IT Strategic Vendor Management

STRATEGIC VENDOR MANAGEMENT:
AN APPROACH TO IT VENDOR CLASSIFICATION
AND MANAGEMENT
PREPARED BY: BILL WHETSTONE 1

Overview of Strategic Vendor Management
Operational Excellence IT Vendor Management Strategic Objectives
Categories of IT Vendors (4 Box Strategy)
Assessing Vendor Performance
AGENDA

STRATEGIC VENDOR MANAGEMENT HELPS MEET THE NEEDS OF THE BUSINESS
THROUGH THE EFFICIENT ACQUISITION OF REQUIRED PRODUCTS AND SERVICES IN
A FASHION THAT SECURES THE BEST POSSIBLE VALUE FROM THE VENDORS
Vendor management matters because the typical IT budget directs about two thirds of the total spend to vendors
In recent years, as organizations have focused on doing more with less, increased attention has been devoted to
effectively managing IT vendors
Often this is accomplished through the creation of a Vendor Management Office (VMO) which takes a view of vendors
across the entire IT organization rather than simply focusing on the current transaction
An early step is to collect data regarding the relationship with each vendor, including:
 Actual $ spend year by year for the past three to five years
 Count of purchase transactions i.e. large ongoing contracts vs. many small transactions
 Nature of the purchases i.e. products, services
 Profile of the vendor i.e. a distributor, product developer, service organization, etc.
 Understand the scale, scope and complexity of the vendors’ services
 Assess how important the vendor is i.e. marquee client, >5% of revenue, etc.
 Indicators of satisfaction/dissatisfaction with each vendor
Greater value (lower price, reduced complexity, faster service, improved Ts & Cs, etc.) can result from better
understanding details of the relationship with existing vendors and identifying opportunities to reduce the overall vendor
population by broadening the relationship with top performing vendors

THE CREATION OF A VMO CAN HELP GET THE REQUIRED FOCUS ON IMPLEMENTING
EFFECTIVE PROCESSES AND BETTER UTILIZING MANAGEMENT TIME IN WORKING
WITH VENDORS
The VMO collects information, defines required processes and performs or monitors the performance of processes as
part of its responsibility for ensuring adherence to your companies commitment to Strategic Vendor Management
 Successful vendor management requires that the VMO :
 Regularly communicate with vendors
 Share information regarding your companies priorities
 Outline where the vendor fits in your companies plans
 Demonstrate appropriate commitment (periodically benchmark, get competitive bids)
 Always have alternatives – even if it might take time to get them in place
Processes to be performed or monitored by the VMO include:
 Relationship management – understanding the total spend and identified relationship owner at your company
 Governance – the use of performance management to ensure you understand how the vendor is performing
 Risk management – understanding of next steps if the vendor goes out of business or otherwise disappears
Categorizing vendors is useful in ensuring the right contract, metrics, relationship management and governance
processes are in place in order to mitigate risk
An assessment of the current level of satisfaction should identify how well the relationship is working, what
improvement/maturation may be required or if the relationship with an alternative provider should be developed

AGENDA

OPERATIONAL EXCELLENCE
IT VENDOR MANAGEMENT OFFICE STRATEGIC OBJECTIVES 2013-2014
1. Support Overall Game Plan Objectives and Technology Road Map
- Our internal customers expect us to deliver and maximize the return of purchased spend by
bringing true business value.
- Mission is to add value through building a strong supply base- one that provides the right
resources in the right places.
To do this we must select and develop:
- Vendors that can meet our QDC targets (Quality, Delivery, Cost) and are prepared to invest
in capacity / people as required.
- Vendors with a high degree of innovation, using their skills to assist our projects and
operations
2. Focus on Improving QDC Performance (Vendor Management Strategy)
- QDC Health Check
- Vendor Evaluation / Risk Management (Audit)
- Vendor Selection
- Measure and Monitor Performance / Governance / Scorecard Development
- Recognition (Recognition awards)
3. Build Strong Relationships with Strategic / Key Vendors
- Strong win-win med to long term agreements
- Business Review Meetings ¼ at the very least (Scorecard Review / Corrective Actions / Potential New
Business / Lean Initiatives
- Good Communication

How Do We Meet These Objectives?

AGENDA

CATEGORIZING VENDORS CAN BE HELPFUL IN BETTER ALIGNING THE TYPE OF
RELATIONSHIP REQUIRED WITH THE ACTUAL NEEDS OF YOUR COMPANY. ONE
APPROACH ESTABLISHES FOUR VENDOR CATEGORIES
The vendor plays a sizeable and essential role in the delivery of IT services to the Business
and could not be easily replaced
The relationship is or is expected to be of a long term
Category
StrategicStrategic
FoundationalFoundational
Description
The vendor provides important, even critical, products and/or services to your company.
Contracts may be 2-3 years in length and tend to be more transactional in nature although
a decision to change vendors may involve substantial effort and cost. Potential to become
Strategic
NicheNiche
Commodity or
Phase out
Commodity or
Phase out
The vendor offers a product or service which is not generally available in the marketplace but
which is important to company
The need for or dependence on the vendor is more likely driven by matters under the control of
company than by the excellence of the vendor’s offering
The vendors’ products or services are available from a fairly large number of sources at very
competitive prices levels
Sometimes the vendor is more of a distributor than a developer of products or services and prices
tend not to vary widely
Switching from one provider to another is quite easy

KEY CHARACTERISTICS OF STRATEGIC VENDOR RELATIONSHIPS
Vendor plays an absolutely essential role in the delivery of IT services to the business
The relationship is or is expected to be of a long term
Negotiations must be win-win
Your company will actively involve these organizations in defining its IT strategies and plans
A cultural fit is important in selecting Strategic vendors since your company employees must trust and feel comfortable
working with this vendor
Company must be prepared to invest the time to understand the vendor’s business and priorities and behave as if it
has a vested interest in the success of the vendor’s business
Key personnel from this vendor should have a portion of their variable compensation tied to your companies
satisfaction
Strategic vendors must work not only across your company but also with other chosen vendors
Replacing a Strategic vendor will likely involve a massive effort and require a transition taking several months or longer
with the potential for considerable risk to the business
As a result the selection of a Strategic vendor, or even major changes to the scope of services provided, must be
approached with considerable care and due diligence
Any agreement with a Strategic vendor should define an acceptable transition plan at the end of the agreement
Senior managers will be personally involved and active in the governance process and should have or
be developing relationships with multiple executives in the vendor organization

KEY CHARACTERISTICS OF FOUNDATIONAL VENDOR RELATIONSHIPS
Vendor provides important, even critical, products and/or services to your company
The relationship may be long term but the business is competed regularly in the marketplace
Purchases may be transactional or could involve a service contract running for 2-3 years
The vendor offers either product and/or service excellence in a selected area or a broad set of capabilities that are a
good match with the needs of your companies IT organization
Frequently a Foundational vendor will customize proprietary tools and processes to better align with the needs of your
company
Foundational vendors understand the risk profile and develop mitigation plans accordingly
Some Foundational vendors may become Strategic vendors based on expanding a very successful relationship
Replacing the vendor and moving this business to another supplier may not be easy and could take several weeks or
even months of elapsed time

KEY CHARACTERISTICS OF NICHE VENDOR RELATIONSHIPS
Niche vendors almost always have a capability or product which is not generally available in the marketplace but which
is
required by your company in order to meet the needs of the business
This dependence may be based on any of a number of factors including:
 Past adoption of a proprietary technology
 Commitment to a technology which did not succeed in the marketplace
 The vendor’s experience with and knowledge of systems lacking appropriate documentation
The lack of choice means price is largely defined by the vendor and your company may have very little leverage,
especially in the short term
The combination of dependence, lack of choice and premium price can make these relationships unpleasant
Addressing the root cause of the dependence is often within the complete control of the buyer, given time and
commitment
Your Company will want to cultivate alternative service delivery choices if the need is expected to be ongoing or long
term
The key is to understand the existence of such a relationship and then taking the necessary steps to gain control –
usually by getting in position to secure the product and/or service from a Commodity vendor

KEY CHARACTERISTICS OF COMMODITY VENDOR RELATIONSHIPS
Commodity vendors almost always sell products and services that are available from a variety of sources
Often the primary business of the vendor is the distribution of products or the provisioning of contracted maintenance
services which were actually designed and produced by others
Price is important but frequently there is little or no gap between alternative suppliers in the marketplace
Other factors influence the overall value and may determine the selection of one vendor over another. These might
include:
 Ease of doing business
 Speed of delivery due to geography or other factors
 Proprietary tools (i.e. a simple asset mgmt system) and processes that support the relationship
 Acceptance of electronic payments
Switching from one provider to another may be as simple as picking up the telephone
Broadening the scope of the relationship to include a larger assortment of products and services can often increase the
overall value received, especially since these vendors frequently serve as agents for multiple companies
Some IT organizations reduce risk by maintaining a secondary vendor relationship justifying the added cost of
maintaining another vendor by the reduced risk of not being totally reliant on a single provider

AGENDA

EXAMPLES OF THE TYPE OF INFORMATION AND METRICS THE IT VMO SHOULD
COLLECT AND SHARE WITH MANAGEMENT ABOUT EACH VENDOR RELATIONSHIP
The types of products and/or services your company acquires from the vendor
Current vendor category
Key metrics (Q,D,C) should include:
 Total spend each year over the past five years
 Breakdown of the spend by product and/or service type, individual purchase transactions vs. ongoing payment for
service
 Number of contracts and purchase orders
 Compliance issues
 Assessment of the importance of your company to the vendor’s business
Indicators of satisfaction/dissatisfaction with the vendor
Current or possible plans to expand or reduce the relationship with this vendor
Any special risks i.e. access to source code, vendor business weakness, etc.

ASSESSING VENDOR PERFORMANCE DEPENDS ON EFFECTIVE EXECUTION OF
ONGOING PROCESSES AND PERIODICALLY COMPLETING A FORMAL REVIEW OF
RELATED METRICS AND COLLECTING FEEDBACK
Key performance metrics and any Service Level Objectives or Service Level Agreements should be clearly defined and
negotiated as part of the contracting process
In the case of all Strategic vendors and some Foundational vendors a joint governance structure and process will be
defined as part of the contract
The VMO should ensure a vendor relationship owner is designated for every vendor of consequence. This individual
will receive information from the VMO, communicate with the vendor regarding performance and related issues and work
with the VMO make decisions regarding continued use of the vendor
When a joint governance structure is not defined the VMO should work with the relationship owner to complete a
periodic review of vendor performance and ensure appropriate communication with the vendor
In the case of substantive vendor relationships the VMO should be sharing information with your management team on
at least an annual basis so there is a common understanding of vendor performance and related issues and to ensure all
managers have an opportunity to share perspectives of the vendor
Beyond the defined metrics, the VMO and the relationship owner - and potentially other managers working closely with
the vendor – should consider other factors in evaluating the overall effectiveness of the key vendor relationships. In this
regard sample questions follow for each vendor category.

POSSIBLE QUESTIONS FOR USE IN EVALUATING THE PERFORMANCE OF A
STRATEGIC VENDOR RELATIONSHIP
A robust governance structure and process should exist for every Strategic vendor
As part of the ongoing relationship the vendor should be conducting periodic client satisfaction surveys, sharing the
results and developing action plans to address all issues identified
In addition the performance of a Strategic vendor might periodically be rated using a 1-5 scale for the following
attributes:
 High level of trust in working with the vendor and its people
 People we work with understand our business, are committed to our success and have the required knowledge and
skills
 Pays attention to details and performs beyond expectations
 Accommodates unique needs such as security, privacy and risk management
 Consistently incorporates continuous improvement processes
 Participates effectively in the established governance process and works to improve it
 Provides proprietary tools, processes and applications that add value
 Contributes to risk mitigation
 Offers up innovative concepts that provide value
 Readily adopts our legal, regulatory and corporate requirements and is easy to do business with

FOUNDATIONAL VENDOR RELATIONSHIP
The existence and scale of a formal governance structure and process will depend on the size and scope of the
relationship with a Foundational vendor
In any case at least once per year the VMO should lead a process to measure and judge each Foundational vendor’s
performance
The performance of a Foundational vendor might periodically be rated using a 1-5 scale for the following attributes:
 Offers unique attributes (talent, research, industry solutions)
 Appears to understand and adapt to sourcing objectives
 The needs of your company receive appropriate attention
 The people we work with are capable and committed
 Provides thought leadership and uses industry best practices
 Methodologies and processes match the needs of your company
 Willing to share knowledge with employees

POSSIBLE QUESTIONS FOR USE IN EVALUATING THE PERFORMANCE OF A NICHE
VENDOR RELATIONSHIP
Why do we continue to use this vendor rather than securing the product and/or service from a Commodity provider?
A “no” response to any of the following questions should drive a specific action plan:
 Are we completely satisfied the vendor provides great value?
 Have we searched thoroughly for alternative providers?
 Do we have a plan in place to address the root cause of this need?
How much longer do we expect to need this vendor?

COMMODITY VENDOR RELATIONSHIP
A “no” response to any of the following questions should drive a specific action plan, including consideration of a
change in vendor:
 Were all key service level metrics achieved?
 Are we completely satisfied with the service and support provided by this vendor?
 Are greater discounts available in return for increased volumes of business?
 Has the overall pricing remained competitive?
 Does this vendor assist in fully capitalizing on available discounts and regularly bring to our attention special
promotional offers?
 Is the assortment of products and services available sufficient to meet the ongoing needs?
 Does this vendor make good use of our time?

REQUIRED STEPS TO ACHIEVE RESULTS
1) Development of Commercial Standards
2) Desk Top Audit Development
- Financial Risk, Dependency, Capacity, Innovation, Competence
3) Data Collection
- Actual $ spend year by year for the past three to five years
- Count of purchase transactions i.e. large ongoing contracts vs. many small transactions
- Nature of the purchases i.e. products, services
- Profile of the vendor i.e. a distributor, product developer, service organization, etc
4) Vendor Categorization Workshop Gap Analysis
Based on:
- Quality, Delivery, Cost, Audit Score
- Current Category
- Future Technology Roadmap
- Assess how important the vendor is i.e. marquee client, >5% of revenue, etc.
- Understand the scale, scope and complexity of the vendors’ services
- Indicators of satisfaction/dissatisfaction with each vendor
5) Scorecard Development
- Quality, Delivery, Cost, Desk Top Audit Score
6) Vendor Strategy Development based on results of 1-4
- Supplier reduction (i.e. Preferred reseller), LTC,
7) Governance & Communication development for the 4- Box categories
- Business Review Meeting, Scorecard, etc
- Governance development will be dependant on each of the categories
- ASL Approval Controls Development

RESULTS TO BE EXPECTED
 Lower Price
 Faster Service
 Vendor Reduction
 Improved Vendor Performance
 Risk Reduction
 Improved Ts & Cs
 Vendor Focus
 Reduced Administration Time and Cost
 Elimination of rework (Cost of Quality)
 Base for Year Over Year Strategy

IT Strategic Vendor Management

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