How to Choose an IT Vendor

An IT manager was negotiating a big software deal at lunch with the president of a vendor company. The manager wasn't getting his way, so he walked away from the table in a huff. The vendor caved in, lowered the price 40% and made the sale. Later, the IT manager said he never understood why that vendor's service was consistently terrible.

"We negotiate so hard with suppliers that they don't make any money, and then we wonder why service is so poor," says Bart Perkins. "You've got to let the other guy make a profit."

IT managers have a lot to learn about the process of choosing an IT vendor, says Perkins, former CIO at Dole Food Co. and Tricon Global Restaurants Inc. who is now managing partner at Leverage Partners Inc., a consulting firm that splits its headquarters between Louisville, Ky., and Washington. Leverage Partners helps companies acquire IT products and services.

"Vendor buys" account for more than 60% of a typical IT budget outside of personnel costs, Perkins says. In a Fortune 500 company, there may be as many as 400 people buying IT products, and very few are giving the process much thought, he adds. Some are following architectural standards, others are just buying what's cool and expensing it.

Some IT sales sneak in like Trojan horses, buried in plant equipment or taken on through mergers and acquisitions; others evolve - you bought telecommunications services from New England Telephone, which became Nynex and then Bell Atlantic, and now you're dealing with Verizon.

"This is the real blocking and tackling of IT, and we put it on autopilot and nobody thinks about it," Perkins says. But a few IT leaders have given the vendor selection process a lot of thought, and they share some ideas about what makes their approaches work.

1. Establish the need. "The day of deep pockets is gone," says Jim Thannum, director of Internet engineering and communications at FedEx Services Corp. in Memphis. "The technology should advance the business. It's not there to entertain us."

2. Select a team, "not just the tech people," says Colleen Mahoney, director of vendor relations for information resources at Marriott International Inc. in Bethesda, Md. An all-tech vendor-selection team is a disaster waiting to happen because members may get blinded by the technology.

Include end users and people from finance, training, application development, vendor relations, legal and privacy/security, says Mahoney. At The Coca-Cola Co. in Atlanta, a team works with its Minority/Women-Owned Business Enterprise Program to keep minority firms in the selection loop.

3. Choose a strategy, says Diane M. Stanko, director of procurement for global IT and services at Alcoa Inc. in Pittsburgh. For example, with technologies such as e-mail, databases and antivirus software, there's a competitive advantage in enabling standard, worldwide use. In other areas, such as telecommunications, a standard may not be critical.

Decide how to go to market as well. "We try to take full advantage of the competitive marketplace using e-tools such as online bidding and e-procurement," Stanko says.

4. Write a request for proposals (RFP). It will force the team to think about what's important. "We look at architecture, maturity, cost, serviceability and reliability of product," says Thannum. "We look at their customer base, pricing arrangements, support and company stability. We need to be sure if a product touches our customer that we have 24-by-7-by-365 support. That's the rule."

Determine your evaluation criteria and the amount of weight accorded to each requirement as you write the RFP, Perkins suggests—and don't waver. He tells of one company that changed the weightings to keep its emotional favorite from being bypassed. "It completely derailed the entire selection process and threw the project into a tailspin from which it never recovered," he says.

5. Focus on total cost of ownership, not just initial cost, says Perkins, and don't get hung up on how much each department pays out. Look at how much your company pays.

6. Develop your negotiation strategy in parallel with your RFP, Mahoney says. For example, Marriott demands that a product work to the specifications it outlines before paying for it. "It doesn't make any sense to hide these things and spring them on the vendor after the fact," she says. "We want to be upfront because we want them to do the same."

7. Consider the value of relationships as you evaluate bids, Mahoney adds, "because not all [vendor] relationships are created equal."

For example, because Coca-Cola has identified roughly 20 strategic suppliers, it can often target one or several of them and skip the RFP, says Kimberly Fey, relationship manager for information infrastructure.

If you're rebidding a product or service that's already in place, consider the value of incumbency. "There is a cost to change," Perkins says. "Figure it out upfront."

Also, think about intangibles. If a prospective vendor is one of your biggest customers, will it take its business elsewhere if it doesn't get the deal? "Don't forget to factor the value of that relationship into the equation," Perkins says.

8. Keep your options open. As you negotiate, deal with multiple vendors simultaneously, Perkins says. "If you can get a little bidding contest going, that can be a good thing - within reason." Also negotiate the concerns of all your team members—from legal to training—in parallel, not serially, he says. Otherwise, concerns left until the end may not get the attention they require.

For example, during the negotiation and contracting process, Coca-Cola works with its strategic suppliers to identify second-tier opportunities for minority and women-owned businesses.

9. Be a good customer. Understand the cost structure of the vendor so you can help it cut you a better deal, Perkins says. For example, if you were buying PCs from a reseller, you could offer it an advance monthly buying forecast. That saves the reseller money in RFPs it won't have to answer, inventory it won't have to stock unnecessarily and scheduling costs because company officials know the workload in advance. In return, you should expect great prices and service levels.

This win/win approach is at the heart of all good vendor agreements. "Both sides must benefit from the relationship," Mahoney says. "If we structure a contract where only we benefit, we may end up not getting the best of their resources."

10. Split the contract between two vendors if possible, Perkins says. "From the IT standpoint, you may want to standardize, but from a business point, you have to look at [the] entire value of the business," he says.

Splitting a contract isn't always desirable, but it can be done if you're dealing with commodity hardware, systems integration or telecommunications services. "You can give 60% to AT&T and 40% to MCI," says Perkins. "It keeps them on their toes. And if they mess up, it's easier to change it."

11. Anticipate the future. Perkins once negotiated for a software contract at a time when he knew his company was likely to spin off a division within two years, so he wrote into the contract the ability to transfer licenses at the same price. "You don't always have that luxury, but, to the extent you can, address it," he says. That goes for impending mergers and acquisitions as well.

12. Don't let technology turn your head. "It's so easy to get enamored with technology," says Thannum, "but you've got to look at it in terms of all those other metrics. You've got to stay pragmatic."

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