Keeping track of bids, vendor performance, previous contract terms, alternative providers and technology differences was taking too much time for Bernard “Bud” Mathaisel as he settled in as CIO of electronics manufacturer Solectron in 1999.

Many of Solectron’s vendors were also customers, which just complicated the job politically. Seeking a more disciplined approach, Mathaisel partnered with Solectron’s assistant procurement officer, Jeff Dixon, to create a virtual vendor management office (VMO) staffed by IT and procurement employees. “The result is that the CIO could be a decision maker without having to run the process,” Mathaisel says. Now CIO of manufacturing outsourcer Achievo, Mathaisel brought that discipline with him.

Likewise, Dixon has brought it to Cisco Systems, where he is now director of enterprise software and outside services for IT vendor management services. “We take care of the trees and let the CIO focus on the forest,” Dixon says.

Dixon estimates a tenfold return in the staffing investments of a vendor management entity—from better deals through consolidated purchasing, and from avoiding the costs of straightening out piecemeal or short-term deals later. “That doesn’t even count the intangible benefits, such as having a flexible contract or reducing supplier risk,” Dixon adds. Following a similar approach, Accenture CIO Frank Modruson calculates that his company has experienced significant savings.

Creating a formal vendor management office is smart, says Marc Cecere, a VP at Forrester Research, yet many enterprises have not done so. A July 2006 Forrester survey showed that 47 percent had some sort of formal vendor management groups—but 90 percent of the rest had no intention of doing so. Such enterprises risk being at the mercy of savvier vendors, he warns.

Most enterprises underestimate the need to actively manage their vendors, concurs Judith Hurwitz, president of consultancy Hurwitz & Associates. Their IT staffs often lose the perspective needed to ensure they’re getting the best value from the relationship, she says, as the emotional connections nurtured by the vendor take hold. “That’s why the vendors’ salespeople are paid so much,” she notes.

Why Bother With a VMO?
With a vendor management office, your goal should not be to create a firewall between IT and the vendor, using a procurement group as a proxy, but to be smart and consistent within the enterprise about managing multiple aspects of any vendor relationship. That’s why a formalized approach that combines IT, procurement and legal people makes sense, says Joe Pucciarelli, program director for technology financing and management strategies at IDC (a sister company to CIO’s publisher).