from that assessment are used to lay the foundation for a future partnership strategy and help local partners build the necessary training programs, financial systems and other operational procedures. Collison and Barnes stress that this is a gradual process. “Don’t overwhelm them with too much money or too much responsibility too quickly,” says Barnes. “With close coordination, local organizations can improve over the lifetime of the program.” Devex is going to Nairobi in October to host its first-ever career and partnerships forum in the developing world. Find out more about the Devex International Development Partnerships Forum and Career Fair in Nairobi, Kenya.