Why IT vendor management makes sense

Commentary - As 60-70% of an enterprise’s IT budget is spent on hardware, software, and external vendor services, maximizing the value derived from IT vendors is key to delivering efficient IT services. Further, the increasing use of outsourcing, out-tasking and cloud computing means that vendors are now playing a fundamental role in IT’s delivery of services to the end-user. Given these two factors, effective vendor management has become an essential competency for every IT organization; arguably as important as any internal technology, service management, or program management capability.

Ad-hoc vendor management challenges
The customary approach to overseeing IT vendors for large organizations is split between a centralized procurement organization and IT. The procurement organization leads sourcing and contracting activities, with a subsequent shift of ownership to IT for the implementation and operational oversight. Vendor management, if performed at all, is typically an incremental activity for the IT managers responsible for delivering the associated service(s). However, as the scale, scope, and complexity of vendor services increase, enterprises are encountering issues that arise directly from this ad-hoc and deemphasized vendor management approach. Examples include:

• Demand Management: Having no aggregate view of demand and, for example, continuing to pay maintenance for retired equipment, being caught out of compliance by a vendor’s software audit, or finding duplicative services being provided by multiple providers
• Contract Management: Being unaware of expiring contracts, resulting in low-leverage sole source extensions instead of executing a comprehensive sourcing process
• Performance Management: Anecdotally believing that vendor service delivery is poor but lacking the performance reports to support the position or pursue service level credits or other remediation that vendor performance warrants
• Relationship Management: Having no aggregate view of total scope of services and spend with a vendor across its various infrastructure, software, and services offerings, limiting the enterprise’s ability to leverage the entire relationship to address issues and concerns
• Risk Management: A key vendor unexpectedly becoming insolvent (e.g., Satyam, MCI WorldCom) and jeopardizing operations, or an inability of the enterprise to verify that its vendors’ delivery models enable compliance with regulatory requirements

In addition, the enterprise trend towards fewer, deeper vendor relationships (reflected in a spate of IT vendor acquisitions and consolidation) is also a factor. As IT vests greater responsibility with a limited set of strategic vendor partners, it needs to maintain an integrated commercial and operational viewpoint throughout the relationship.

IT VMO benefits realized
To manage these issues, an increasing number of enterprises are deploying a dedicated IT Vendor Management Office (the IT VMO) that is responsible for overseeing the entire vendor lifecycle and for “bridging the gap” between IT and the corporate procurement organizations to better enable vendor relationships that drive strategic benefits. The goals of the IT VMO include:

• Balancing operational, financial, and technical considerations during each sourcing event. Financial optimization now requires that the enterprise address operational and technical considerations in addition to commercial factors during each procurement (rather than just “buying the same for less”). For example, network congestion and poor application performance can be addressed by WAN compression technology or alternative application delivery models (e.g., Citrix) rather than simply jumping to higher bandwidth transport services and hoping to utilize increased volume to negotiate steeper discounts.
• Establishing agreements that allow a flexible, mature vendor relationship to develop. The primary focus of sourcing professionals on optimizing the agreement from a financial/contractual basis can lead to overly prescriptive and aggressive terms. This can drive a confrontational vendor relationship characterized by scope disagreements, change orders, and mutual dissatisfaction. Ongoing vendor management allows a more flexible agreement structure to be implemented, enabling ongoing calibration without the enterprise fearing being taken advantage of.
• Actively and aggressively managing all aspects of the vendor relationship. For complex IT services agreements, good governance practices include robust relationship, performance, financial, and contract management activities. These activities can be extensive, and are fundamentally different from the traditional IT skills used to directly manage service delivery. As a result, responsibilities for large agreements do not lend themselves to being added incrementally to existing IT manager duties.
• Retaining commercial focus during operational interactions. While the goal is to develop a mutually beneficial relationship, vendors are constantly striving to increase enterprise spend on their products and services. Each vendor will likely have a team of commercially and technically savvy individuals focused on achieving that goal. The enterprise must therefore, as a matter of course, consider the commercial implications of each interaction and avoid sacrificing leverage for marginal operational benefit.
• Fully leveraging the capabilities of each vendor partner. Given the trend towards strategic, longer-term relationships, the goal is to develop partnerships with preferred vendors that can collaboratively guide the IT strategy, technical architecture, and help the enterprise innovate. This requires that vendor management expand beyond a pure operational delivery focus to maximize the overall relationship value, providing strategic technology, trend and industry expertise and content.

While there is debate on the detailed aspects of IT VMO implementation, including demarcation of responsibilities between procurement and vendor management, and the precedence of the functions, the overall benefits to the enterprise outweigh any internal risks or downsides associated with the VMO model.

biography
Jonathan Shaw, Ph.D., is a principal of Pace Harmon, an outsourcing advisory firm.