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A Vendor Management Office Can Help Get Your Suppliers in Line

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

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 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."

For staffing contracts, he aims to have five suppliers because "I'm always getting rid of one or two" for various reasons. Sometimes they shift strategy and focus on different markets; sometimes HISNA gets too big for them.

But why should a CIO have multiple vendors at the ready even though one vendor stands out? Because, Hoffman says, eventually you may have to drop even some of your best vendors. When a vendor changes leadership, its performance may suffer. And with mergers and acquisitions and -- until recently -- leveraged buyout activity, there has been no guarantee who will own today's trusted vendor tomorrow, or what changes a new owner might bring.

Hoffman picks his vendors based on a slew of metrics, technical and otherwise, including the vendor's certifications, years in the business, and track record meeting budget and deadlines on previous contracts. But he also tries to keep size in mind. With offshoring, for instance, "we work best with the Tier 2 companies. We're not big enough for the Tier 1s to make them happy, and the Tier 3s don't have the competency." (In this case, a Tier 1 company would be Tata Consultancy Services, the Mumbai-based IT services company with more than $4 billion in annual revenues.)

Hoffman says he can get a lot more respect from a Tier 2 company like Infogain Corp., a Los Gatos, Calif., company with hundreds of software developers in India. "We're big to them. We get their attention and we get their best," Hoffman says. "If I go to Tata, I'm getting their fourth-string guy because I'm not GE."


Some staffing agencies feel left on the sidelines with automation.

One of the main dangers of vendor management systems is the risk that the automated part of the process will drive away good vendors.

This is a major complaint of staffing firms that supply IT consultants specializing in .NET, Java, SQL, Oracle and of other areas. These are highly skilled workers, and salaries can range to $300,000 for software architects proficient in Teradata, SQL or database re-engineering, to name a few.

In past years, employers have gone to great effort to woo such candidates, but now they are increasingly seen and hired as commodities. CIOs and other executives are using vendor management systems to order up these applicants without allowing the placement agency to have any contact with the hiring manager.

IT organizations are among the heaviest users of VMS. A recent survey by researcher Staffing Industry Analysts found that more than half of IT users had adopted some form of VMS. "This makes sense because they typically have the most dollars at stake and the most to gain by ensuring that rates are competitive," says Barry Asin, chief analyst at Staffing Industry Analysts. "The adoption rate of VMS has been much faster in technical areas than in other areas of contingent work usage, in part because technical organizations are just more comfortable with technology."

How It Works

When a staffing agency is invited to bid, it must submit only its top two or three candidates and hope for the best. While CIOs and vendor management offices find this method efficient -- especially when the alternative can be a ream of unsorted résumés -- the staffing agencies are finding the arrangement increasingly unworkable.

"A complete prohibition on speaking to the hiring manager under all circumstances is not a good policy. What people are doing is throwing résumés over the wall and hoping one sticks," says Mark Roberts, CEO of the National Association of Computer Consultant Businesses, based in Alexandria, Va.

In a poll, the group's members reported placing one in three candidates when they had contact with a company's hiring manager, but only one in 10 candidates when working through vendor management systems.

And that means staffing vendors, for one, will increasingly bypass vendor management systems.

In 2003, when hiring was slow, staffing companies had no choice but to go along with anything the vendor management systems demanded. But now, "in a marketplace where talent is scarce, people have options," Roberts says. "You've got to make sure that it works for all stakeholders in the process. If you don't, you're not going to have a successful VMS."

-- JR

Vendor Management Systems

Common sense strategies like these are a good start, but they only go so far. To really analyze vendors' bids and performance, CIOs are beginning to rely on vendor management systems, a series of software programs that take IT governance into account to help companies write requests for proposals (RFPs) as well as score bids and track vendor performance against various metrics.

The tools are out there. They include Chimes CVM Centralized Vendor Management by Ensemble Chimes Global, Click Commerce's Contract Management and Service Management Solution and ITM Software's ITM vendor relationship management application. Contingent staffing software includes ProcureStaff, IQNavigator, Beeline, Fieldglass, Taleo, Peopleclick and PeopleNet.

But most people don't use this type of application yet. In a Forrester study of 292 enterprises with centralized vendor management offices, one-quarter to one-third say they use software for contract management, service-level agreements (SLAs) or service delivery management.

Marguerite Raaen is a consultant who has served as CIO and in other executive IT positions in numerous companies, including the U.S. Department of Education and British telecom company Cable & Wireless. She has hired consultants to teach her staff about vendor management tools, including enterprise data management (EDM) software that tracks the progress and quality of a vendor's work; lifecycle management software that tracks the lifecycle of IT assets; and eCPIC, the federal government's system for getting the most out of IT investments (the acronym stands for Electronic Capital Planning and Investment Control).

Some larger midsized firms are pushing the vendor management process out to the vendors themselves. Brady says Forrester heard from several companies that "are now expecting their vendors to measure their own performance and bring it to them." One company told Forrester it had developed a PowerPoint template that it gives to every strategic vendor -- ranging from the SAPs of the world to server providers like Sun Microsystems -- to fill in the blanks and present the results quarterly. The questions track how vendors meet deadlines, budgets and other SLAs.

Bring in the Business Folks

Since vendor management tools work only as well as the people using them, companies have paid special attention to the people they hire to be contract watchdogs, giving preference to those with business backgrounds like an MBA or business analyst experience. People who track contracts should also be certified, as should the vendors themselves, Raaen says.

Raaen has made a habit of hiring consultants to teach her staff how to write RFPs and airtight contracts with appropriate SLAs. The training also covers how to review bids and use the whole alphabet soup of industry standards, including the Capability Maturity Model Integration, a method of process improvement that was developed by the Software Engineering Institute at Carnegie Mellon University.

To pay for this training at smaller organizations, she has had experts give talks about the standards during ice cream socials or pizza parties. She likes to invest in training because the consequences of failure are high. "If you have a number of applications that go belly up, the sales guys go insane, the finance guys go insane, the procurement people go insane, and then you're let go," she says. "So what you start to do when you're given a budget is you start carving out a certain percentage of that to manage risk." For Raaen, that percentage is seven or eight.

In addition to benefiting from the training itself, "I want to have the ability to prove that I minimized risk so that if anything went wrong, I can show that I hired vendors to write performance-based contracts for my RFPs and that I hired vendors to teach us how to do EDM," she says.

Vendor Give-and-Take

CIOs at midsized companies are even more vulnerable to failure than their enterprise counterparts that have larger budgets and more projects under way. Raaen felt the pressure of working in a smaller midsized firm several years ago, while serving as a senior vice president for Intelisys, an electronic commerce vendor whose customers include Chase Manhattan Bank and Ford Motor Co.

In a small company, "if a project goes belly up, it has immediate focus," she notes. What's more, customers are more likely to take their travails straight to the top. For that reason, the need to have standards, tools and training aimed at closely monitoring vendors is "more important in the little companies. You have fewer moments where you can fail. You have tighter budget controls," she says.

Against the backdrop of these strategic issues, negotiating prices with vendors may seem unimportant. But for a smaller midsized organization, it can make a big difference, says Todd Nugent, CIO at Chapman and Cutler LLP, a Chicago-based law firm that specializes in corporate and public finance. Nugent has noticed that many IT executives are pretty good at negotiating SLAs, "but they're typically bad at price negotiation." In fact, they often don't do it at all. "Price? There it is. OK, check," Nugent says, echoing what he hears from some of his staff who hire vendors.

Sure, Chapman and Cutler isn't General Electric, but the midmarket firm still has enough sway to negotiate prices of its networking equipment, laptops and cell phones. When seeking bids, Nugent lets vendors know he is also talking to competitors known for the lowest price. And like anyone who has studied the art of buying a new car, when Nugent has the flexibility, he defers purchases to the end of a quarter or year, when the vendor's salespeople are willing to drop prices to meet their sales targets for the period.

When purchasing a few hundred thousand dollars' worth of Sun Microsystems gear, "we got the configuration worked out," waited until the end of the year, "and then suddenly, the price is very good -- we got 15% off," Nugent says.

Nugent honed his negotiation techniques while traveling in Asia, where the give-and-take over the equivalent of a few nickels is often staged as an hours-long verbal dance over tea. If he could, he'd send his lieutenants to Asia to get the same lesson. Instead, he coaches them and then lets them negotiate on their own. When they tell him they've reached what they think is the vendor's best price, "I take it over and knock it down a bunch more. I let them see how I do it. I show them that a little more can always be squeezed."

There are limits, though. Nugent realizes that if he squeezes too hard, the deal loses its profit for the vendor, and with that, any friendly attention the vendor might have conferred on it. "You can get somebody down too low where they're not making money on you. It can make them not want to hear from you," Nugent says.


Joan Indiana Rigdon was a contributing writer for CIO Decisions. To comment on this story, email [email protected].

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