How to build an IT vendor management office or standards body

Vendor management offices and standards bodies can help large organizations save money on IT purchasing and better manage vendor relations, both critical during a recession.

Scrutinizing your enterprise organization's vendor management program has taken on even more importance this year,

as the economic recession has forced companies to strengthen relationships with vendors and further justify money for technology purchases.

In turn, many enterprise organizations are taking another look at vendor management offices (VMOs), internal units aimed at supervising day-to-day interactions with vendors and managing longer-term relationships. For those organizations not prepared to leap into a full-scale VMO, it's also possible to establish a governance or standards body of employees from across the company to oversee purchasing policies and assess new vendor technologies and other offerings.

"I think what's happening is now, with a combination of the economic downturn and increasing regulatory [oversight], corporations are paying more attention to their contracts and the lifecycle of them," said John McCarthy, an analyst at Cambridge, Mass.-based Forrester Research Inc., who focuses on vendor management issues. "It's part of a broader trend of trying to drive more process maturity within IT. Firms need to deliver more effectively and, now, with fewer resources."

According to Forrester's "The State of Vendor Management: 2008" survey, released in November, firms are 15% more likely to have a VMO in place now than in 2006, and more than double the number of firms plan to create one in the near future.

Vendor management involves numerous duties for a CIO or IT executive to keep track of, including: negotiating and then monitoring the length and substance of contracts; keeping tabs on new technologies; maintaining relationships with current vendors; and reaching out to vendors with which your organization has not yet worked.

Alan Carver, who manages the project management office for 14,000-person insurance company Blue Cross and Blue Shield of South Carolina (BCBSSC), said his organization has maintained a governance committee in some form over the past 20 years. It grows and adapts with the company, he said.

"Having several data centers, multiple mainframes and around 2,000 servers with VRUs [voice response units], it is a necessity," he said.

The governance committee consists of senior finance staff, technical operations staff, architects and several business vice presidents. "This was assembled to give a wide variety of viewpoints in decision making," Carver said.

That's the proper approach, McCarthy said.

When assembling either a VMO or a standards body, it's vital to have broad representation from procurement, legal services, IT and business units, and it can be helpful to have people with a background in project management, McCarthy said, as they are often more comfortable in supervisory roles.

It is important to include people with a far-reaching view of the organization and who, above all else, understand the importance of good relationships with vendors, McCarthy said.

A common mistake is to hire somebody "too young or too technical," he added, as they might not understand the importance of building relationships and defining problems.

"They don't have the context," McCarthy said. "The role of the director of the VMO is larger -- more of a conductor, rather than an individual musician in an orchestra."

McCarthy's recent research on building an effective vendor management office, the job description of the director of the VMO, and other vendor management topics is based on Forrester-collected survey data, which corroborates the important role of IT in vendor management practices.

It's not surprising that IT is a hot testing ground for enterprise organizations' vendor management activities, McCarthy said.

"Clearly, what we're seeing is that most of these organizations start with IT because those are some of the thorniest relationships to manage," McCarthy said. If successful in this endeavor, organizations often move on to apply those vendor management best practices to other areas of the business, such as facilities or office supply management, he said.

Vendor management offices and standards bodies should take a measured approach to having vendors -- both current providers and new candidates -- come in to demonstrate their new solutions.

"They're not doing dog-and-pony shows," McCarthy said. "They're managing strategic relationships at a more strategic level, bringing in a limited number of strong vendors and saying, 'Here's where we're going and here's how you can help.'"

Twenty percent of relationships account for 80% of spending, McCarthy added.

At BCBSSC, Carver said his group meets weekly to review requisitions. "Vendors are brought in based on projects, and we are consistently reviewing our vendors and other opportunities," Carver said.

The role of the director of the VMO is larger -- more of a conductor, rather than an individual musician in an orchestra.

John McCarthy, analyst, Forrester Research Inc.

The organization -- which has the second-largest IBM mainframe in the world and processes more than 80% of all Medicare claims nationwide -- has certainly realized cost savings due to consolidation and effective use of hardware and software, Carver said.

"In addition, we are able to create master contracts with certain vendors that realize a corporate-wide cost savings," he said.

Carver advises other IT executives to grow the direction and goals provided to the standards body. "Failure to do so invites chaos and disorganized growth, which equates to cost, not savings," he said.

McCarthy agrees. When seeking to establish a vendor management office or standards body, it's important to begin with governance -- in particular, a very solid charter delineating the role of the VMO and how it relates to procurement with the organization, he said.

"Define and refine processes, and only last look at implementing the automated tools," McCarthy said. "Too many people try to automate poorly designed and implemented processes that are not fully mature. Once you put them in software, they're in cement."

Let us know what you think about the story; email Rachel Lebeaux, Associate Editor.

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