Six Ways to Succeed with Sourcing and Vendor Management

From challenging vendors to perfecting process, Forrester's Sean Sweeney shares advice from CIOs on how IT teams can improve their sourcing and vendor management - at a time when successes will truly be noticed by the business side.

For Oracle, SAP, Microsoft, and other IT vendors, the only thing worse than knowing there is a meeting of global IT sourcing and vendor management executives is being a fly on the wall at a meeting of IT sourcing and vendor management executives. At a recent meeting of Forrester's Sourcing and Vendor Management Leadership Board, the words "cost" and "cutting" were rarely separated during any discussion among the executives in the room — and their specific quotes regarding some vendors would make my father blush.

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Thanks, you say. More gloom and doom. Likely, youre a vendor with little pipeline or internal IT tasked with doing more with less. Well, there is some good news in the IT world — and in particular in the IT sourcing and vendor management space. While there is argument over if the economy is better or worse than six months ago, there is no doubt that sourcing and vendor management groups are a key enabler for their organizations to improve their sourcing strategy during this downturn and to benefit from the eventual economic recovery. One executive said of the evolution of focus during boom times to current status: "revenue hides a lot of problems."

Last November, Forrester's CEO George Colony hosted a dinner of global sourcing and vendor management executives and captured the salient points of that discussion in a blog post. Highlights of the discussion focused on cost cutting: cutting maintenance contracts on non- mission critical software, cutting weak, superfluous vendors, and stopping upgrades.

So what has improved? While the meeting in November skimmed the surface on "what to do" as the economy collapsed, our meeting in May focused on the details of the how, why, and when of these efforts. This recession is forcing both clients and vendors to refocus and has enabled sourcing and vendor management groups to do needed work that will position their organizations to capitalize on the upturn.

Instead of blind cost cutting, calmer minds within organizations are taking a long, hard look at improving third party IT sourcing strategy, investing in tools, improving templates and processes, and segmenting vendor relationship, all while delivering cost savings sorely needed by their organizations. A final soft benefit, albeit difficult to quantify, is the focus on establishing stronger relationships with vendors so when the recovery takes place, organizations will be prepared to capitalize based on the work the executives have done — which is also good news for the vendor, as it can be part of this recovery. Organizations will remember those who assisted and reward them with new business.

Our discussion highlights clear successes via a step-by-step, phased approach:

1. Market the value of sourcing and vendor management. The marketing of sourcing and vendor management groups is easier in the recession. As one member said, "If you can't market what you did for the business, what you did was useless." Sourcing and vendor management groups are part of the solution during this downtown, not part of the problem. Many firms have addressed the challenge of executive sponsorship or mandate of sourcing and vendor management groups. If you do not have one, now is the time — but establish a level of authority inside the organization. Groups that have the proverbial carrot can still experience success but, if combined with a stick, there is much more potential, such as vendor portfolio and spend analysts, vendor segmentation, and scorecards.

2. Vendor rationalization. This seems like the common bond across organizations. Vendor consolidation strikes fear in some of the lower-tier vendors, but it should not. Vendor consolidation is not solely about getting rid of the weak vendors ("We use them because someone's uncle works there" is a common response to using one of four similar vendors). It is also about communicating to the business the preferred vendors and why a vendor who may not be number one in the market is a viable option to the organization because of this exercise. Also vendor consolidation should also be driven by category (hardware, software, telecom, and services) and the approach and methodology may be slightly different to map the organizations model.

3. Challenge Vendors. Clients are challenging vendors to provide innovation for cost cutting. Cost cutting discussions should be a two way street, not simply the client asking the vendor to cut cost. A few members of our Council have hosted IT supplier days to share information about both markets and challenge the vendors to return with suggestions. The result: quick wins that not only promote the value of sourcing and vendor management groups internally, but also highlight the value of key strategic vendors. So take this advice, vendors: while everyone recognizes this is not a welcome conversation, prepare for it and be proactive if you can. If you can deliver, you will have a client for life.

4. Cut where you can. Professional services and contract labor have a high beam shining on them. Some of our member organizations have successfully decreased rates on average of 10 to 15 percent while other success stories — I would hate to negotiate with these executives — have seen a decrease in the range of 20 to 30 percent. While this is not great news for the services category and some providers will not survive the recession, the access to better talent, shorter assignments, and an available bench is a clear win for end users.

5. Process immaturity is an ongoing battle. One member highlighted a key point that resonated across all the executives: best practices and challenges often swim in the same pool. For example, having the right data necessary for decisions is considered a best practice; however, many organizations still struggle with data quality. In George's post, he notes that everyone thinks they are negotiators. However, by improving marketing of sourcing and vendor management groups, organizations are reducing the number of rogue procurement efforts. The business expects low risk in their third-party sourcing strategy, which cannot happen if these issues are not addressed.

6. Monitor and manage risk. There is a renewed focus on risk management. Dave Higham, Director of Vendor Management Services and John Nickens, Senior Consultant of Vendor Management Services, both of Russell Investments, presented to the group their risk management program and methodologies. Their robust and overly successful program has led to savings for Russell and is clearly defined, stage by stage, process step by process step. All the effort of marketing sourcing and vendor management, consolidating vendors and segmenting appropriately, may be for naught if organizations fail to monitor the risk of their key strategic or vital members. Like Russell, organizations must closely monitor suppliers operating within their business.

Our next Council meeting will be in October — hopefully, by that time, we will all be comparing notes on our optimization success stories while discussing our organizations new challenge: too much revenue. Because remember: revenue also SOLVES a lot of problems!

Sean Sweeney is Global Council Manager for Forrester's Sourcing & Vendor Management Council, part of Forrester's exclusive peer networking communities. For more information on the Forrester Leadership Boards and free related research, please click here.

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