Opinion: When preferred supplier programs go too far

Computerworld - How often have you seen this happen?: A good idea takes hold, and rules are created to formalize it. But before you know it, the rules are being followed to the letter, with little thought given to the underlying goals that originally made the idea so effective.

Many IT organizations have created preferred supplier programs (PSP) to help reduce the number of suppliers, cut IT costs and ensure a consistent IT architecture. Unfortunately, some companies have pushed their PSPs too far and reduced the number of suppliers unnecessarily, often at the expense of more important goals.

Consider vendor innovation. As companies become large and entrenched, they typically become more risk-averse and less creative, often rejecting ideas that challenge conventional wisdom. As Clayton Christensen, Andy Grove and Joseph Schumpeter have all discussed in their books, breakthrough innovations rarely come from an industry leader. Rather, they tend to burst forth from companies that are not wedded to established business methods. PSPs that exclude smaller suppliers can prevent access to the kind of innovative products that provide a competitive edge.

Then there's the crucial issue of cost. Overly restrictive PSPs can actually unintentionally increase various costs. One example is in the vendor selection process. PSP compliance is complex and resource-intensive. Large IT suppliers can assign compliance teams to deal with PSP requirements, but smaller firms can rarely afford such an effort without a guarantee of business, essentially precluding their participation.

In addition, the largest IT suppliers are often perceived to be the safest choices, able to insulate managers from blame should things go south. But when everyone relies on the same handful of large, well-known suppliers, small suppliers can be forced out of business. Without healthy market competition, competitive pricing can become an endangered species.

Worse yet, the truly behemoth suppliers are often hired to develop IT strategies. And guess what: They frequently recommend their own products and services. And their incentive systems reward salespeople for persuading clients to purchase the services of large teams of consultants -- who charge correspondingly large fees that will fund the vendor's many layers of overhead.

PSPs can also create awkward and expensive subcontractor relationships. One Fortune 500 company hired a boutique firm for "hospice maintenance" on an application scheduled for replacement in 18 months. Six months later, the company's new PSP required that the boutique be replaced by a preferred vendor -- which promptly subcontracted the work back to the boutique. That yielded a 20% price markup, but no additional services were provided.

Even standardization can become problematic for global organizations with PSPs. Few suppliers are able to provide consistent products and services worldwide. One Fortune 500 CIO standardized on a particular PC manufacturer. But in Eastern Europe, the manufacturer's support was unacceptably poor and the cost of its PCs was 50% more than the cost of machines from a local manufacturer. The CIO was eventually forced to override PSP restrictions and allow regional variation but suffered political ramifications.

Are we so enamored with the advantages of preferred supplier programs that we have become blind to their problems? An effective PSP definitely offers significant benefits. But an inflexible PSP based on cut-and-dried rules will break if you push it too far. Make sure your PSP is capable of steering around the potholes and achieving its original goals.

Bart Perkins is managing partner at Louisville, Ky.-based Leverage Partners Inc., which helps organizations invest well in IT. Contact him at BartPerkins@LeveragePartners.com.

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