Concept: Vendor Management

Overview
In today’s competitive marketplace, many companies have moved from a single vendor
to
a multi-vendor platform. Managing the numerous individuals and companies you do
business with is crucial for developing valuable relationships. Ensuring that correct
vendor
information is entered, and updating relevant contracts with new information in a timely
manner are two major pain points of vendor management. To improve the vendor
management process, it is important to track and evaluate vendors on a regular basis. Not
only will regular monitoring of vendors ensure they are meeting your expectations, it will
also allow you to proactively take measures to seize opportunities or mitigate risks.
How UpsideContract Can Help You
UpsideContract offers several methods to handle vendor entry and evaluation. The main
tool used for vendor entry is Business Entities. This allows users to easily manage
vendors
in one area. Performance Metrics are used to evaluate vendors on factors that are
important to your organization and specific to your standards. There are many other
related
features that can be used in conjunction with Business Entities and Performance Metrics
to
assist in vendor management.
Business Entities – Area used to create and maintain vendors in the application.
ƒ Allows you to maintain the vendor’s contact information.
ƒ Defines what relation the company has to your organization as well as any parent
companies or subsidiaries of the vendor.
ƒ Used to assign and/or update Performance Metrics.
UDFs – User Defined Fields collect additional information about vendors based on your
organization’s requirements.
ƒ Provides the ability to collect additional or custom information not easily captured
through standard fields.
ƒ UDFs are accessed through Business Entities and work in conjunction with
eForms.
Performance Metrics – Assigned to vendors, Performance Metrics define the
evaluation criteria and schedule (frequency of evaluation).
ƒ Defines if the Performance Metric is required or optional for vendors.
ƒ Allows you to define how often you want to evaluate the vendor for a specific
Performance Metric.
ƒ Configures how you want to evaluate vendors (rating system).
eForms – Collects additional information about vendors entered in the application.
ƒ Collects information pertaining to a vendor (UDFs) in an organized format.

ƒ Defines if the eForm is required or optional for each vendor.

ƒ An eForm’s workflow can be customized to be used with Business Entities.
Business Entity Workflow can also be adjusted to reference an eForm.
UpsideForms – Flexible and configurable forms used in conjunction with Performance
Metrics to further evaluate your vendor’s performance.
ƒ Allows users to create a detailed evaluation for a vendor.
ƒ Custom features can be configured for the form.
ƒ An UpsideForm can be linked to a contract type in UpsideContract as well as to a
vendor/supplier and also can be created at a project level.
Business Entity Merge – Feature used to combine two vendors into one. Used for
business mergers and dual entry of the same vendor.
ƒ Allows users to create a detailed evaluation for a vendor.
ƒ Ability to undo changes that occurred during the merge.
ƒ Updates and tracks all contracts that were using the vendor which was merged
into another vendor.
Supplier/Customer Performance – Allows users to track information about a
vendor and their interactions with contracts in the application.
ƒ Allows users to track all contracts a vendor is involved with.
ƒ Based on a vendor’s performance, users can suspend contracts issued with the
vendor. These contracts can be reinstated at a later date, if required.
ƒ Provides the ability to add additional items (Events, Performance Metrics,
Compliance Items and Attachments) directly to the vendor. These items can be
used to evaluate a vendor on specific details or list additional information about
the vendor.
On Demand Creation – Allows users to add vendors during the contract creation
process.
ƒ Provides the flexibility to enter a vendor while the contract is being created. The
created vendor is used as the contractor on the contract.
ƒ Vendors inserted with this feature can be maintained from Business Entities.
Interfaces – Configurations which enable vendors to be entered from an external
software application.
ƒ Allows users to insert vendors into the application from a 3rd Party Software
application (i.e. Oracle, PeopleSoft, SAP, Great Plains, etc.).
ƒ All vendors entered through an interface can be accessed from Business Entities.
ƒ Enables a large quantity of vendors to be quickly entered into the application.
Vendor Management Tips
Vendor management can be a painless process by following a few simple guidelines:
ƒ Share your top priorities with vendors to ensure they are aware of them.
ƒ Obtain solutions with features that fit your organization now and allow room for
growth in the future.
ƒ During the evaluation process, narrow down the choices to your top two vendors.
Engage in negotiations with the top two (rather than just one vendor) to
encourage friendly competition.
ƒ If you are looking to build long term relationships with your vendors, avoid overly
aggressive maneuvers for short term gain.

Definition of Vendor Management

Posted by Anthony on Wednesday, November 28, 2007 · 5 Comments
Executives and outsourcing vendors alike are constantly evaluating what vendor management is. Here is our quick definition of vendor management: Vendor
management is the discipline of establishing service, quality, cost, and satifaction goals and selecting and managing third party companies to consistently meet
these goals.
• Establishing Goals – Just as employees need clearly established goals, operations need clearly defined performance parameters. When selecting
or managing vendors, vendor managers must optimize their opportunity to achieve these goals by using third parties companies.

• Selecting Vendors – The fine art of vendor management is essential to optimizing operational results. Different vendors have different strengths
and weaknesses, and it is the vendor manager’s responsibility to match the right company with the desired performance characteristics. Failure to consider this
comprehensively could lead to complete failure.

• Managing Vendors – On a daily basis, vendor managers must monitor performance, provide feedback, champion new projects, define or
approve/disapprove change control processes, and develop vendors. There’s a tremendous amount of detail to this aspect of the discipline, and we’ve covered
this in many posts here.

• Consistently Meet Goals – Operations must perform within statistically acceptable upper and lower control bounds. Everything the vendor manager
does should focus on meeting goals, from providing forecasts to defining requirements, from ensuring vendors have adequate staff to ensuring the staff have
completed all required training.

Note that vendor management is not the same as operations management, although it is remarkably similar. In an outsourcing relationship, vendor managers
must understand the drivers of the relationship in order to ensure the vendor is successful. Vendor managers are not empowered to perform all aspects of the
outsourced operation. Rather, they must influence the vendor to perform. This level of influence is different from managing employees because of the economic
differences in the relationship: a company typically represents 100% of an employee’s income, but rarely represents even 5% of a company’s revenues. More to
the point, most outsourcing contracts are priced by vendors in a way that even if the vendor paid the maximum nonperformance penalties they are likely to still be
profitable. So, the conundrum vendor managers face is how to influence profitable vendors to meet performance objectives when reaching these levels are likely
to be less profitable in the near term….

Vendor Management Organizations Are a Bad Design

Posted by Anthony on Monday, December 7, 2009 · 2 Comments

Does Your Vendor Management Organization's Design Serve the Enterprise?

For some, vendor management organizations are a silver bullet that solve all problems. For others, vendor management organizations are the source of internal
strife. Bottom line, for many organizations, they are a terrible solution. They hoard decision-making ability, distance ownership of execution and delivery from
stakeholders, and focus on narrow contractual goals instead of broader strategic objectives.
An Artifact of Historical Scarcity
There was a time, a long time ago, when the challenges of outsourcing required a specialized vendor management organization. Your procurement organization
lacked the skills to source outsourcing suppliers, and they rarely displayed the ability to partner with suppliers to achieve long term organizational objectives. Your
operations team had sufficient conflicts of interest that a team with the incentive to make outsourcing succeed was needed. Your IT and operations team didn’t
know how to work with outsourcing vendors. The complexity and effort required to transition operations required dedicated staff, lest you not achieve your other
business objectives. Your leadership team wanted closer line of sight to management decisions. You didn’t have sufficient vendor management process or skills.
Maybe there was organizational conflict where the CIO and the CPO didn’t agree.
So, vendor management organizations were an artifact of experience and knowledge scarcity and the need to control decision-making. Born was an organization
that needed it’s own sourcing, contracting, project management, vendor management, strategy, financial analysis, and operational management skills. It’s
objectives could be defined by vendor achievement of contractual service level agreements and, more strategically, the achievement of corporate EBITA and
innovation objectives. It managed a broad group of internal stakeholders, including human resources, IT, procurement, legal, operations, public affairs, corporate
communication, sales, and finance. All groups leveraged the centralized VMO to facilitate decision-making and execution of outsourcing decisions.
Listen to Forrester Research’s Vice President John McCarthy’s comments on “best practice case studies for vendor management” durin the 2007 Services And
Sourcing Forum in Orlando:
Wow, these are complex jobs. Listen to John list all the reasons for VMOs and the stakeholders they serve. And that was before politicking began…

Where the VMO resided was a subject of major corporate politicking. Initially, it was easy. CIOs wanted to own IT VMOs. COOs wanted to own BPO and supply
chain VMOs. CFOs wanted to own F&A and indirect procurement VMOs. HR leaders wanted to own HRO VMOs. At a more lower level, call center executives,
application development and maintenance, IT infrastructure, and every sub-organization created their own VMOs. The politicking began when the COO or CIO
had more than one VMO. Who would own it? The app dev VP or the infrastructure VP? Or would they create a standalone VMO to “rule them all”? Or one
governing VMO to manage the sub VMOs?
It became more complex when the COO and CIO shared the same vendors. Companies, like Accenture, with their strong back-door selling (you’ve
seen this excellent back-door selling training company, right?) ran circles around CIOs and COOs whose teams couldn’t get organizationally on the same page
regarding strategic initiatives. They had better information than their competitors and limited companies’ decisions by plying this information with internal
stakeholders to influence outcomes. Companies realized this was going on, and sought enterprise VMOs to centralized decision-making.
And then organizations that shared the same functional sub-responsibilities clamored for centralization. Procurement asked to source and contract outsourcing
vendors. Legal asked to own the outside counsel relationships that supported outsourcing contacts. Global workforce management teams asked for management
of vendor call center personnel. Contingent labor vendor management organizations wanted to leverage offshore IT labor, too. Project management offices asked
to lead the outsourcing transitions. Operations leaders, on the line for service levels, performance, innovation, and customer service, asked for greater control
over vendor management decisions related to their organizations.
At this point, the VMO was in an impossible position. It’s once strategic role was being challenged by operations and IT executives who were directly responsible
for execution – the problems outsourcing vendors were experiencing, in part due to the internal communication challenges of independently operated VMOs, were
causing operations and IT executives to miss goals. Functional organizations had evolved, bringing more outsourcing experience to HR, Legal, Finance, and
Procurement – and these groups wanted to own their functional responsibilities for the entire enterprise, without exceptions for VMOs.
Applying Organizational Design Theory
First, it’s important to realize that organization structure is made-up of 4 key elements (John Child, Organization: A Guide to Problems and Practice, 1994):
1. Assignment of tasks and responsibilities that define jobs
2. Clustering of positions into groups and groups into departments and departments into the broader organizational structure
3. Mechanisms to facilitate top-down and bottom-up communication
4. Mechanisms to facilitate cross-functional coordination
One can quickly see that compromises in clustering (step 2) require more cross-functional coordination. Structurally, this coordination is created by matrix
organization structures. These matrix organizations go through several structural stages (Richard Hackman and Greg Oldham, Work Redesign, 1980):
1. Traditional structure (the starting point)
2. Temporary overlay, which managerial roles are created to run particular projects, like transitions and implementations
3. Permanent overlay, in which the managerial roles created in the 2nd step become permanent
4. Mature matrix, in which the roles permanently created in step 3 have equal power to the traditional structure
The organizational problems arise in step #3 when the VMO becomes permanent and then shift to a mature model, which requires power sharing. Traditional
structure leaders are challenged to share power, which takes the eye off the strategic objectives of the company. Also, as outsourcing becomes more pervasive in
an organization, matrix designs become more widely adopted by an organization.
This is exactly where the largest strategic problem lies. Danny Miller matched strategies similar to Porter’s strategies with the best organizational structure:

Matching Vendor Management Organization Structure with Organization Strategy

Type of
Strategy
Departimentalization
Functional Niche differentiation, or focus
Cost leadership; possibly market
Functional
differentiation
Market differentiation or cost leadership
Divisional or hybrid
at a division level
Matrix Innovative differentiation
As few organizations have innovation as their primary corporate strategy, they aren’t structured into a matrix organization. Pervasive use of outsourcing using
VMOs arranged in matrix organizations create significant problems because they cause the company to inadvertently change structures, taking away focus from
corporate strategy.
What You Should Do
The bottom line is that vendor management organizations should only be created when the skills and experience don’t exist in a company at the beginning of an
outsourcing initiative. It should be temporary, designed to develop the skills and experience necessary to implement outsourcing projects and manage vendors.
At some point, the day-to-day line responsibilities of the VMO should be shifted back into line organizations, where line managers take responsibility for delivery of
objectives by managing vendors to achieve the goals. Since the service level agreements in the contracts should meet the needs of these organizations, there
should be little concern – these organizations should be managing performance and reporting on results already. The staff responsibilities should be shifted back
to the staff functions (procurement, legal, HR, and finance).
The only responsibility that should remain centralized is outsourcing governance. This governance function, as described in the IAOP OPBOK, should focus on
rules of engagement, encouraging cross-functional communication, project prioritization, initial project implementation tracking, high level interdependent planning
among divisions/departments and vendors, evaluating enterprise-wide vendor performance, and the sharing of outsourcing best practices. That means the other 9
categories of responsibilities defined by the IAOP should be temporary or distributed through other organizations.
Counter Arguments
Outsourcing advisors and experienced clients may disagree with the recommendation above.
There may be situations where outsourcing for cost reduction reasons is an imperative and such should be centrally managed to ensure EBITA objectives are
achieved. I wouldn’t argue against this, except to suggest that even this should be temporary and that, at some future point, the organization work toward
developing the vendor management competency in all parts of its organization in order to deliver on its new reality – outsourcing isn’t just a project, it is a long term
manner of delivering, and decentralizing the management of its delivery mechanism outside of the delivery leadership makes little long term sense for the reasons
listed above.
There may be situations where the focus of outsourcing is sufficiently large such that few internal operations remain. For example, I worked for a west coast
savings and loan bank fifteen years ago that had exactly six IT employees – the CIO, his admin, his VP of strategy, and some assorted junior staff members. The
rest, including most leaders, were entirely outsourced. In this case, staff functions should still be allocated to procurement, HR, and legal organizations, but the
day-to-day line vendor management responsibilities should be centralized.
Some people may argue that managing a matrix organization is the role of an outsourcing VMO. That’s great, but see all the problems listed above. Why go
through that if you don’t need to?
Finally, some people would simply argue that outsourcing management and vendor management skills are insufficiently available within an organization to
distribute the responsibilities. Well, it is absolutely the responsibility of any organization undergoing an outsourcing transformation to take this internal
development opportunity seriously. Upgrade talent, use training organizations to build skills, and seek professional development at major organizations to develop
your staff. Simply housing the talent in a single organization is destined to failure in the long run.

Related posts:

1. Offshore Outsourcing Vendor Governance Organizations

2. Outsourcing Vendor Management Organizations

3. Outsourcing Governance and “Who Owns Supplier Performance Management?”

4. The Business of Outsourcing Certifications

5. IT Outsourcing Metrics: A Good Example of Management Controls

FILED UNDER FEATURED, VENDOR MANAGEMENT FUNDAMENTALS, VENDOR MANAGEMENT ORGANIZATION · TAGGED WITHOFFSHORE
OUTSOURCING, OFFSHORING MANAGEMENT, ORGANIZATIONAL DESIGN, OUTSOURCING, OUTSOURCING MANAGEMENT,VENDOR MANAGEMENT, VENDOR
MANAGEMENT ORGANIZATION DESIGN, VMO DESIGN, VMO ORGANIZATIONAL DESIGN

Comments
2 Responses to “Vendor Management Organizations Are a Bad Design”
Trackbacks
Check out what others are saying about this post...

1. Offshore Outsourcing Vendor Governance Organizations | 360° Vendor Management says:

December 8, 2009 at 12:25 am

[...] shown that the business of outsourcing certification is big business, and explained why vendor management organizations are a bad idea. This much
skepticism could be a bit karmically unhealthy, so let’s turn the attention onto [...]

2. Outsourcing and Vendor Governance Predictions for 2010 | 360° Vendor Management says:

December 14, 2009 at 7:31 pm

[...] VMOO solutions. They will explain the incompetence of vendor management organizations (which, I have argued, should not exist), link this incompetence to
it’s competitor’s performance, and build the case [...]