BEST PRACTICES FOR EFFECTIVE & EFFICIENT VENDOR
BEST PRACTICESFOR EFFECTIVE & EFFICIENTVENDOR MANAGEMENT
TABLE OF CONTENTS1. Introduction42. From IT vendor management to strategic partnership83. Vendor Management Tools and Mechanisms104. The successful vendor selection process225. Benefits of implementing Vendor Management266. Case study of Financial Services IT outsourcing project277. Summary30Authors:Małgorzata Zabieglińska – LupaICT Product ManagerComarchAdam TymofiejewiczConsulting Director of ICT Services BENELUXComarch
1. INTRODUCTIONLong-term development in the business environment has become much moredifficult to anticipate due to globalization, digital innovation, more demandingcustomers, shorter product life cycles, continuous pressure on costs, as well associal and ethical issues. In addition, vendors are finding that the world is rapidlychanging as we move into the digital era.While responding to the changing business environment, organizations are usingnew organization models, modern management methods (i.e. lean managementor Six Sigma), or innovative sourcing approaches (i.e. crowdsourcing). Outsourcingand vendor management have become the key factors in enabling organizationsto build a successful business and achieve business goals.Regardless of the business you're in, vendors play a key role in the success of yourorganization. If you had asked automobile manufacturers 20 years ago how theyselected car parts suppliers, they would probably have said it was based on pricein the first place, then the supplier location and preference. Customer demands,governance and the rapidly changing and growing IT industry have put a strongeremphasis on safety and quality, so evaluating and selecting the right supplier todayhas become a much more critical and complex process for each organization, notonly automobile manufacturers. According to Gartner, by 2019, 50% of the externalservice and solution expenses of global 2000 companies will be through lessthan 10 strategic vendors in an organization's vendor ecosystem1. This shows howimportant vendor management is.4WHITEPAPER1. “Predicts 2016: IT Vendor Ecosystems Must be Re-evaluated Based on Agility,Collaboration and Risk”, Gartner report
WHAT IS VENDOR Management is “a discipline that enables organizations to control costs, drive service excellence andmitigate risks to gain increased value from theirvendors throughout the deal life cycle.”2 In keeping with Gartner’s definition, Vendor Managementshould help each organization, regardless of thesize and the industry, to:nn WHO ARE YOU? – YOU SHOULD HAVE ACLEAR UNDERSTANDING OF YOUR ORGANIZATION’S EXPECTATIONS AND PRIORITIES;nn WHY DID THE COMPANY DECIDE TO IMPLE-MENT A VENDOR MANAGEMENT PROCESS?nn WHAT IS THE SUITABLE NUMBER OF PEOPLEnn select the right vendors;TO COMMIT TO THE VENDOR MANAGEMENTFUNCTION?nn categorize vendors to ensure the right contract,metrics and relationship;nn HOW ESSENTIAL ARE VENDORS’ PRODUCTSAND SERVICES TO THE ORGANIZATION?nn determine the ideal number of vendors;nn WHAT METRICS SHOULD BE UTILIZED TOnn mitigate risk when using vendors;MEASURE THE EFFECTIVENESS OF THEVENDOR MANAGEMENT MODEL?nn and establish a vendor management organiza-tion that best fits the enterprise.3nn WHO WILL BE RESPONSIBLE FOR THE VEN-DOR MANAGEMENT PROCESS?Good vendor management allows your organizationto build a successful and stronger relationshipwith your suppliers or service providers. Thesepartnerships will not only strengthen bothbusinesses, but also allow you to focus on buildingand delivering products and services at the optimallevel of quality and add value to your clients.The list below is a good starting point for figuring outthe types of deal your company needs. You shouldtake a brief moment to answer these questions.All answers help your organization to match thevendor management model to your organizationalgoals and objectives.2. nt/3. nt/nn WHICHPROCESS IS RESPONSIBLE FORMANAGING RELATIONSHIPS WITH VENDORS AT THIS MOMENT?nn WHY SHOULD OUR ORGANIZATION CAREABOUT RELATIONS WITH VENDORS?nn WHAT ARE THEY CAPABLE OF?nn WHATVALUE DOES IT BRING TO THEORGANIZATION?WHITEPAPER5
JOIN US ONVENDOR MANAGEMENTLIFE CYCLELarge, international organizations often have hundreds of vendor relationships to make effectiverelationships and manage them. Increasingly, theserelationships are drawing scrutiny from regulators,stakeholders (i.e. boards of directors) and internal /external auditors. With this increasing dependenceon vendors, it can be challenging for organizationsto effectively monitor and manage these relationships. The following steps should be performedto identify, validate and operationalize all requirements. It's also important for organizations to followthese stages to ensure a comprehensive plan is putin place to reap the benefits of the vendor management process.nn Develop the strategic vision– a strategicvision for vendor management is critical tothe development of the framework. The visiondefines the desired organization, capabilityand scope of vendor management activities.The vision should be created with the input ofall key stakeholders (e.g. business units, financedepartment, legal and compliance, etc.)nn Design and documentation – the strategicvision is brought to life through the designand documentation of the framework. Each ofthe elements is documented to facilitate thevalidation, roll out and ongoing execution of theframework.nn Validationand Implementation–keystakeholders should be provided with theopportunity to validate and vet the frameworkto confirm that their specific requirements havebeen addressed. Validation of the framework willsupport the development and execution of rollout plans, while creating improved awareness forvendor management.nn Reporting and continuous improvement – exe-cuting the new vendor management frameworkusually includes making company–wide changesto accommodate the new governance processes,operational roles and responsibilities. Additionalimplementation activities may include changesin management and communication, processre-engineering, progress reporting, as well as system requirement definition and selection.6WHITEPAPER
These stages can also be shown in a slightly differentway.relations with the vendor. Previously definedKPIs can be used to identify areas to change,optimize or improve.nn Vendor Selection – during this stage, thevendor management strategy should be executed. It is based on relationships with vendors,commodities and services procured, and pastperformance metrics, etc. Evaluation criteriatogether with KPIs are also defined at this stage.Additionally, vendors should be measuredagainst the terms and conditions agreed in thecurrent contract.nn Service Delivery– during this stage, theselected vendor provides services, which needto be monitored and managed. Based on thedefined strategy and evaluation metrics criteria,performance should be collected from varioussources. All collected data should be measuredand reported in an appropriate form to beshared with both parties.nn Contract Review – during this stage, reviewmeetings should be conducted with vendorsas per the strategy defined earlier. The reviewmeetings should be held periodically i.e. oncea month, quarterly, half yearly or yearly. Thisdepends on the strategy and client expectation.The agenda of these meetings should includethe following points:nn Discussion of performance as regards variousmetrics;nn Action points from previous review meetings;nn Areas of improvement;nn Support needed to drive project improve-ment, etc.nn Service Adjustment – this stage provides theopportunity to optimize already establishedVendor SelectionContractReviewVENDORMANAGEMENTLIFE CYCLEServiceDeliveryService AdjustmentWHITEPAPER7
JOIN US ON2. FROM IT VENDORMANAGEMENT TO STRATEGICPARTNERSHIPFor many years, customers have used vendorsto support various IT and business activities.In a fast-changing business environment, theyare interested in increasing the direct businessvalue of IT by developing strategic partnerships.Strategic partnerships are becoming more criticalto enterprise success. But what is the meaningof strategic partnerships and how can they bebuilt? According to Gartner's definition, “strategicpartnerships (SPs) are external relationships thatdirectly support key business processes, outcomesand revenues. They are integral to IT’s ability todeliver business results to the enterprise. An SP thatfails to deliver results will create a business risk.”4In accordance with Gartner's definition, customerssee vendors as strategic partners if they delivereffective systems and services that support thecreation of value for the enterprise. Below is a figurewhich shows how an enterprise evolves step by step.First, from “simple” vendor management to strategicvendor management, and finally to strategicpartnership management. Strategic partnershipmanagement is a new level of vendor relationshipmanagement. Managing strategic partnershipsis a very different approach from the traditionalstrategic vendor management.5EVOLUTION OF VENDOR RELATIONSHIPSVENDOR RELATIONSHIPITSTRATEGIC VENDOR dorOtherbusinessunitsSTRATEGIC icates direct relationshipNote: Relative size of circles indicates extent of responsibility for business/enterprise riskSource: Gartner4. 5. http://www.gartner.com/document/1727978
Strategic partnerships is morelike process, not an occasionalevent.Małgorzata Zabieglińska – LupaOne of the main reasons why enterprises areevolving to strategic vendor management is thatthe price aspect is no longer the crucial key factorin the vendor selection process. The result of thischange is that the vendor relationship model hasswitched to strategic business partnerships.nn Communication is a two-way street. Com-munication between customers and strategicpartners still leaves a lot to be desired. Theweaknesses of partnerships largely consist ofone-sided communication.nn BuildingStrategic partnerships are more like processes, notoccasional events. To establish strategic partnerships,the entire business environment has to evolve to ahigher level of collaboration. The true effectiveness ofstrategic partnerships can be achieved only throughthe mutual development of complementary skills.trust. There is no long-termrelationship without trust. Focus on buildingtrust in relationship with your partners.nn Be process- and metrics-driven.Here are some hallmarks which help to builda successful strategic partnership:Currently,business decisions are mostly data- andmetrics-driven. The value for business needsto be quantified. Customers should focus notonly on "hard" metrics, but also the "soft" side ofrelationship metrics.nn Get the basics right first. Being responsivenn Evaluating your relationship. Both parties,and providing stable solutions and services arestill the main factors of a successful strategicpartnership.Customersshouldidentifyand remove obstacles that limit vendors'responsiveness and stability.customers as well as vendors, should makesure the relationship is sustainable in terms offinancial and strategic business objectives.WHITEPAPER9
JOIN US ON3. VENDOR MANAGEMENT TOOLSAND MECHANISMSRELATIONSHIP DEVELOPMENTDeveloping good relationships with vendors isnot so complicated, but in real life where humansneed to interact with each other it requires goodinterpersonal skills. Take the time to get to knowyour vendors, be communicative and tell them ofyour needs and standards.One of the best practices is to maintain proactiveand multi-level contact. You should start fromestablishing multiple points of contact at thevendor. Effective vendor relationship developmentdepends on:nn Clearly define roles and responsibilities at eachlevel;nn Share information intensively, but also selectively- keep vendors aware of what's going on in yourcompany, about changes in key personnel, newproducts, special promotions and so on;nn Formulate a vendor selection process for yourcompany;nn Choosenn Effective communication with the vendor – thisis the most important aspect, which helps toestablish long-term and profitable relationships;vendormanagementmodels(centralized, decentralized or hybrid) whichbest suit your organization’s needs;nn Timely and constant measuring of performance(company-wide) – vendormanagement functions managed andcoordinated centrally;– this helps to analyze whether companies’expectations have been met;nn Decentralized (business units, sites, region)nn Understand how your vendor works - to creategood partnerships you need to know as muchabout your vendors as the vendors know aboutyou;nn Centralized– vendor managementmanaged centrally;functionsnotnn Hybrid – vendor management split acrossthe organization; for example: contractscentrally, performance locally.Developing good relationships with vendors is not so complicated process,but in a real life where humans need to interact each other it requiresgood interpersonal skills. Take the time to get to know your vendors, becommunicative and tell them of your needs and standards. In today’sworld, managing the vendors is all about strengthening and developingrelationships that can make your business.Adam Tymofiejewicz10WHITEPAPER
CONTRACT MANAGEMENTContracts establish more than just terms andconditions. There are a number of different contractdefinitions. According to the simplest definition,contract management is the process of managingcontracts from vendors, partners, customers oremployees. The most complete definition is that“contract management is the process of managingcontract creation, negotiation, execution andanalysis to maximize operational and financialperformance at an organization”6The main goal of contract management is toensure that all contract participants fully meet theirexpectations and obligations in order to deliver theobjectives required from the contract. One part ofthe contract management process is building agood business relationship between the clientand service or product provider. Another part isto help your organization manage proactively inorder to anticipate future needs, as well as reactingto situations that arise. The contract managementprocess includes the following steps:1. Enabling contract management. In this phasethe contract management process begins byidentifying contracts, the verification of roles,responsibilities and procedures.2. Contract authorization. Writing a contract byhand is a time-consuming activity, but throughthe use of automated contract managementsystems the process can become quitestreamlined.6. agement.html3. Contract negotiation relies on the completionof the draft contract. Employees who take partin negotiations should be able to compare allversions of the contract. The main point is toensure that the best possible contract is availableto all sides.4. Approving the contract. The instance in whichmost bottlenecks occur is getting managementapproval. Users can preemptively combat this bycreating tailored approval workflows, includingparallel and serial approvals to keep decisionsmoving at a rapid pace.5. Execution of the contract. Executing thecontract allows users to control and shorten thesignature process through the use of eSignatureand fax support.6. Obligation management. This requires agreat deal of project management to ensuredeliverables are being met by key stakeholdersand the value of the contract doesn’t deterioratethrough its early phases of growth.7. Revisions and amendments. Gathering alldocuments pertinent to the contract’s initialdrafting is a difficult task. When overlooked itemsare found, systems must be in place to amendthe original contract.WHITEPAPER11
JOIN US ON8. Auditing and reporting. Contract managementdoes not simply entail drafting a contract andthen pushing it into the filing cabinet withoutanother thought. Contract audits are importantin determining both organizations’ complianceto the terms of the agreement and any possibleproblems that might arise.nn the supplier is co-operative and responsive;9. Renewal. Using manual contract managementmethods can often result in missed renewalopportunities and lost business revenue.Automating the process allows an organizationto identify renewal opportunities and create newcontracts.nn there are no surprises;nn the organization understands its obligationsunder the contract;nn there are no disputes (supported by no incon-sistencies in the contract);nn aprofessional and objective debatechanges and issues arising can be had;overnn efficiencies are being realized.A good contract management process does notonly ensure that the agreed terms and conditions ofthe contract are being met. This is just one step, butthe first of many that should be taken. No matterhow well the contract negotiation process runsand the scope of the contract, there will always besome tensions between the different perspectivesof the customer and provider. The idea behinda good contract management process is aboutresolving these tensions as soon as possible to builda partnership relation with the provider.During day-to-day operations, you probably askyourself why you should manage contracts. Yourorganization needs to manage contracts:nn to achieve the agency’s business outcomes anddeliver savings/efficiencies;nn as part of the agency’s ongoing risk manage-ment; andThese relationships should be based on mutualunderstanding,trust,opencommunicationand benefits to both sides. In that way, contractmanagement could be compared to projectmanagement, because each contract is like a miniproject. It has unique goals, consumes resources,has a beginning and end date, and requirescoordination and planning of relevant activities, aswell as documentation in a contract file throughoutthe process. And each contract is different andshould be treated separately.nn to meet various governance, legislative andaudit compliance requirements.Successful contract management is more thanjust the management of documents, terms,conditions and a few signatures. Effective contractmanagement relies on the implementation ofsuccessful post-award and upstream activities.Contract management is successful if7:nn the arrangements for service delivery continueto be satisfactory to both parties, and theexpected business benefits and value for moneyare being realized;nn the expected business benefits and value formoney are being achieved;12WHITEPAPER7. http://www.cips.org/documents/CIPS KI Contract%20Management%20Guidev2.pdf
GOVERNANCE ANDSTEERING MECHANISMS(INCL. KPIs)A governance model describes the organizationalstructures and roles that project participants cantake on and the process for decision making andreporting within the project. A lack of governancecan be considered a major threat to proper vendorrelationship management. The nature of thegovernance model covers the following elements:nn Strategic – at this level, governance focuses onoverall strategic performance, strategic KPIsand contract management;nn Tactical – at this level, governance focuseson relationship, performance management,including penalty and incentive systems, monitoring service improvement initiatives, escalation process, contracting, financials and KPIs;nn Operational – at this level, governance focuseson local day-to-day operational work.To ensure efficient and effective periodic formalcommunication at the different steering levels,between all involved parties, meetings should bestructured. This leads to a more constructive use oftime.Having clear communication lines between theclient and vendor and assigning roles at each levelis an important success factor of the cooperationbetween both parties. This is especially true ifbusiness processes are not working or some partsof agreements are unclear. That’s why both partiesshould have clear knowledge about communicationflows and the first person of contact at each level.This helps to solve problems quickly. There aredifferent meetings defined on operational, tacticaland strategic levels.nn Strategic Meeting – the purpose of this meet-ing is to ensure that both sides’ objectives canbe achieved in a balanced manner. For example, meetings with regional boards.nn Tactical Meeting – the purpose of this meetingis to assess whether the service portfolio continues to meet the current and future needs ofthe client.WHITEPAPER13
JOIN US ONnn Operational Meeting – the purpose of thisthis meeting is to discuss business continuitymatters. (Business) Continuity Managementmakes sure the client’s business operationscan continue during and after a disaster at anagreed level until normal business operationsresume. Continuity management is also aimedat pro-actively preventing discontinuity andavoiding extended disruption.First of all, we would like to concentrate on penaltyand incentive systems. They should be reasonable,systematically applied, and anticipated by thesupplier. In practice, penalty and incentive clausesshould be included in the SLA (Service LevelAgreement) as a critical part of any vendor contract.It should also be mentioned in the letter of credit(if applicable) and on purchase orders. It is veryimportant to make sure the supplier is aware ofpenalty and incentive systems. This system shouldrefer to the compensation agreement and penaltyand incentive clauses that determine the level ofvendor compensation. Below are five ways in whichpenalty and incentive systems can make for a betterbusiness:nn Security & Compliance Meeting – the purposenn Use penalties together with incentives – punish-of this meeting is to discuss new developmentsand the progression of affairs and activitiesconcerning security and compliance in relationto the services the vendor will deliver underthe agreement. These meetings could have anon-demand character and be triggered by theTactical Committee.ment cannot be used effectively without incentives. Penalties should be used to keep vendorson track. In the same way, incentives shouldbe used as an encouragement to provide better services or products. This will benefit bothparties.meeting is to ensure the timely and smoothimplementation of planned and ongoing projects, releases and changes in which the vendoris involvednn Business Continuity Meeting – the purpose ofnn Communication is critical – all metrics andSteering Mechanisms should consist of two areas:nn Penalty and Incentive systems;nn Performance Management together with KeyPerformance Indicators (KPIs).14WHITEPAPERgoals should be visible and clear to vendors.Additionally, regular communication helpsboth parties avoid potential threats.nn Establishthe escalation process, which isimportant to solve any critical issue as soon aspossible.
nn Focus on your critical vendors – not all vendorsnn A continuous vendor evaluation stage as partare equal for your business. That’s why youshouldn’t try to apply penalty and incentive systems to all your vendors. The company shouldlook at all high-risk vendors. An additionaladvantage is that the added attention will helpyou support and develop ongoing relationshipswith vendors.of the company procurement risk migrationprocess;nn Different goals for different vendors – if youhave a large number of vendors across differentindustries, don’t use the same metrics and keyperformance indicators to review the level ofprovided services or goods.Sometimes a penalty system is not the best solutionfor your business. Use alternatives to a penaltysystem to support the development of your vendorrelationships:nn Introduce a system of vendor rating for fairnessand transparency;nn Exclude vendors from your approved list of ven-dors / suppliers;nn Meeting vendors on a regular basis.Last but not least, performance management. Herewe would like to find the reasons why you shouldmeasure vendor performance, as well as what andhow should be measured. Don’t forget - the vendor'sperformance must be monitored constantly fromthe beginning.With increasing numbers of vendor relationships,it can be challenging for your organization toeffectively monitor and manage each process. Thisshould include the requirements that are mostcritical to your business. In order for the performancemanagement process to be efficient and effective,you should implement and review it consistently.The vendor performance management process isan ongoing practice, definitely not a once-a-yeartask. It should show vendors the continual directionand feedback they need to improve and achieve.Here is a list of best practices in performancemanagementnn Collaborative root cause analysis;nn Performance metrics must be established fornn Timely planning of reviews and call off strate-gies to solve problems;each critical element / service and should beset realistically in view of other performancerequirements;WHITEPAPER15
JOIN US ONnn Metrics should also be maintained at an accept-able required level of performance;nn Effectively evaluate vendor performance for theexpected level of quality and standards;nn Vendor performance metrics should be subjectnn Enforce expected service levels;to penalty and motivation systems;nn Improve processes so problems are anticipatednn Vendor performance metrics as the focal pointof all performance measurement should beboth quantitative and qualitative in nature anddeveloped according to the value objectives ofthe relationship;and prevented.Establishing effective metrics related to vendorperformance management allows your business to:In choosing effective metrics, decide what is mostcritical for your business. The most important goalof any vendor performance metric is to motivatethe appropriate behavior of both the client and thevendor. Sometimes less means more. It is better foryour business to avoid choosing too many metrics.All metrics produce a voluminous amount of data,so if you choose an excessive number of metrics, noone will have time to analyze them. Depending onthe provided service, different types of metrics canbe monitored. Below are some examples:nn Implement a future vendor selection processnn Priority 1/2/3/4 incidents are resolved withinnn The most important of all metrics are KeyPerformance Indicators (KPI). KPIs should bedefined and regularly evaluated under thecontract.based on past performance metrics;nn Implementpenalty and incentive systemsbased on performance;the hours as specified by the SLA: Resolutionis measured as a percentage of incident ticketssuccessfully closed within the defined target;nn Servicenn Adjust purchasing strategy based on accurateperformance data;Level Availability / Unavailability:Availability is measured as the percentage oftime a service should have been available vs. theEFFECTIVE VENDOR PERFORMANCEWhy measurevendorperformance?DefiningAcceptable VendorPerformanceWhat should anceImplementingvendor metricsContinual serviceimprovement
actual time the service was available per server(no average). Availability is counted as follows:the % that a service is below target is weighedin the formula of the average availability;nn Satisfaction: Measuring satisfaction metrics,such as stakeholder satisfaction and end-usersatisfaction, etc.in major deliverables. Examples: incompletebackups and restores, coding errors/rework,missed deadlines etc.;Defining the right vendor metrics is just halfway to success. To be useful, the metrics mustdefine acceptable levels of vendor performance.The following factors ensure the effectiveness ofperformance measurement:nn Service and Change Requests delivered onnn the vendor performance management processnn Defect rates: Numbers or percentages of errorstime: The Service and Change Request (SCR) ismeasured by the number of SCRs delivered ontime vs. the total number of SCRs;nn key stakeholders are engaged and support thenn Security: Measuring security metrics, such asprocess with agreed improvement plans andactions;review is performed in a timely manner;anti-virus updates and patching, etc.;nn measures align with the service level defined inthe contract.WHITEPAPER17
JOIN US ONEXAMPLES PERFORMANCE MEASUREMENTMETRICS FOR VENDOR MANAGEMENT8VENDOR PERFORMANCE AND RISK REPORTSnn Total annual spend (bynn Vendor performancevendor)nn Number of full-time(on-time delivery, stc.)nn Aggregate internal riskemployees assigned to theengagement / engagementspendnn Percentage of SLAassessment score acrossservices / contracts (byvendor)nonconformance (incidentresolution, on-time delivery,etc.)nn Number of subcontractorsviolations by vendor typenn Percentage of Wescalationnn Available capacity dedicatedto clientnn Percentage of invoices withissues (aged)price variance from contractINTERNAL AND EXTERNAL CONTROL,COMPILANCE, TEST AND QUALITY REPORTnn Percentage of qualitynn Number of occurrences ofassurance nonconformanceissues by vendornoncompilance to contracttermsnn Number of compilancenonconformanceacceptances by vendorFINANCIAL RISKnn Percent profit marginnn Percent debt to equitynn Credit capacityEXTERNAL NEWS / MANAGEMENT REPORTnn Frequency of risk reportingnn Percentage of negativenews returns per quarter18WHITEPAPER8. “Vendor Management. Realizing Opportunities in the Financial Service Sector” Protiviti
FINANCE AND COMMERCIAL MANAGEMENTFinancial Management covers the functionsand processes responsible for managing vendorbudgeting, accounting and charging requirements.It provides the business and vendor with thequantification, in financial terms, of the value ofprovided services and the value of assets.First of all, we would like to concentrate on twoaspects: pricing models and reporting. We will tryto explore and understand that different pricingmodels exist in Vendor Management. Cu
From IT vendor management to strategic partnership 3. Vendor Management Tools and Mechanisms . ing with Gartner’s definition, Vendor Management should help each organization, regardless of the . dreds of vendor relationships to make effective relati
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