by Peter B. Nichol

Take the training wheels off your vendor-management office

Nov 25, 2019
Change ManagementIT LeadershipSupply Chain Management Software

Why you’re not getting the most out of your third-party relationships.

handshake deal vendor management hands business relationship agreement
Credit: Getty Images

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’t seem to get this right?

We 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.

What’s not readily apparent is that establishing a single point of contact for vendor management saves your team time. Five people aren’t pulled in to answer vendor questions when one person could have addressed the need.

The past, present and future of outsourcing

The 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.

The 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).

Before we establish the foundational elements of our VMO, it’s wise to reflect on the four stages of the outsourcing cycle:

  1. Stage 1 – Offshore sourcing achieved by setting up a foreign subsidiary or establishing new partnerships.
  2. Stage 2 – Phasing out of the foreign subsidiary and moving to independent operators or shifting non-essential business to vendors
  3. Stage 3 – Increasing dependence on suppliers, leading to less value appropriation
  4. Stage 4 – Industry departure from or reduction of outsourcing

These 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’t a value-add.

What does a VMO do?

Our objectives in establishing a VMO might include improving performance, supporting business objectives, reducing or mitigating risk and improving data accuracy.

Often, leaders are confused about the difference between strategic sourcing, vendor management and procurement operations. Allow me to highlight the differences

Strategic sourcing…

  • Manages contracts
  • Negotiates contracts
  • Qualifies suppliers
  • Defines sourcing strategy
  • Manages demand
  • Analyzes spend
  • Manages risk

Vendor management…

  • Assesses the relationship
  • Manages performance
  • Manages supplier risk and compliance
  • Defines performance expectations
  • Initiates the relationship
  • Creates and refines supplier groups

Procurement operations…

  • Identifies need
  • Creates requisitions
  • Routes approvals
  • Creates purchase orders
  • Coordinates delivery
  • Receives goods and services
  • Authorizes payment and settlement

Now that we’re 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:

  1. Contract
  2. Financial
  3. Relationship
  4. Performance
  5. Compliance
  6. Governance
  7. Value

Contract 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.

Financial management deals with total investment over time—volume commitments, revenue rebates, recurring costs, final cost, initial cost, hard-and soft-dollar savings, savings and financial commitments.

Relationship 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—in 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.

Performance management deals with total investment over time and focuses on similar concepts as financial management—vendor scorecards, vendor performance measures, dashboards ranking vendors and weighted KPIs based on business requirements

Compliance 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.

Governance 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.

Value 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.

There are dozens of additional VMO competencies, and it’s easy to get lost searching for the next new shiny one. When searching for that needle, don’t lose sight of these seven essential functions.

Roles of a VMO

Standing 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’re 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’s a single person. Clear ownership must also be established for each of these roles:

  • Vendor manager
  • Sourcing consultant
  • Value-initiatives project manager
  • Transactional purchasing manager
  • Contracts administrator
  • Vendor director
  • Auditor
  • Vendor analyst

The vendor manager is responsible for monitoring and evaluating vendor performance. This is the primary task for ensuring accountability of performance from each vendor.

The sourcing consultant conducts the evaluation of bids from proposed vendors and determines whether the vendor can meet the expectations of the organization.

The 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.

The 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.

The 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:

  • RFI: We think we know what we want, but we need more information.
  • RFT: We know the goods or services we need, but we want to understand the vendor differences.
  • RFP: We know we have a problem, but we aren’t sure of the best way to solve it.
  • RFQ: We know what we want, but we need info on how vendors will meet our need.

The 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.

The 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.

The 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.

Small 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.

Reaching vendor maturity

As 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’re 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.

We all need vendors to be able to scale. They also employ humans. Inspect what you expect.