Regardless of the size of your organization, someone is responsible for identifying the need of a service or product being purchased. One could therefore surmise this individual would also assume the ongoing ownership and maintenance of the product, providing vendor management oversight, right? Well, you might be surprised by the number of occasions on which the linear progression of identifying a need and satisfying the need becomes disconnected in technology organizations.
This disconnect often occurs when a business unit obtains approval to bring a new product to the company which in turn places new or expanded requirements on its Information Technology (IT) organization. With their backs often against the wall, the IT department will “buy” the technology in order to meet required deadlines. What happens in this case is that the IT department ends up relying on the vendor to manage the technology, and often times let the supplier act as the IT point of contact for the “customer” – the internal business unit. Well, as we know problems often start out small and later mushroom out of control. This situation is no exception: If the new product the company has developed becomes successful, IT will continue to buy more of the necessary technology for the business unit. The next thing you know, the original contract for, say, $100,000 morphs into an agreement covering perhaps $5M in purchases – and since the vendor manages the technology, no clear internal owner exists. A sure-fire recipe for big problems.
The process starts with the negotiation of the contract which typically initiates a rather ‘interesting” time within the organization. The discussions with the supplier often times become stressful with both sides treating the negotiations as a form of competition to obtain the best price and terms. This is further complicated with the coordination of the different groups who provide input and are required to approve on both sides of the agreement. For example, the finance departments will be called upon to review the financial impact to budgets and Return on Investment (“ROI”), while the procurement and legal departments review terms and conditions. With all these organizational units involved, the final agreement ends up segregated into sections which are relevant to disparate groups within the organization, and in many instances no single person understands the agreement as a whole. This issue can be avoided by identifying the organizational unit that owns and drives the negotiation of the agreement, and ensuring this unit also has the authority to represent the company and manage the supplier. By insisting on thorough preparation and coordination regarding input and approval processes in advance, the individual or group acting in the vendor management capacity will not only secure a contract which is beneficial to the company but will also foster a positive ongoing relationship with the supplier.
With the vendor management role clearly defined, you will avoid the most costly mistake of relying on the supplier to manage the agreement for your company. The vendor manager will not only monitor the suppliers’ performance, but will also leverage the vendor on your company’s behalf to provide service level and performance metrics along with other valued services such as expert consulting support. The individual acting in this role in your company can carry the title of Vendor Manager and coordinate with the technology owner(s), or this role can actually be incorporated into the technology owner’s job description. In any event, the most important role of the vendor manager is to routinely meet with the supplier to review performance and to insure the negotiated service level agreements are applicable and are being met. For those of you who practice ITIL, you may even want to invite your suppliers to attend your problem management reviews. Problem Management aims to resolve the root causes of incidents and thus to minimize the adverse impact of incidents and problems on business that are caused by errors within the IT infrastructure and to prevent recurrence of incidents related to these errors. Inviting suppliers to problem management reviews was always my favorite way to make sure the supplier understood my business and was focused on working for my company.
Identifying issues with your existing contract will insure that your company is prepared when it is time to negotiate a new agreement. This is especially critical in large organizations with dedicated procurement departments. These procurement teams are responsible for negotiating agreements on behalf of the technology owner(s), often based upon templates and procurement methodologies meant to cover everything from bed pans to mainframes. In these circumstances, the vendor manager must be prepared to identify and educate the procurement manager on any issues with the current supplier. This is especially true with products that the procurement department might consider as “commodities”. (Products are referred to as commodities when the product is seen as fungible or the same no matter who produces it.) The commodities tag can sometimes prove to be a BIG mistake, especially with technology as this term is often applied incorrectly. I once had a junior level negotiator assigned to a request for purchase because the procurement department perceived desktop computers as fungible commodities. That quickly changed once we were able to quickly show – from trends in our monthly product performance scorecards that we had experienced a 20% failure rate of over 75,000 desktops that had been in service less than a year. These failures not only had a negative impact on customer service but also negatively impacted IT service level metrics with a dramatic increase in help desk calls and required additional contracted field support to fix the devices. The vendor manager was subsequently able to successfully team with the procurement department and negotiate product quality guarantee’s which the suppliers indicated had never before been included in their contracts.
Once your suppliers are being actively managed, your organization can maintain a fully mature vendor management model by monitoring the lifecycle of your agreements. The hallmark of a mature vendor management lifecycle model is tracking when agreements are scheduled to terminate. Being prepared for expiring contracts is critical because your vendor manager will make sure all necessary parties are prepared to enter into a negotiation and avoid delays which result in the original agreement being extended because the organization was not ready to negotiate. This is often times the point where organizations which are not prepared will bring in outside assistance to coordinate the competitive bid process and subsequent negotiations. If you believe your organization needs external assistance, make sure that whomever you contract with is not only negotiating terms and conditions, but also provides an on-going vendor management model after the negotiation.
Lastly, I mentioned the importance of fostering a positive relationship with your supplier. You want your account manager and his/her team to be the envy of the organization for account relationships. Obviously the amount of revenue an account team brings to their organization is a major component in determining their performance within their company. However, don’t underestimate the importance that suppliers place on their representatives to maintain healthy relationships. Just as within your organization, you want your suppliers’ account team to be proud to be working for their company and proudly say they are servicing your company because, at the end of the day, your success is a result of performance – and support – of suppliers’ product and services.
At this point you’re ready to begin managing your vendors. As we’ve seen, a successful relationship with your suppliers begins not with the contract itself but with the management of the agreement after it has been negotiated. If you haven’t met with your suppliers recently give them a call and initiate your vendor management process by asking for an account review. Before the review, draft a list of items you would expect them to cover when they walk into the room and then compare your list with their presentation. You’ll quickly be able to identify gaps in your supplier relationship and use your list as a roadmap for obtaining better pricing and services from your vendor. The results are guaranteed not only to surprise yourself but will result in new respect from your vendor.
This article is contributed by Brian Superczynski, CFO and Senior Partner at Datacenter Trust. Brian has extensive experience leading and advising information technology companies on financial and business operations strategies. His combined financial management and operations background allows him to follow the development of strategic initiatives from system design to detailed implementations