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Vendor Management: Price Doesn't Matter

Think brutal price negotiations with vendors benefits your business with cost savings? You may be surprised.

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Internal customers are worried about getting what they require and getting what they've paid for. Unfortunately, traditional purchasing organizations are typically focused on getting the lowest possible price and placing orders. What internal customers really need from their purchasing organization is expertise in sourcing, a total cost of ownership approach and management of the entire vendor relationship lifecycle. Out of this need emerged an organizational trend, the vendor management office, or VMO, which takes an entirely different approach from that of traditional purchasing organizations and instead focuses on value, not price.

Squeezing vendors too much on price will result in the vendor's making it up somehow and somewhere, likely through marginal performance or lower quality. It's no secret that vendors are going to perform at a higher level, work more collaboratively and allocate more resources to those customers who permit them to make a fair and reasonable profit. The "value-for-money" approach taken by the VMO function results in lower total costs, improved vendor performance and decreased business risk. In driving value for its customers, the VMO function expects a high degree of commitment, flexibility, innovation and total cost management from its vendors.

The foremost expectation is the vendor's commitment to deliver a quality product or service. This includes all aspects of delivery, such as providing quality customer service, excellent support and a high degree of responsiveness. Vendor commitment is also demonstrated through a combination of customer focus, trust and other relationship-based elements geared to helping a customer succeed. Ultimately, the VMO function expects vendors—particularly strategic vendors—to be invested in the customer relationship. Commitment also includes a vendor's demonstrated interest in working with a customer such that each stakeholder in the relationship develops a deeper knowledge of his respective needs and issues. This type of exchange typically leads to relinquishing some control and forfeiting self-interest in favor of mutually compatible objectives. As trust is developed, fears that the vendor—or the customer—will act opportunistically are alleviated.

Flexibility in the business relationship means that a vendor will make reasonable efforts to modify its business model, products or services to meet the needs of the customer. That depth of flexibility can sometimes conflict with the underlying contract between the vendor and the customer, however, in a true business relationship, the both recognize that the underlying contract is not intended to be a user's manual or a set of commandments by which to manage the customer-vendor relationship.

For many companies, innovation drives differentiation and competitive advantage in the market. As facilitators of innovation, IT organizations are particularly dependent on vendors. The VMO function must not only help its customers understand a vendor's current capabilities but must ensure that a vendor and a customer are well-aligned in terms of their goals and commitment to the business relationship to contribute to synergistic innovation. For example, a vendor can provide knowledge transfer, helping customers achieve innovations that they could not otherwise achieve on their own. Similarly, customers must reciprocate by giving insight and direction to vendors. Particularly in the manufacturing sector, customers are becoming increasingly open in sharing their strategic plans with vendors in an effort to ferret out opportunities for mutual innovation. Similarly, IT organizations should consider sharing their IT strategies with trusted and strategic vendors.

Total cost management is much broader than merely obtaining lower prices. Clearly, a vendor's prices must be competitive; however, total cost management implies that the customer collaborates with vendors to actively seek out methods to manage costs and drive unnecessary costs and inefficiencies out of the relationship. Forward-thinking vendors continually evaluate their business processes and pass efficiencies on to their customers. Cost management activities include improving reliability and maintainability, in addition to a vendor's willingness to help a customer achieve efficiencies. Tangible investments by the vendor in the business relationship can be reasonably expected only when the vendor can be assured that the relationship will last long enough to achieve sufficient returns. To that end, seek long-term relationships with vendors and drive revenue opportunities to strategic vendors.

These expectations of commitment, flexibility, innovation and total cost management can't be achieved through a lowest-cost mentality. Instead, a value-for-money approach moves past the price tag and looks to the contributions that a vendor can make in progressing toward achievement of customer success. In many ways, it's impossible to put a price tag on a relationship of trust and commitment, and, in that sense, price doesn't—and shouldn't—matter.

Stephen Guth is the executive director of the National Rural Electric Cooperative Association's Vendor Management Office. He is a Certified Commercial Contract Manager (CCCM), Certified Purchasing Manager (C.P.M.) and a Certified Technology Procurement Executive (CTPE).He is the author of The Contract Negotiation Handbook: An Indispensable Guide for Contract Professionals and The Vendor Management Office: Unleashing the Power of Strategic Sourcing.