Vendor management offices provide value

They're necessary, says John C McCarthy

By itself, an ironclad contract can't save a soured sourcing relationship, any more than an ironclad prenuptial agreement can ensure a happy marriage. When the honeymoon is over and you realise that the vendor with which your company entered a multiyear relationship isn't all you thought it would be, you scramble for the contract to see what options you have. But at that point, it's probably too late to salvage the relationship.

Oftens, companies enter sourcing relationships with all due diligence and then lose interest in maintaining it. They go about their business, relying on their carefully crafted contract to steer them clear of any problems. But when problems do crop up, they tend to be significant because so little attention has been paid to the relationship.

What's needed is a more formal vendor management effort and, in many instances, a dedicated vendor management office (VMO).

In fact, many firms are building VMOs. In 2007, Forrester Research asked 700 decision-makers at North American enterprises and 300 at European enterprises whether expanding their vendor management capabilities was either on the agenda or a critical priority. Nearly half — 48% — said it was.

But in a time of economic uncertainty, how can sourcing pros justify to resistant business leaders the value of a VMO? Business leaders are always interested in the bottom line, never more so than when times are tough. As a result, VMOs can get buy-in from executives by demonstrating the hard- and soft-dollar savings.

Forrester's research shows that VMOs deliver a consistent set of benefits that apply equally to new efforts and expanded ones. For example:

  • More effective demand management yields hard-dollar savings. Most of the tangible benefits of a VMO come from better leveraging volume-purchasing agreements, as the VMO improves coordination and institutes thorough reviews of maintenance contracts. Such oversight often reveals unnecessary spending. For many Fortune 1,000 companies, vendors can account for 65% of the IT budget. That being the case, a large company can easily recognise 1% to 3% savings by creating a VMO.
  • Better governance processes and supplier performance yield soft-dollar benefits. VMOs can improve processes in areas such as requirements gathering, vendor scorecarding and governance. Although it is much harder to quantify the benefits, the company will gain more consistent and predictable supplier performance.
  • Rigorous risk management minimises disruptions from poorly performing vendors. Increasingly, VMOs' governance responsibilities include formal risk management assessments of IT suppliers. These assessments help organisations avoid potentially expensive and brand-damaging outages that can result from poor supplier performance.

When you start to take control of the vendor management life cycle, it's important to avoid getting ahead of the company's ability to absorb change.

Building a VMO represents a key part of a company's strategy to bring more maturity and process discipline to IT and take an "activist sourcing" approach.

If your company doesn't recognise the value of a VMO, it's time to get key decision-makers on board by showing them how VMOs can drive costs down and IT's performance up.

Frank Hayes' Frankly Speaking column will return soon

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