Vendor management once meant squeezing service providers for the lowest costs. That approach won't fly today.
These days, IT departments get more of their services from outside sources than they did in the past, so they need vendors that can keep up with their increasingly complex needs and innovation and integration requirements.
Key vendors can't be out of step, even if they come at bargain-basement prices. To get the most value from their vendors, leading CIOs employ a combination of policies to forge stronger partnerships with vendors while spurring them to be more responsive and innovative -- all while keeping tabs on the returns that they get from their tech investments.
Here are seven emerging strategies that help IT get the most from vendors.
1. Hold on-site vendor events
Leading companies don't want vendors to fade into the background after they sign their contracts. So they hold on-site events where their managers and employees can mix and share ideas with their vendor counterparts.
"They want the vendor to have a better understanding of the business, but it's also for vendors to take that information back to their own workers so they can develop ideas that are much more tailored and targeted and relevant to the business's needs," says Gartner analyst Christopher Ambrose.
Such events can help change the nature of the relationship from "purely transactional" to "much more strategic," he says. "You are able to develop those relationships beyond sales and even beyond the CIO level out into the business [units]."
The Governor's Office of IT for the state of Colorado wants its vendors to feel they're part of the team, with enough knowledge of the IT environment and its challenges to develop plans for improvement, says Deborah Blyth, the office's chief information security officer. So the state's IT leaders in March held a daylong conference during which they shared their five-year technology road map.
"The vendors were so excited to have a peek into the various initiatives that were coming up. It gave them an opportunity to say, 'Here's where I can help.' It allows them to make strategic contributions," Blyth says.
2. Choose small vendors
B.J. Fesq, chief architect and chief data officer at CIT Group, says he has a personal preference for working with small vendors -- particularly when his company is one of the vendor's larger clients.
"You're much more important to them, so they're much more attentive," he says. Fesq says that dynamic gives him leverage when negotiating contracts; he says he can get good prices not only on core services, but also on extras such as training.
Moreover, Fesq says a larger company may have enough pull to sway a smaller partner's upgrade and technology development plans. "You can influence the product road map," he adds.
Another advantage of working with smaller vendors is that they may be more responsive and nimble than larger companies, says Ambrose, noting that both of those qualities can help client companies gain a competitive edge.
Ambrose says he has seen CIOs partner with small vendors for their agility, their innovative technologies and their willingness to collaborate. And if bigger vendors see you doing business with small companies, they may be inspired to be more agile, innovative and collaborative themselves.
3. Consolidate your roster
When Stephen J. Gold started as executive vice president and CIO at CVS Health four years ago, he says he developed a framework to help drive decisions on which vendors to use, when to use them, and for what jobs. With the framework as a guide, he reorganized his company's approach to hiring vendors, opting to keep innovative and strategic work in-house while turning to vendors for commodity services.
Gold says his next step was to reduce the number of vendors, in part to get better prices by negotiating more work spread across fewer providers.
That seems to be a trend. Analysts and IT leaders say companies are rethinking the need to bring in a different provider for each and every need and are instead opting to hire just a few key vendors that can each handle a large part of the IT department's outsourcing requirements.
Angel Garcia-Manso, director of the program management office at Goodwin Procter, says IT leaders once used multiple vendors to handle a single project or function. But now, he notes, "I see value in consolidation in specific areas. Complexity is increasing, so integration is becoming more and more difficult. So in some cases it makes sense to consolidate so you can get better integration. And if you go to one vendor, you might get better pricing."
4. Create a tiered system of relationships
Tim Mills, director of the Portfolio Management Office at Lahey Health, says he puts his vendors into one of three categories: They're either tactical, strategic or partners. The relationship he has with each vendor depends on its classification.
Mills says he wants to get the best service at the lowest price from tactical vendors, while he sets a priority on ensuring that his strategic vendors are capable of supporting his IT team as it delivers on critical initiatives. And he wants partners to deliver technical and business insights to his IT department to help his team navigate challenges and identify opportunities.
With partners, "we're not just waiting for vendors to come to us with a sales pitch. We go out to them and say, 'This is what we want, these are our clinical requirements,'" he says. "They're providing us insight to help us move forward and grow."
He points to the relationship he and his team cultivated with the vendor of Lahey's electronic health records system. The vendor not only implemented and supports the EHR system, but also helps Lahey understand the changing U.S. healthcare landscape and how advances in technologies will impact healthcare delivery in the future.
"We feel we get more value doing this partnership rather than just price," he says.
5. Build true partnerships
Ambrose says many leading IT organizations are looking to create an "ecosystem of supply," in which CIOs expect their top vendors to act like true partners.
"What they're trying to do is get these vendors to build strong relationships and strong levels of trust," he says. "This is beyond the strategic vendors. They might have one list of strategic vendors, but a smaller list of 'true partners.'"
Like Mills, Beth Spriggs separates her vendors into different categories.
Spriggs is vice president of technology at Leadership for Educational Equity (LEE), a nonprofit advocacy group. She says there are some LEE vendors whose products are practically plug-and-play and whose contracts don't require much negotiation. Then there are four key vendors that provide her organization with essential services. Spriggs says she fosters close relationships with those four, visiting their offices, learning about their work and culture, and encouraging them to keep up with her business and its strategies.
"We go to them and say, 'This is a problem we're having,' and they help us solve it," she says.
She says she cultivates real partnerships with them, and that strategy pays off for both sides. Spriggs says she can count on them to get all hands on deck when she has an emergency, but she, in turn, has occasionally pushed back her deadlines when a vendor had to shift resources to other clients in crisis.
"It creates the feeling that your problem is my problem, and it has worked very well," says Spriggs, who is a frequent speaker and lecturer with the Project Management Institute.
6. Share the risk
"The problem with conventional vendor agreements is that the vendors get paid either way," whether a project succeeds or fails, says Gold.
So he and other CIOs are drafting new types of contracts that call for vendors to share some of the risk. Gold says he's using a shared-risk model with some of his vendors, structuring contracts that punish them financially if a project fails but reward them financially if the project goes right.
Forrester analyst Marc Cecere says he's seeing more contracts that tie payments to vendor performance. "We're starting to see an uptick in risk-based or value-based contracts, and I think you're going to see more of those in the future," he says.
7. Create transparency
IT executives with mature vendor management practices say they communicate with their vendors beyond sales meetings and negotiation sessions. They talk with their counterparts at the vendors and share information about their strategic plans and the challenges of implementing those plans. Analysts say it's a new level of sharing that can yield vendor-driven innovations that will ultimately benefit customer and provider alike.
The Colorado Governor's Office of IT wants vendors to know about its projects and how they can contribute. So every year the office publishes a playbook (online and in print) that highlights recent accomplishments and future plans.
The approach pays off. Says Blyth, "We love when people come forward and can help with something that's strategic."