Why you’re not getting the most out of your third-party relationships.
Increase buying power, identifying cost-savings and influencing the strategic vendor performance all sound like practical outcomes of establishing a vendor-management office (VMO). Then why is it that so many companies can’t seem to get this right?
We need to track vendor performance, but, somehow, this important need becomes a wish and then becomes a dream never realized. Resources are overallocated. Teams are stretched to capacity. Departments are racing to meet already aggressive commitments.
What’s not readily apparent is that establishing a single point of contact for vendor management saves your team time. Five people aren’t pulled in to answer vendor questions when one person could have addressed the need.
The past, present and future of outsourcing
The history of outsourcing goes back to the 1960s, and the progression and adoption of outsourcing were rapid. Outsourcing in the 1960s focused on hardware and shared processing services carried out on huge and expensive mainframes. The 1970s brought contract programming, and standard-application packages were the rage. By the 1980s, with the release of the personal computer, entire IT departments were being outsourced. Services such as network, applications, development, distributed systems, telecom management and systems operations were all moving out of companies and into the sourcing arena.
The concept of a VMO started to emerge around the 2000s in the face of complex solutions to address Y2K. These solutions involved multiple, geographically dispersed vendors. CFO compliance with the exponential and virtually uncontrollable costs all but demanded that cost-control measures be put into effect. Accelerating into the 21st century, sourcing has yo-yoed from outsourcing (moving the business to vendors) to backsourcing (pulling business from vendors).
Before we establish the foundational elements of our VMO, it’s wise to reflect on the four stages of the outsourcing cycle:
- Stage 1 – Offshore sourcing achieved by setting up a foreign subsidiary or establishing new partnerships.
- Stage 2 – Phasing out of the foreign subsidiary and moving to independent operators or shifting non-essential business to vendors
- Stage 3 – Increasing dependence on suppliers, leading to less value appropriation
- Stage 4 – Industry departure from or reduction of outsourcing
These phases could also be viewed as discovery, adoption, maturation and decline. Keep these stages in mind as you prioritize which functions of the VMO to tackle first. Spending great amounts of time with vendors that are at the end of the lifecycle isn’t a value-add.
What does a VMO do?
Our objectives in establishing a VMO might include improving performance, supporting business objectives, reducing or mitigating risk and improving data accuracy.
Often, leaders are confused about the difference between strategic sourcing, vendor management and procurement operations. Allow me to highlight the differences
Strategic sourcing…
- Manages contracts
- Negotiates contracts
- Qualifies suppliers
- Defines sourcing strategy
- Manages demand
- Analyzes spend
- Manages risk
Vendor management…
- Assesses the relationship
- Manages performance
- Manages supplier risk and compliance
- Defines performance expectations
- Initiates the relationship
- Creates and refines supplier groups
Procurement operations…
- Identifies need
- Creates requisitions
- Routes approvals
- Creates purchase orders
- Coordinates delivery
- Receives goods and services
- Authorizes payment and settlement
Now that we’re straight on the difference between sourcing, vendor management and procurement, let’s look at the core functions of a VMO. The seven primary management functions that a VMO must drive toward excellence include:
- Contract
- Financial
- Relationship
- Performance
- Compliance
- Governance
- Value
Contract management is the administration of the legal contract with your vendors. Negotiation, authorization, support, invoicing, purchase orders and management all are areas associated with contract management. This is the stewardship for the overall general agreement.
Financial management deals with total investment over time—volume commitments, revenue rebates, recurring costs, final cost, initial cost, hard-and soft-dollar savings, savings and financial commitments.
Relationship management is responsible for maintaining the strategy, managing transitions, implementing projects and generally monitoring performance. Maintaining the strategy considers portfolio planning, business-case generation and project requirements as well as guiding the long-term development of the relationship. Managing the transition wraps in any software, hardware, systems, vendor training, vendor retention and vendor transitions. Implementing projects is outcome-based—in short, are we getting what we expected from this vendor in terms of delivery? Monitoring has to do with delivery performance and is usually in the form of a steering committee.
Performance management deals with total investment over time and focuses on similar concepts as financial management—vendor scorecards, vendor performance measures, dashboards ranking vendors and weighted KPIs based on business requirements
Compliance management ensures that vendors plan, organize, control and lead activities within the laws and standards that have been established. This could be in the form of a Federal or State law or, less formally, in the frame of company principles, policies, standards, procedures, or guidelines. Frequently, compliance also takes on ownership of audit and control activities and any resulting plan of action.
Governance management reduces organizational risk resulting from increased awareness and visibility. Conventional approaches to contract management consistently miss the anticipated value expected. Governance provides both parties an opportunity to realign and synergize before issues become escalated. Governance enables organizations to control costs, drive operational excellence and mitigate risks to drive increased value for their business partners.