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Vendor Management Strategies

By Elana Varon

November 01, 2003 — CIO —

When Jeff Chasney signed on a few years ago as CIO of Vicorp, which owns the Village Inn family restaurant chain, he inherited a contract for maintenance of point-of-sale terminals that had "great, low rates." But service was a disaster. When equipment that was used to input orders to the kitchen malfunctioned, it wasn’t repaired promptly, and the downtime resulted in lost revenue.

He fired the vendor and put the contract up for bid again. To his surprise, every proposal he received quoted a higher labor rate than he had been paying. "While everyone was doing high fives over getting such a great price, we had put [the vendor] in such a bind it was impossible for them to be successful," Chasney says. He agreed to pay the next contractor more; system uptime improved and so did the bottom line.

Chasney, now the executive vice president and CIO with CKE Restaurants, the $1.3 billion franchisor of Hardee’s, Carl’s Jr. and La Salsa restaurants, says he always looks for "fair deals," in which the vendor makes money and he gets value. After 15 years as a CIO, he’s familiar enough with vendors’ costs to know how far he can push them without hurting himself.

Yet according to an exclusive CIO survey, he’s an exception rather than the rule. Although 94 percent of the 118 IT executives surveyed make the effort to negotiate lower fees, that kind of lowballing generates precious little business benefit. Indeed, the same survey found that for nearly two-thirds of respondents, squeezing dollars from vendors’ fees wasn’t very effective at adding business value. It didn’t, for instance, make employees more productive or generate new business. And in many cases, it boomeranged into poor service and support. When it comes to relationships with vendors, the old adage still applies: You get what you pay for.

"If you get the lowest cost and that hurts the vendor, you will suffer," Chasney says.

To make sure he gets what he pays for, Chasney negotiates detailed service-level agreements (SLAs) that spell out what he’ll get for his money. And in fact, what does add value, according to the survey respondents, is crafting airtight contracts that balance toughness with fairness. Fifty-four percent of those surveyed give high marks to the effectiveness of comprehensive SLAs. The more specific the SLA, the better, CIOs say in interviews, so that both you and your contractors agree about what they have to deliver and when, and how much it’s going to cost.

 

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