By itself, an ironclad contract can't save a soured sourcing relationship, any more than an ironclad prenuptial agreement can ensure a happy marriage. When the honeymoon is over and you realize that the vendor with which your company entered a multiyear relationship isn't all you thought it would be, you scramble for the contract to see what options you have. But at that point, it's probably too late to salvage the relationship.
Oftentimes, companies enter sourcing relationships with all due diligence and then lose interest in maintaining it. They go about their business, relying on their carefully crafted contract to steer them clear of any problems. But when problems do crop up, they tend to be significant because so little attention has been paid to the relationship.
What's needed is a more formal vendor management effort and, in many instances, a dedicated vendor management office (VMO).
In fact, many firms are building VMOs. In 2007, Forrester Research asked 700 decision-makers at North American enterprises and 300 at European enterprises whether expanding their vendor management capabilities was either on the agenda or a critical priority; 48% said it was.
But in a time of economic uncertainty, how can sourcing pros justify to resistant business leaders the value of a VMO? Business leaders are always interested in the bottom line, but never more so than when times are tough. As a result, VMOs can get buy-in from executives by demonstrating the hard- and soft-dollar savings.
Forrester's research shows that VMOs deliver a consistent set of benefits that apply equally to new efforts and expanded ones. For example:
- More effective demand management yields hard-dollar savings. Most of the tangible benefits of a VMO come from better leveraging volume-purchasing agreements, as the VMO improves coordination and institutes thorough reviews of maintenance contracts. Such oversight often reveals unnecessary spending. For many Fortune 1,000 companies, vendors can account for 65% of the IT budget. That being the case, a large company can easily recognize 1% to 3% savings by creating a VMO.
- Better governance processes and supplier performance yield soft-dollar benefits. VMOs can improve processes in areas such as requirements gathering, vendor scorecarding and governance. Although it is much harder to quantify the benefits, the company will gain more consistent and predictable supplier performance.
- Rigorous risk management minimizes disruptions from poorly performing vendors. Increasingly, VMOs' governance responsibilities include formal risk management assessments of IT suppliers. These assessments help organizations avoid potentially expensive and brand-damaging outages that can result from poor supplier performance.
When you start to take control of the vendor management life cycle, it's important to avoid getting ahead of the company's ability to absorb change. It can be helpful to approach the process in four steps:
- Charter and establish the vendor management office. Oftentimes, companies set up a VMO to work in conjunction with the procurement organization, augmenting its purchasing skills with new capabilities in the areas of demand management and governance.
- Review maintenance contracts and volume-purchasing agreements for simple, upfront savings. Once in place, the nascent VMO's next step is to look for the low-hanging fruit of hard-dollar savings. A number of VMOs have begun by reviewing maintenance contracts to make sure that the company is still using the equipment that the contracts support or to verify that the maintenance still supports mission-critical resources. These VMO-led reviews have enabled firms to reduce their maintenance outlays by millions of dollars.
- Rationalize processes to ease end-user compliance. Initial savings will empower the VMO to tackle the tougher task of standardizing IT processes in areas such as demand aggregation, specifications gathering, vendor selection, supplier scorecarding and risk management. Depending on what motivates management, the VMO can start with demand management to drive down costs or with governance to deal with regulatory issues.
- Automate simplified processes to reduce bureaucracy. Longer term, the rationalization of processes in areas such as contract management and vendor governance can be followed up with automation. This investment can lead to a reduction in head count in areas such as legal, purchasing and vendor management itself, or at least negate the need to hire additional staff members as the portfolio of suppliers expands.
Building a VMO represents a key part of a company's strategy to bring more maturity and process discipline to IT and take an "activist sourcing" approach.
If your company doesn't recognize the value of a VMO, it's time to get key decision-makers on board by showing them how VMOs can drive costs down and IT's performance up.
John C. McCarthy is a vice president and principal analyst at Forrester Research Inc., serving sourcing and vendor management professionals.