In most IT organisations external sourcing is an everyday occurrence, yet many organisations still struggle to capture the expected value from their sourcing arrangements. Research by the CIO Executive Board shows that 54 per cent of organisations report challenges with managing IT vendors effectively. Interestingly, almost all of the value erosion happens not in the negotiation phase, but through bad sourcing management, once the deal is already made.
So if the problem isn’t picking the right vendor, where does value leakage occur? The research shows that up to 90 per cent of the expected benefits from sourcing arrangements are lost due to inaccurate baselines, operational inefficiencies, poor risk and performance management, and collaboration failures. Managing vendor relationships effectively is therefore essential to realising the expected monetary as well as operational benefits of sourcing. Below, we will outline how to achieve this.
Counteracting Vendor Relationship Value Leakage
To reduce value leakage from sourcing, progressive IT organisations focus on the follow four areas:
Make Risk and Performance Evaluation Predictive: As reliance on outsourcing increases, so does an organisation’s exposure to vendor-induced risks. To predict vendor capabilities and avoid potential failures, Company A uses reactive metrics that measure a vendor’s past performance. They also employ a set of forward-looking KPIs such as employee turnover, financial strength, and contribution to innovation to help predict a vendor’s future capability and sustain high quality of performance in future.
Work Harder for Customer-of-Choice Treatment: Customer-of-choice status is valuable, but you have to work for it (e.g., by giving vendors narrowly targeted and mutually beneficial collaboration and innovation opportunities). If you don’t, you may find yourself among the many organisations who believe they are a customer of choice, but who in fact are treated by the vendor no differently to anyone else. To encourage vendors to collaborate and drive innovation, Company B clearly defines short-term initiatives against which vendors can quickly and easily execute, and offers targeted future collaboration incentives – often tied to the vendor’s strategic objectives – in turn for execution on these initiatives.
Align Vendor Management Effort with Vendor Relationship Value:Even when focused on strategic partners, vendor management teams devote too much time to managing non-strategic work. To adjust the allocation of internal resources to the level of management required by each vendor, Company C segments its outsourced services portfolio based on strategic impact and adjusts resource-intensity and vendor management focus to each service accordingly.
Don’t Rely on “Like-for-Like” Comparisons for Vendor Benchmarking:IT leaders strive to find truly representative benchmarks, but comparisons against your own historic performance or with direct peers are unlikely to uncover the greatest savings opportunities, and data used to evaluate vendor relationships is often insufficient to make an informed decision. To identify opportunities for price or service re-negotiations, Company D redefines its benchmarking parameters and evaluates procurement performance against a larger market. The company consciously trades a degree of comparability for the chance to replicate savings opportunities from a broader pool of peers.
Given the importance of vendor management in capturing sourcing benefits, organisations must pay more attention to getting vendor relationships right. To achieve this, they need to focus on creating efficient baselines, right sizing internal resource allocation, implementing predictive vendor KPIs, and designing effective collaboration with vendors – bearing in mind that the biggest potential benefits can be obtained by getting a tighter grip on risk management which accounts for 20-30 per cent of value loss, and on improving collaboration techniques which range from seven to 20 per cent of the eroded value. Addressing these two issues alone can make up for half of the total value leakage risk.
About the Corporate Executive Board
For additional information about the CIO Executive Board, please visit www.exbd.com/IT.