A Vendor Management Office Can Help Get Your Suppliers in Line

Vendor management offices are just one way to ensure an organization's effective use of outside resources. CIOs share their best tactics.

Rich Hoffman recalls starting as CIO at Hyundai Information Service North America and driving smack into gridlock. A lot of daily tasks were slipping through the cracks as managers worked horrendous hours. As for workers, there weren't enough of them.

Hoffman asked his managers why they didn't fill the vacancies. One manager showed him a thick stack of resumés she was supposed to sort through. A staffing vendor had supplied them without conducting any screening. "What this contracting firm did was downloaded 100 résumés from Monster.com and flipped them to her and said, 'Pick one,' " Hoffman recalls.

Hoffman's reaction: "What's the name of that company?" he asked his manager. "They don't work here anymore."

The vendor-CIO relationship poses many pitfalls. For starters, some vendors like Hoffman's staffing supplier are poorly chosen and then allowed free rein to fail. Even vendors that perform well can inadvertently harm a company if they aren't managed well. When an organization doesn't understand its IT assets and contract needs, for instance, it can unwittingly hire (or allow others in the business to hire) multiple vendors to do the same job.

"It is not uncommon for a division to have the same software implemented 15 times in 15 different locations in 15 different ways, when maybe it could have been implemented one time across the board," says Liz Brady, senior analyst at Forrester Research Inc. in Cambridge, Mass.

In other cases, a vendor can perform so well that it is allowed to proceed independently for years, eventually working itself into a position where it knows more about the company than the company does. This is especially true if the vendor's workers have remained constant and the company has slashed or shuffled staff during reorganizations.

Forrester knows of one company that experienced this form of vendor lock-in with several core vendors, including enterprise application provider SAP. In SAP's case, "that vendor had been there seven years, while the client had changed after three to four years," Brady says. In the process of providing licenses, SAP essentially climbed into the driver's seat and ended up "holding all the business process knowledge that the organization needs," which makes it difficult or impossible for the company to switch vendors.

CIOs can avoid much of this grief with better IT governance for choosing vendors and managing contracts. "Vendor management should be a high priority for any CIO. They rely on them as a part of their team," Brady says.

The Vendor Management Office

The larger a company, the more likely it is to formalize governance standards by establishing a vendor management office, or VMO. Of companies with at least 1,000 employees, 39% have VMOs, according to Forrester. Nearly half of companies with at least 5,000 employees have VMOs.

At some companies, VMOs handle all vendors and report to the COO. In larger companies, an IT department might have its own VMO.

Since an IT department of a midmarket company doesn't have the means to employ all the specialists it needs, it tends to lean more heavily on vendors. It might hire from dozens to hundreds, ranging from niche application to top-shelf consultants who architect enterprise-wide solutions based on Oracle, SAP or other business software. Brady says midmarket IT organizations typically manage from 10 to 100 vendors, with an average of about 50.

At Hyundai Information Service North America (HISNA), Hoffman has a $100 million budget to meet the IT needs of the carmaker's North American family of companies. He is like an external vendor to them, since they can choose to go with other vendors if they don't like his price or service. HISNA is a corporation in its own right, and hires its own vendors.

Hoffman likes to think of HISNA's vendor relationships in three tiers: tactical, slightly more involved and strategic. Tactical vendors fill immediate needs for commodities like office supplies. The next group consists of important partners, including staffing companies, but the players are easily interchanged. The last group supplies highly customized, mission-critical solutions.

To make sure no vendor gains too much power, Hoffman makes a point of always engaging several of each kind. "I never like having a single supplier for anything. You want a minimum of three for everything," Hoffman says, whether it's for leasing or acquiring hardware. "I don't need more and I don't want less, because one of them is always falling away."

This was first published in October 2007

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