Inside The Next Generation Vendor Management Office

Today, almost 50% of companies have a centralized vendor management group in place, with 11% planning to introduce one this year. Why are we seeing the growth of this unit within the organization? The main drivers for a business to invest in a VMO are to get more value out of existing suppliers and to lower overall costs through better rate negotiations and demand consolidation. Most often, the VMO is either housed in IT or procurement, depending on the business, and consists of two to ten people who are responsible for overseeing the big picture of vendor management.

Besides working to cut costs, VMOs are increasingly responsible for building strategic relationships with suppliers; challenging vendors to provide more innovative solutions to better meet business needs. VMOs are accomplishing this task by measuring vendor performance in key areas such as quality, cost, and customer service. This continual performance management is a key reason organizations are setting up VMOs, especially as they look to evaluate vendor performance across multiple projects, or in a multisourcing environment.

VMOs are also taking on the responsibility for allocating resources to vendor risk mitigation and helping to organize these efforts. Vendor risk management activities are often complicated as they are spread across a wide variety of business units including financial risk, regulatory risk, corporate responsibility, IT systems security, and business continuity. The VMO can help facilitate the process by contributing to the effort of governance, risk and compliance (GRC) groups, or in companies without a GRC, by owning risk mitigation for the largest IT vendors.

Additionally, as we enter into 2011 and expect an improved economy, some VMOs are moving beyond post-contract activities like performance management and issue escalation to take responsibility for processes that occur before the contract is signed. For example, having a VMO present during contract negotiations can drive more effective agreements and assess performance and risk before a supplier is on boarded. Other pre- contract responsibilities can include managing the vendor selection process, where the VMO can act as a third party to facilitate sessions across business units, enforce a framework to make the decision, and incorporate best practices into the selection cycle. The involvement of the VMO in the pre-contract process will result in improved future compliance monitoring, as the group is more familiar with the vendor, and better prepared to enforce ongoing performance measurement.

While these examples illustrate how VMOs can and should, and in some cases have evolved, the reality is in the numbers. Recent Forrester data shows that even though businesses ranked building out strategic relationships with vendors as a high priority when setting up a VMO, less than a third of VMOs are fully able to take on this responsibility once the team is set up. This missed opportunity highlights the issues around business unit resistance, as stakeholders are often hesitant to involve a VMO in the relationship management with the most strategic vendors. As a result, businesses are missing out on the impartial look VMOs can provide to help assess vendors — especially across multiple projects at a company that can span different stakeholders.

To begin to alleviate this roadblock, VMOs need to demonstrate the value they add to the business, beyond simply cutting costs. These offices need to actively market their successes to sell their value to the other business units who are currently dealing with vendors. This includes measuring the capabilities of the team and pointing out what they can do for the rest of the company. For example, determining the dollar amount saved because of research on vendors, as well as how much time and money is saved in creating and approving vendor contracts through standardized templates and processes. Even on a day-to-day basis, VMOs can measure vendor performance and risk profile turnaround time in comparison to before the group was in place to highlight the effectiveness of the services they provide.

With innovation, VMOs can bring tools to the business that will greatly improve the time cycle and reduce costs for vendor management, but in order to be successful, they must first gain acceptance from the rest of the company.

Patrick Connaughton is Principal Analyst at Forrester Research, serving sourcing and vendor management professionals. He will be keynoting at Forrester’s IT Forum, May 25-27 in Las Vegas.