Managing technology vendors used to be an invisible job that somehow just got done. But with more-complex IT offerings, increasingly complicated negotiations and the budgetary imperative to get the best deal, companies are formalizing the vendor management function with standard processes, centralized administration and firm opinions as to what does and doesn't work.
The change can be seen among US Computerworld's Premier 100 IT Leaders, some of whom agreed to share best practices. Here are their tips on managing your hardware, software and services vendors.
1. Remove IT from the contract business. "The last thing you want is IT negotiating with vendors," says David Rice, CIO at Siemens Medical Solutions. "It can get very confusing and make negotiations unwieldy."
Take the contract negotiation process away from IT and leave it to the experts. The rewards: efficiency, purchasing power and increasingly experienced negotiators.
Many companies have established vendor management officers (VMO) to handle vendor relationship management, negotiations and contract cost containment. When you've got a VMO, IT has to learn to butt out.
"When we're working on a deal, we communicate within the organization that only certain people should be discussing it with the vendor," says Rick Omartian, IT chief financial officer at The Guardian Life Insurance Company of America in New York, which has established a VMO. E-mail reminders warn IT workers not to talk with any salesperson, lest an innocent remark reveal pricing details on competitive contracts or internal deadlines and pressures.
But not all successful vendor management happens through a VMO. At Regions Financial Corp each vendor relationship is managed by the IT manager who most often uses that vendor's products or services. The procurement group heads up negotiations, however, while the legal department handles the contracting process, according to CIO John Dick.
2. Aggregate purchasing power. Centralizing contract negotiations can also help aggregate technology purchases and leverage your purchasing power, Dick says. Regions Financial strives to be among its vendors' top 10 customers in terms of sales volume, in the hope of maximizing the business relationship and getting deeper discounts. "It's important to position your purchasing power at the sweet spot of the vendor," Dick says.
Being a key customer has other potential rewards, including reciprocal business, he adds. For example, Regions Financial encourages its top technology providers to purchase its banking services.
3. Don't get cozy. No matter how strong the relationship is between your company and your vendor, always keep an eye out for other deals. A case in point: until recently, Guardian was using a single vendor for its telecommunications services. Then it conducted a full-blown request for proposals and ended up choosing two other vendors that now compete for its business, resulting in a 35 percent cost reduction, Omartian says. Now, "all vendors have to win our business on every deal," he says.
Guardian ensures that no relationship gets too cozy. "When we spend a certain amount of money with one particular vendor, we need to substantiate why we went with that one versus another," says Shelley McIntyre, vice president of business technology services.
Finding a better deal doesn't always mean changing vendors. Sometimes it just means lighting a fire under a partner. At MasterCard International, Jim Hull, vice president of engineering services, checked out competitive offerings and found that one of his current telecomms vendors had overpriced a bid by 100 percent. "We went back to our partner and said, 'You're in danger of losing this business'," he says. "And guess what? They matched" a competitor's bid.
MasterCard takes pains to keep everybody honest. For example, one vendor had previously dominated its storage business, but MasterCard recently added a second vendor to the mix. "Even though you have a great relationship and they have a great product, how do you know you're getting a good deal?" Hull asks.
4. Benchmark the industry. Industry benchmarking is an important tool for getting a fair deal. Contracts should always have benchmarking clauses to ensure that the service and pricing you receive stays competitive; this is particularly important in long-term service contracts, says Frank Enfanto, vice president of healthcare services systems delivery at Blue Cross and Blue Shield. "Ten years ago, things were more costly on a per-unit basis than now," he says. The benchmarking clause should specify the review process and who needs to be involved.
You can also get pricing trend information from vendors that solicit you for business. "We get an idea of what their pricing is and renegotiate rates [with current suppliers] if we see a downward trend," McIntyre says.
5. Don't beat up the vendor on price. There's a caveat to all this talk about price. Sometimes, getting the lowest price is a harbinger of poor quality. Shoot for a mutually good deal. "This idea that I'm going to squeeze the vendor to get every cent -- that's not good business," Rice says. "If it's too sweet a deal on either side, it comes back to bite you later." The relationship can turn adversarial, the supplier may become less responsive to issues you raise, and quality can suffer.
6. Evaluate, evaluate, evaluate. Evaluate vendor performance using standardized procedures on a weekly, monthly, semi-annual or annual basis, depending on the type of relationship. Guardian, for instance, uses 12 categories to rate its hardware and software vendors semi-annually, including presales, postsales, cost-effectiveness, technology leadership, financial strength, cost savings and flexibility.
Siemens meets with outsourcers weekly to review call volumes, mean response time and other metrics. "You have to bird-dog it," Rice says. Evaluation metrics let you catch problems early and be open with the vendor about resolving them. "I've seen people rant and rave about poor service and then not follow through," Dick says. "Vendors need to understand your willingness to escalate to the highest levels in the company and do it rapidly."
7. Apply peer pressure. Regions Financial sometimes uses peer pressure to resolve vendor service issues. For example, it had a problem with its older ATMs, which were achieving only a 95 percent availability rate compared with a 98 percent industry average. The ATM vendor suggested that Regions purchase all new ATMs -- a multimillion-dollar investment. Instead, after a week of exceptionally long outages, Dick began monthly meetings with all of the ATM service and equipment providers, as well as the internal IT people. Everyone was required to detail problems, resolutions, costs and avoidance measures. "There were 40 people in the room, and we used peer pressure to make them accountable for their performance," Dick says.
The result: "We went from several hundred extended outages to less than 15 a month," he says. The company's 1400 ATMs now have an availability rate of 98.6 percent.
When MasterCard recently encountered a problem restoring backup data, it called in its hardware, software, network and storage vendors. It turned out that the tape vendor had mistakenly sold faulty drives to MasterCard. "Until it proved it could fix the problem, we told them we wouldn't buy any more tape drives from them," Hull says. Not only did the vendor fix the problem, but today it's much more focused on meeting MasterCard's needs, he says.
8. Focus on security. When Guardian created its VMO, it set up standard processes for its contracts, ensuring that terms were consistent across all relationships. When creating the contracts, the company decided to also nail down its security requirements. It created stricter intellectual property terms, for example, and required that contractors undergo background checks and that contracting firms carry a certain level of insurance. "If fraud is committed by one of their employees, we want to know they have insurance to cover that," Omartian says.
9. Develop a list of preferred vendors. Regions Financial maintains a strategic vendor management program for the dozen or so of its suppliers that it deems most important. The criteria for that designation include how much money Regions spends on the vendor's technology, the strategic nature of the products or services, and the commonality of the companies' technology visions, according to Dick. Regions develops special relationships with these vendors and expects higher delivery standards, shared technology investments and reciprocal business.
Remember, not every vendor can be -- or should be -- strategic. You need to differentiate, Enfanto says. "You need to understand what type of relationship you want -- strategic or just tactical," he says. "In a true partnership, there's a lot of compromise on both sides. You might give up something on price but then get [more in] services." In a strategic relationship, he says, the vendor "is really concentrating on you. Your problems are their problems; your successes are their successes".
10. Check contract terminology. The last place you want to get bogged down in vendor management is during contract review. "Once we make the decision to go with a certain vendor, we don't want to find out there's a major [contract] term that they won't agree to," Omartian says.
Guardian uses documents which outline contract terms in business lingo rather than in legalese, and gives them to the handful of vendors during negotiations that make the final cut.
The pre-contract phase has already proved useful. "There was one time that we'd narrowed it down to three finalists, and we couldn't get an agreement from one on the terms," McIntyre says, "so we actually switched out a vendor."
IT vendor relationships are challenging in general, but relationships with outsourcers are the most challenging of all.
According to a white paper by consulting firm Technology & Business Integrators, there are some very wrong things to do when considering outsourcing IT functions. Here are TBI's outsourcing no-nos.
- Don't rely on a handshake or ignore your due diligence.
- Don't second-guess the decision to outsource. That will undermine working relationships.
- Don't rely on a vendor for business advice, strategic advice or thought leadership in emerging technologies, unless that's specifically the service it is contracted to provide.
- Don't assume that saving money will be the overriding benefit.
- Don't be complacent if you notice significant personnel change at the vendor.
- Don't outsource a problem. That will just make it an externally sourced problem