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The new vendor governance model: Challenges, best practices

How do leading IT vendor governance offices successfully adapt to a rapidly changing business environment?

Editor's note: In part one of this two-part tip, IT sourcing expert Dan McMahon, director at Pace Harmon, a management...

consulting and IT sourcing firm, discussed how and why we are seeing a change in the traditional IT vendor governance model. 

Here, he tackles three questions that come up when moving to this new and expanded model of IT vendor governance: What are the challenges faced by vendor governance organizations when trying to become more responsive to the business? For companies that have made the migration successfully, do any consistent themes emerge? If this change requires an investment, where are companies finding funding in tight budget environments?

Three challenges

Organizations contemplating a change to their vendor governance model must be prepared to face change management issues on three fronts:

  • Initiative Funding. Defining the sources of funds to support an investment in new capabilities or maturing existing processes through some form of a business case is most common. Leading organizations clearly identify the sources of funding, payback expectations, and risk contingencies.
  • Organizational Resistance. As with most change within an organization, resistance should be expected. Again, using the business case and communicating the targeted outcomes, benefits, and rationale for change will help.
  • Resource Availability. Occasionally new capabilities will need to be added to a vendor governance function. Often, the experience or capabilities needed reside outside the organization. Finding and securing these resources can be time-consuming and, in some cases, costly if a significant change is required.

These potential business case elements need to be considered. Fortunately, these elements are typically offset by expected benefits.

Five success factors

Some fairly consistent themes reveal themselves when you review companies that have successfully made this transition. The success factors are:

Resources for vendor governance transitions are surprisingly available internally to most organizations.
  • Vendor governance is organizationally aligned close to the C-Level.
  • There is a clear understanding of vendor governance's intent and how the function adds value.
  • There is a set of vendor governance enabling processes.
  • There is a clear focus on delivering value to the larger business targets.
  • The company takes a critical look at vendor governance's resource needs.

Three sources of funding

Resources for vendor governance model transitions are surprisingly available internally to most organizations. Frequently, funding for a vendor governance transition comes from gains in efficiency or cost avoidance, and is led by the vendor governance function. The three most commonly observed funding sources supporting vendor governance transitions have been:

  • First, sharpening the terms on a vendor agreement can produce funds, of which a portion of these savings have been used to fund transitions. This is the most direct opportunity and can produce savings if the commercial elements of an agreement are more than a few years old.
  • Second, most vendors possess intellectual capital that can produce cost improvements through efficiencies, access to information, or technology leveraging. The vendor governance function can work with a vendor to understand the impacts of incorporating vendor intellectual capital. A portion of the benefits should be retained as a second source of funding.
  • Third, when migrating to a new service delivery model (e.g., managed services) reduced spend should be expected and a portion of these savings can be retained for vendor governance model transition.

About the author: A director at the management consulting and IT sourcing firm Pace Harmon, Dan McMahon helps executives in leading and implementing globalization strategies. With more than 20 years of experience in IT sourcing, he takes a pragmatic approach to strategy, vendor evaluation and contract development, with special focus on the financial and operations nuances that maximize value and vendor service delivery.

Next Steps

CIO advice from the experts at Pace Harmon:

Outsourcing contracts: Common CIO mistakes -- and fixes

How to govern your ITO provider after the deal is done

Private cloud termination contracts: Primer

This was last published in September 2016

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