A New Way To Manage Vendors

When Carl Ascenzo took over as CIO of Blue Cross Blue Shield (BCBS) of Massachusetts four years ago, the health insurance company outsourced most of its data center operations, help desk and code programming to a single vendor: EDS. Today, however, EDS is only one of four large technology providers working with the New England health insurer.

In order to handle the increasingly complicated negotiations with his growing stable of vendors, Ascenzo expanded a group within IT known as the vendor management office (VMO). Although a rudimentary VMO existed when he arrived at BCBS, Ascenzo added to its responsibilities, building a group that oversees RFPs, works with legal counsel on all contracts and maintains relationships with all vendors. Whereas the initial vendor management group dealt with invoices and back-end activity, the VMO now gets involved at the start of negotiations and helps IT managers make informed decisions on which vendor can offer the best deal and the best service for a particular project. BCBS’s VMO—led by a manager with financial and IT experience—also makes sure the vendors know about each other in order to foster healthy competition among them, which ultimately leads to better products, services and pricing for BCBS.

“When we moved from being a single-sourced company to a multivendor model, it became clear we needed an expert who knew all the vendors, was out in the marketplace all the time, and was well-versed in contracts and negotiations,” Ascenzo says. “The result is that the prices we are getting are always competitive, and the quality of the work has improved.”

BCBS’s use of a VMO is not uncommon. Organizations grappling with more complex IT offerings and juggling multiple vendors are increasingly forming VMOs within their IT departments. They are looking for cost savings but also better service and more control over the technology buying process. With a quickly changing technology market and a shift toward more outsourcing and multiple vendors, CIOs are often uncertain whether they are getting the best deals from vendors.

“The market today has become very sophisticated, especially with the increase in outsourcing,” agrees Cassio Dreyfuss, a Gartner vice president of research based in Sao Paulo, Brazil. “The dream of any VMO [head] is to offer his or her enterprise exactly the combination of resources and services that are needed, and to pay for exactly what you are using. It’s not that the IBMs and Hewlett-Packards of the world are dishonest; they just don’t know your company.”

VMOs started to appear on the corporate IT landscape after 2000, when the economy soured and CIOs were forced to justify IT spending. In order to get the best deals, CIOs subsequently began working with a greater variety of vendors. The increase in outsourcing has also pushed more CIOs to consider centralizing their IT procurement. After 2000, some companies began to form “sourcing offices” that oversaw spending on IT services. And large vendors—such as IBM and HP—started to bundle IT services with hardware and software to meet individual companies’ needs. “This means that buying IT now requires a deeper knowledge of different aspects of technology,” Dreyfuss says.

With a dedicated VMO within the IT department, a CIO can more easily manage relationships with multiple vendors, keep track of metrics and vendor performance, and negotiate discounts on IT services and products. While a project manager may know best what technology is needed for a specific project, a VMO can help make sure the company gets the most competitive offers from vendors. That’s precisely why having a VMO within your organization can be a good idea. And it’s also why we’ve asked three CIOs with experience managing a VMO for their tips and advice.

How to Structure a VMO

After Jim Lester was appointed CIO of Columbus, Ga.-based insurance giant Aflac in 2001, he set out to change the way the company buys hardware, software and IT services by creating a VMO. He had been on the other side of the fence in his previous job as a software vendor and wanted to create a system in which Aflac would be able to get the best technology deals. That would mean treating vendors with respect, but also making them compete amongst themselves to provide discounts when possible.

Lester’s first task was to find a VMO manager with an understanding of technology and experience in finance and legal issues. He knew that someone with this combination of skills would be best equipped to handle accounting and contract issues. After searching for several months, he hired Stephen Guth, a former programming analyst who had also earned a law degree and worked as senior manager of sales operations support for Dell. Jim Lester, Aflac CIO, hired a VMO manager who knew technology as well as finance and legal issues.

Over three years, Lester and Guth have put together a process in which IT managers create project briefs and submit some of them to the VMO, which in turn finds the best dealsin terms of price, quality, and vendor commitment and expertisefrom vendors and negotiates IT contracts for Aflac. The project brief is generally a two-page description of an IT project, drawn up by the project sponsor, that includes a full explanation of the technology and business needs.

Guth and his group, working with the project sponsor, then start looking for an appropriate vendor, basing the search on their own research, experience and vendor metrics. Once negotiations start with a vendor, after a complete RFP process, Guth uses his own standardized contracts rather than relying on those drawn up by the vendor. “When you set up a standardized practice [for vendor selection] with people who do it over and over again, you are going to get the best deals for your company,” says Lester.

This centralized approach has formalized Aflac’s relationships with vendors that in the past were handled on an ad hoc basis. Before the VMO, vendors met with a wide variety of IT managers and even technology users. Aflac’s technology projects are now completely aligned with business initiatives, says Lester, because they are initiated by the business, not by technology vendors.

Aflac treats its VMO as a concrete office with a dedicated team. But a VMO can also be a virtual office, experts say, made up of individuals in disparate geographical locations. Most important, though, the VMO should remain within the IT department if CIOs want to maintain control over technology procurement. “The CIO has traditionally been focused on IT,” Gartner’s Dreyfuss says. “But we are telling them they need to establish a [business-level] relationship with the CFO and business leaders. This will be easier to do with a VMO in place.” Dreyfuss says that in rare cases companies have expanded the VMO to include all types of procurement. But he says this type of arrangement can lead to turf wars.

The VMO is still in its infancy, however, and there are no firm statistics that show how many companies have one. VMOs are especially appealing to large companies with diverse IT needs, simply because they are handling so many vendor relationships. But the centralized office isn’t for every company. In industries where competitiveness is not based on IT—such as petrochemical and steel or paper mill companies—a VMO may not be necessary because vendor relationships are relatively static. In large multinationals with offices around the globe, a single, centralized VMO may be difficult to implement. And small companies, which simply don’t have very many vendor relationships, may not need it.

One Advantage of a VMO: Save Money

CIOs report that VMOs have saved them money in hardware, software and IT services, mainly because they are constantly comparing prices and vendors. “An application development manager may go into the market two or three times a year,” says BCBS’s Ascenzo. “But those in a VMO are constantly in the marketplace and therefore are very aware of market changes. The VMO is invaluable when it comes to reacting to market changes,” he says.

At the American Red Cross, CTO Dave Clarke says he has cut ongoing operating costs by more than 20 percent from three years ago by rebidding, restructuring or not renewing contracts with software and hardware vendors that his VMO has found to be performing poorly. Clarke says the VMO has helped him save money by tracking spending, which helps the management teams find better deals. “The VMO is a major element of our approach to financial rigor,” Clarke says.

The collaboration between Guardian Life Insurance’s VMO and its telecommunications department has helped the company cut telecom costs by 35 percent by negotiating a new contract, says Rick Omartian, CFO for IT. By bringing in all of the major telecom players in an RFP process, the company found that it could save money by switching from MCI WorldCom, which had been chosen several years before by the head of the company’s telecommunications department, to Sprint and Quest. Before Guardian had a VMO, contracts were often negotiated without RFPs, which meant they didn’t always get the lowest price.

Aflac has also saved money through careful negotiations by its VMO. Guth says that when negotiating with a supplier on a hardware purchase, he can leverage volume discounts by adding some IT services into the deal. “Instead of using two companies, I’ll use one and get a big discount,” he says. In fact, he was able to negotiate such a deal with IBM, which provides both desktops and services to Aflac.

Guth emphasizes that first and foremost, his goal with the VMO is to “maximize Aflac’s tech investments so that the company pays a fair and reasonable price in return for superior delivery.” He reminds CIOs that getting the lowest price is sometimes less important than assuring a vendor performs well and brings in senior staff to do the job. “Some customers are not savvy and try to get a supplier down on price at any cost,” he says.

Creating Vendor Competition

Guth also notes that the VMO allows Aflac to minimize risk by creating its own purchase agreements; the majority of its deals have contracts drafted by Guth rather than by vendors. While such an approach isn’t restricted to a VMO, Guth’s expertise with legal and financial issues has helped him put this practice in place. This is another good reason to hire the right person to head a VMO.

“When I got here, all of our contracts were on supplier paper, whether they were software licenses or services,” he says. “They were all slanted to the supplier. By getting our own form agreements, we help reduce legal risk and operation risk.” Microsoft, for example, has negotiated agreements using Aflac’s contracts, he adds, giving Aflac protection against possible proprietary rights infringement and any other contract-related risks. Guth speaks with pride about this accomplishment but admits that vendors haven’t always liked working from Aflac’s contracts. He stresses that his legal background led him to insist that Aflac use its own contracts wherever possible and also notes that vendors have been willing to accept the unorthodox arrangement because Aflac treats vendors fairlynot always driving for the rock-bottom price.

What’s more, vendors working with companies that have VMOs are more likely to perform competitively, Ascenzo says. “We like to make sure our vendors know about each other in order to maintain a competitive environment and drive down costs,” Ascenzo says. For example, EDS, which does middleware integration for Blue Cross Blue Shield, knows that BCBS uses other software developers to work on its Web browser interface. EDS has bid on that work as well.

Joe Fraser, an EDS client delivery executive who spends most of his waking hours working with Ascenzo’s VMO, confirms that thought. “We are a preferred vendor right now, but by no means are we entitled to all of the IT work that comes down the road,” Fraser says. “Carl [Ascenzo] has created a competitive environment among vendors.” Despite this added competition, Fraser says working with BCBS’s VMO has saved time because he now deals with one VMO director instead of multiple IT managers. But he admits he had to work out some kinks in the beginning.

Initially, Fraser spent some time explaining the new process to his staff, and reworking his documents and templates to fit BCBS’s standardized approach. He has also worked closely with Tony DeGregorio, BCBS’s VMO director, to make sure both sides were communicating well. Now, for example, he says, both EDS and BCBS are better able to prepare a 2005 budget analysis because they can better predict costs and revenue.

Tom Iannotti, manager of consulting and integration business at Hewlett-Packard, says that although he has not yet seen widespread adoption of the VMO-type of function among his clients, he has noticed a difference in how companies buy IT products and services. “There is a general ratcheting up of expectations from suppliers,” he says. “Companies are focused on getting more return for their investment. They are no longer naively expecting miracles. They are buying IT just as anyone would carefully buy any sort of investment.”

Beware of the Pitfalls

When Clarke set out to create a centralized VMO at the American Red Cross two years ago, the radical change in how the organization treated its technology vendors created some internal disquiet. “There was some concern and confusion from the line managers that the VMO would exercise complete control,” Clarke says. “That was not the intention, but we needed to clarify the VMO’s role.” Line managers, says Clarke, said they didn’t want to be shut out of the buying process, and were relieved to learn that they were still responsible for procurement. The vendor management office tracks spending and provides that information to the management team, which in turn can secure better deals.

Clarke’s VMO serves as a center of expertise for IT’s role in the overall contracting process, analyzing IT spending and vendor performance. But it is a sort of information clearinghouse that ultimately defers to the organization’s national contracting office when negotiating contracts.

“We view the VMO as a bridge between technology and business requirements and contracting requirements,” he says. Clarke stresses, however, that they did not want to create a bottleneck in which all contracts must be signed off by the VMO. At Aflac, where the VMO plays more of a leading role, Guth says, some IT managers and technology users miss negotiating with vendors. “Internal customers really enjoy negotiating with suppliers,” he says. “So we try to bring them into the process. We at the VMO are tightly coupled with our [technology] customers.”

Clarke and Guth stress that organizations setting up VMOs need to be sure that managers who have had control over vendor relations in the past understand the change and that IT users be brought into the process whenever possible. Wayne Bennett, a partner in the commercial technology area of Boston law firm Bingham McCutchen, cautions that VMOs could cause problems if they leave business owners out of the IT purchasing process. If those who need the technology aren’t part of the buying process, he reasons, they might feel left out and less motivated to successfully implement their project; they might also feel as if they didn’t get the technology or service they really needed. “The success of most complex IT projects requires the intense participation of not only the CIO and key IT personnel, but the business owners of the process as well,” Bennett says.

Once a VMO is firmly in place, convincing vendors to work with the office can also prove to be a challenge. “If vendors are used to dealing with a number of people, they will try to use a divide-and-conquer approach,” says BCBS’s Ascenzo. They may also, in some cases, try to go around the VMO altogether in order to make a sale to the person who they think holds the purse strings. To avoid such problems, Ascenzo and other CIOs with VMOs go over the process carefully with vendors. Ascenzo says he has consistently repeated to vendors that DeGregorio at his VMO is in charge of vendor management. “You have to make sure that the VMO is of equal power to the rest of the direct reports to the CIO. And the vendors have to know this,” Ascenzo says. “I continually endorse that Tony [DeGregorio] has power and authority.”

Aflac’s Lester adds that CIOs need to be prepared to be tough with vendors who don’t cooperate. “We’ve had to replace some vendors who did not want to work with the VMO or with IT in general,” Lester says. In one instance, he says, Aflac saved over $2 million by rebidding a contract held by a vendor that refused to work with the VMO.

VMOs here to stay

The economic downturn over the past several years has given a clear advantage to technology buyers over vendors, thus paving the way for companies to get tough in negotiations. But CIOs interviewed for this article say their VMOs will remain in place regardless of the economic climate. “It has been a great time to be a buyer of IT services, but I don’t see the process changing at Guardian,” says Omartian. The shift toward multiple vendors and large outsourcing contracts means that CIOs can benefit from a centralized VMO “in any climate,” he adds. With a VMO, they are likely to get better deals and better service from vendors—no matter who has the upper hand.

Some CIOs say they are so pleased with the new arrangement that they plan on adding responsibilities to their VMOs. At Aflac, for example, Lester predicts that his VMO will become more active in searching for technology acquisitions. The VMO already does a lot of behind-the-scenes work, investigating vendors by talking to venture capitalists, and analyzing when a startup might sell or have an IPO. In the future, the VMO, in addition to negotiating deals with vendors, might be able to discover promising technology companies. (Lester speaks with experience on this topic; Aflac bought his software company in 1999.)

With hundreds of vendors trying to get in touch with Aflac daily, Lester says, many would never get through without the VMO. “There are a lot of small vendors who call us, and they might have great ideas,” Lester says. “With an expanded VMO, we will be able to try some of them out. We’re ready to take it to the next level.”