Six Steps to Successful Vendor Management

By Deb Perelman  |  Posted 2007-05-17

Six Steps to Successful Vendor Management

NASHVILLE, Tenn.—To meet the technology needs of their organizations, CIOs are increasingly turning to outside vendors, a trend that appears to have little chance of letting up. Although the ability to manage vendors effectively enhances the business perception of IT effectiveness and helps CIOs achieve success, few have actually been formally trained in managing these relationships.

In a roundtable discussion with three CIOs on Forresters Leadership Boards at the consultancys annual IT Forum here May 15, participants discussed vendor management tactics that worked—as well as those that failed—for their organizations. One thing that was nearly universally eschewed was choosing vendors by price alone.

"You talk about price for short-term relationships. If its a commodity, the only differentiator is price. But if you take a long-term view of your vendor relationship, its more than the lowest dollar that will create value," said Philip Go, CIO of Barton Malow, a Detroit-area design and construction services firm.

The CIOs acknowledged the importance of performing risk analysis—what they would do if they had to pull out as well as the odds that such a thing would happen. Performing risk analysis helps reduce the likelihood of needing to change vendors, a process that was labeled especially painful.

"I have heard of a lot of bait-and-switch in outsourced relationships, where the brochure showed pictures of a state-of-the-art data warehouse, but in person the racks looked like theyd come from Cosco and the servers were ancient," said Tom Halbouty, vice president and CIO of Pioneer, an Irving, Texas, exploration, drilling and production company. "You cant be too careful. Youve got to mandate site visits, too."

A survey finds CIOs like their jobs but not their outsourcers. Click here to read more.

Death traps—including inadequate monitoring of vendor performance, poor negotiation and letting the other party take over the drivers seat in the relationship—seem to linger at every juncture of a vendor relationship.

"The true test is not when things are going well, but when things go wrong," said Go. "Its good to work with people whove seen both sides of this fence."

Three Most Common Pitfalls

The notion of standardized practices of vendor management is a relatively new one, borne of countless case studies that relied on CIOs who were early adopters of outsourcing practices.

One of the most common pitfalls these CIOs ran into was confusing vendor selection for vendor management.

"There was so much focus on the selection process and building the contract but little about how to manage the relationship that followed, from re-evaluating the selection process to figuring out the value that the vendors themselves bring," Liz Brady, senior analyst of Forrester Leadership Boards and author of the report "Six Steps to Successful Vendor Management," told eWEEK.

The second trap that CIOs fall into, according to Bradys interviews, is simply going for the lowest price.

"There was often a feeling that you should give yourself a high-five for beating the vendor down," she said. "You really want it to be a win-win relationship. They have a business to run too, and they might be able to pick up and choose other customers if their margins are not met. As the market has matured and as many of these vendors have become consolidated, stable companies, the dynamics have changed."

Finally, Forrester learned that surprisingly few of the CIOs measure the business value of their vendor relationships on business metrics.

"Increasingly, CIOs are going to have to see beyond SLAs [service-level agreements] and only whether the contract was fulfilled, but whether the exchange brought value to the business and whether they got a return on their relationship," said Brady.

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The "Six Steps to Successful Vendor Management" report outlined six steps to successfully manage vendors and form strategic partnerships for custom products, services or outsourcing functions.

"In a time of flattening budgets and mounting priorities," Brady said. "One of the key ways CIOs can stay strategic and competitive is with effective vendor management. You have to manage your vendors well. They represent you to your internal and external customers."

The report claims that viewing vendor management as a life cycle and not a procurement event will provide such benefits as reduced costs, increased customer satisfaction, greater business impact of technology projects, and the ability to co-develop and innovate with partners.

"What we learned was that everyone is doing vendor management, but the question was whether it was a formal vendor management function that theyve developed processes for," said Brady.

The best practices report hopes to provide a common set of practices that can be applied to any organization.

The first step is to acknowledge that vendor management models vary in terms of resources and structure, and to match the vendor management model to organizational needs. Choosing the right one can play a big part in ensuring success.

"This will determine what kind of model you will have for vendor management: a dedicated resource or relying on a program management office, or will you start a vendor management function? Will it be a virtual team that you bring together, or will you, as some have already started, outsource the vendor management relationship entirely? Youve got to match your needs to one of these models," said Brady.

The second step is to categorize an organizations existing relationships according to the role their products and services play in the business. The process of collecting all of the contracts out there, many that companies didnt even know about, putting them into a category of a service they provide and determining where there is overlap can be enormous.

In a famous case, GM managed to save $6 billion by standardizing and consolidating its processes.

"Any CIO stands to save a lot of money. Research has found hundreds and thousands of dollars of savings from duplicated hardware licenses," said Brady. "This is considered the low-hanging fruit, and its important to consider how you ended up with so many soloed licenses everywhere in the first place."

The third step is to establish the selection process. Because every organizations vendor selection process is unique, its critical to decide the parameters and decision points that matter most.

"At this stage, you address whatever problems have come up in past relationships. You cant use the same model for each. Youre talking about partnerships with people," said Brady.

Although engaging an IT legal specialist may not be required for all sourcing, the report notes that complex technology relationships benefit from early legal involvement to manage dialogue, lead negotiations and author partnership agreements. Some companies brought lawyers in from the outside and others had them on staff. This is the fourth step.

"Its important that the relationship is documented, and not just in the contract phase. Many lawyers even feel thats the worst time to be brought in. Before the contract, there are proposals, demos and negotiations, and there can be something lost in between this and the time the standard contract comes together," said Brady.

"Lawyers also helped companies outline which battles were worth picking," she said. "Legal specialists were especially helpful when negotiating ERP [enterprise resource planning] systems, as the product is not ready when the contract arrives. One CIO said that his credibility was heightened by having the legal specialists with him."

Read more here why you should get a lawyer if you plan to outsource.

Regular measurement and data monitoring is suggested as the fifth step, as part of a strong project management approach. There is not one silver bullet tool that can do all of a companys oversight.

"When renewal time comes around, youve got to be on top of it. You need to have good data that you can bring back to your company," said Brady. "A lot of CIOs mistakenly think that just because outsourcing is cheaper that they dont need to monitor the numbers. CIOs must be able to monitor their own data and compare the value of vendors to make informed decisions."

Step six is define the partnership for long-term success and the relationship will be more effective. To be able to set up the parameters of a relationship, CIOs need to have the preceding systematizing of functions in place, the report explains.

"Before you can share intellectual property, co-develop products, share your road map, show how youll help each other with media, joint promotions and even cross-selling products, youll need to define your relationship parameters. Youre still responsible for the ultimate performance," said Brady.

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