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\u2019t seem to get this right?\nWe 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.\nWhat\u2019s not readily apparent is that establishing a single point of contact for vendor management saves your team time. Five people aren\u2019t pulled in to answer vendor questions when one person could have addressed the need.\nThe past, present and future of outsourcing\nThe 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.\nThe 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).\nBefore we establish the foundational elements of our VMO, it\u2019s wise to reflect on the four stages of the outsourcing cycle:\n\nStage 1 \u2013 Offshore sourcing achieved by setting up a foreign subsidiary or establishing new partnerships.\nStage 2 \u2013 Phasing out of the foreign subsidiary and moving to independent operators or shifting non-essential business to vendors\nStage 3 \u2013 Increasing dependence on suppliers, leading to less value appropriation\nStage 4 \u2013 Industry departure from or reduction of outsourcing\n\nThese 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\u2019t a value-add.\nWhat does a VMO do?\nOur objectives in establishing a VMO might include improving performance, supporting business objectives, reducing or mitigating risk and improving data accuracy.\nOften, leaders are confused about the difference between strategic sourcing, vendor management and procurement operations. Allow me to highlight the differences\nStrategic sourcing\u2026\n\nManages contracts\nNegotiates contracts\nQualifies suppliers\nDefines sourcing strategy\nManages demand\nAnalyzes spend\nManages risk\n\nVendor management\u2026\n\nAssesses the relationship\nManages performance\nManages supplier risk and compliance\nDefines performance expectations\nInitiates the relationship\nCreates and refines supplier groups\n\nProcurement operations\u2026\n\nIdentifies need\nCreates requisitions\nRoutes approvals\nCreates purchase orders\nCoordinates delivery\nReceives goods and services\nAuthorizes payment and settlement\n\nNow that we\u2019re 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:\n\nContract\nFinancial\nRelationship\nPerformance\nCompliance\nGovernance\nValue\n\nContract 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.\nFinancial management deals with total investment over time\u2014volume commitments, revenue rebates, recurring costs, final cost, initial cost, hard-and soft-dollar savings, savings and financial commitments.\nRelationship 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\u2014in 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.\nPerformance management deals with total investment over time and focuses on similar concepts as financial management\u2014vendor scorecards, vendor performance measures, dashboards ranking vendors and weighted KPIs based on business requirements\nCompliance 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.\nGovernance 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.\nValue management takes a strategic approach to discover, optimize, realize and celebrate value. Value discovery identifies areas of importance or desired change. Value optimization extends or stretches desired outcomes to be transformational. Value realization quantifies outcomes achieved in terms that are meaningful to business partners. Value celebration recognizes that great outcomes are rare and publicly honors the collective hard work that achieved the outcomes.\nThere are dozens of additional VMO competencies, and it\u2019s easy to get lost searching for the next new shiny one. When searching for that needle, don\u2019t lose sight of these seven essential functions.\nRoles of a VMO\nStanding up any organization takes time, dedication and sweat. Establishing the resource framework for a high-functioning VMO team is no different. People are the game changers you\u2019re looking for. Take time to find the right ones. Start with getting these folks on the bus. They might be formally assigned roles that are part of a business unit, or they could serve in a matrixed fashion and be utilized as needed working together cross-functionally. However, within every organization someone is performing each of these roles, even if it\u2019s a single person. Clear ownership must also be established for each of these roles:\n\nVendor manager\nSourcing consultant\nValue-initiatives project manager\nTransactional purchasing manager\nContracts administrator\nVendor director\nAuditor\nVendor analyst\n\nThe vendor manager is responsible for monitoring and evaluating vendor performance. This is the primary task for ensuring accountability of performance from each vendor.\nThe sourcing consultant conducts the evaluation of bids from proposed vendors and determines whether the vendor can meet the expectations of the organization.\nThe value-initiatives project manager formulates purchasing strategies to increase the value that vendors provide to the organization. This forward-looking role conducts market research to identify industry trends and bring those that are fit-for-purpose in-house. This role also manages transitions among vendors. Note that this is not resource off-boarding.\nThe transactional purchasing manager deals with the day-to-day. This includes invoices, purchase orders, processing and moving the vendor-management process along. This role is focused on improving vendor ROI by working in partnership with the value-initiatives project manager.\nThe contracts administrator mainly comes onto the scene when the team is dealing with a request for proposal (RFP), request for quote (RFQ), request for information (RFI), or request for tender (RFT). These are defined as:\n\nRFI: We think we know what we want, but we need more information.\nRFT: We know the goods or services we need, but we want to understand the vendor differences.\nRFP: We know we have a problem, but we aren\u2019t sure of the best way to solve it.\nRFQ: We know what we want, but we need info on how vendors will meet our need.\n\nThe vendor director has responsibility for the executive-level relationships with suppliers. This role incorporates considerable knowledge and experience to effectively set the strategy and metrics that will drive a best-in-class VMO. This role also often performs on-site reviews of vendor facilities and campuses while conducting due-diligence visits.\nThe auditor works daily to assess the performance of vendors and manages regulatory and compliance requirements. Common areas of scope include validating insurance requirements, ensuring adherence to company guidelines, confirming background checks and assessing that performance guarantees are met. This role also accompanies the vendor director during on-site, due-diligence reviews.\nThe vendor analyst evaluates service-level agreements, business-level agreements, operational-level agreements and the associative performance aligned to contractual performance terms. Raising awareness of issues escalations and tracking down root causes are part of this role. Arguably, the most time-consuming task is the reconciliation of vendor invoicing against purchase orders.\nSmall organizations may have a single manager performing all these roles. Larger organizations need to specialize as contracts grow in complexity, vendors multiply and project delivery becomes increasingly more dependent on multiple departments to realize desired outcomes.\nReaching vendor maturity\nAs you develop your vendor management office and introduce program governance, start by establishing policies, procedures and line-level ownership for each vendor. Define accountability up front. Once in place, shift the focus to contracts. Design and build a standardized review process and methodology to achieve repeatable, high-value results. Next, evaluate vendor risk. We all use vendors. Some vendors create more risk than others. Quantify that risk. Now you\u2019re ready to assess resources and decentralize. Identify multiple vendors and explore which can locate and present the best resources. Multi-sourcing is encouraged and decreases risk. Lastly, target KPIs and the method and mode of how vendors will be reviewed for performance.\nWe all need vendors to be able to scale. They also employ humans. Inspect what you expect.