Making the A list

Few companies have the staff power to manage all their IT suppliers well, but it's essential to manage at least the strategic ones. By focusing your efforts on the handful of relationships that really matter, experts say you can reap financial and technological rewards.

Larry Graham, vice president of IT vendor management at San Mateo, Calif.-based Inovant, a wholly owned transaction-processing subsidiary of Visa International Inc., says focusing on strategic vendors has helped him negotiate stronger contracts with better risk balance while saving an average of 15 percent.

Pat Fausett, strategic alliances manager for embedded software and intellectual property at Agilent Technologies Inc. in Santa Clara, Calif., also reports discounts from leveraging volume with strategic vendors, but she says savings don't come from discounts alone. "They come from working better and getting our product out faster, and that's very hard to quantify," she says.

Defining Strategic

Companies define strategic IT vendors as those whose products or services are essential to their IT infrastructure or play a key role in their business or future direction. "We use IBM mainframes, so what does that tell you?" asks Graham.

The number of strategic IT suppliers a company uses should be manageable: between eight and 20, depending on the size of your company, according to IT procurement professionals.

"You can't work at a solid level with 33 suppliers," says Fausett. "You have to pick those who will be there for the long haul, who want to work with you, who have real technical expertise to help you get that competitive edge."

Companies usually do a large volume of business with strategic suppliers, but volume is less important than the nature of the product or service the vendor supplies. "We have some vendors with whom we may spend several million dollars on a billing system, but I don't look at them as a key part of our strategy," Graham explains.

IT and procurement usually work together to identify and manage strategic IT vendors. At Nationwide Insurance Co. in Columbus, Ohio, the IT procurement group ranked its portfolio of vendors by the amount of money it spends with each. Then a panel of IT executives winnowed the list by discussing the top 25 in terms of products and services and their impacts on the company, including the vendor relationship, the vendor's position in its market and major projects in which the vendor plays a role.

Jockeying for Position

The Coca-Cola Co. in Atlanta has developed a comprehensive system to identify its strategic IT vendors, of which there are currently about 20, according to Chief Technology Officer Ed Steinike. It periodically issues a request for proposals inviting vendors to vie for strategic status. Using a scorecard, candidates rate themselves on a variety of criteria. They are also rated by IT, the procurement team, internal users of the product or service, references and consulting companies such as Gartner Inc. Coca-Cola uses a 1-3-9 rating to separate winners and losers more distinctly than a 1-to-10 rating would.

Agilent "inherited" most of its strategic IT vendors when it spun off from Hewlett-Packard Co. in 1999, but if an important new Agilent product or service depends on a particular technology vendor, that vendor will be considered for the list. "Volume plays a part, but product design and what we're trying to do from a technology point of view will be the key driver," says Fausett. The other major criterion is risk. You need to count on these vendors. "Software is different from other procurement," she explains. "You don't have the ability to plug in any of five vendors to make a system run, so risk mitigation becomes a driving factor. If Enron was in software, I don't think we would want to be dealing with them."

Making the A List

How vendors choose, use and reward special clients.

Most big IT vendors have special relationships with customers they consider "strategic." Those customers develop personal relationships with the vendor at the executive level. They get to affect the vendor's product and service lines at the earliest stages, have their needs addressed during product development and even influence the vendor's strategic direction. How a company qualifies for that status and what that relationship entails varies.

Some vendors, such as Dell, keep the relationship on an advisory level. Others, such as Lotus, take it up a notch and encourage collaboration on product development. And some, such as Microsoft, develop multilateral business relationships. Here's how these three major vendors partner with strategic customers.

Dell Computer Corp.

Dell's Platinum Council of strategic customers provides feedback on its product line. Its sales force nominates a cross-section of educational customers, such as universities, as well as midsize, large and global corporate customers, including both high- and low-volume customers.

The most important criteria are executives' buy-in and their useful insights. "We talk to CEOs, CFOs and CIOs and look for customers who want to collaborate," says Steve Felice, vice president and general manager of Dell's large corporate accounts division. "We also look for relationships [at companies] where there have been issues such as problems with Dell as a vendor or with their equipment. We're looking to improve," he says.

At a two-day annual meeting, CXO-level representatives of the 60 Platinum Council members advise top executives, including CEO Michael Dell, on topics that might range from products and services to wireless. No salespeople attend the sessions. The meetings are "strictly feedback and advisory," says Felice. "Our strategic customers directly impact what we build." The vendor follows up with periodic smaller conferences on special topics.

Lotus Development Corp.

Lotus' strategic International Notes Customer Consortium (INCC) advises the company on software development. The sales and support teams nominate companies of various sizes, as well as government and consulting organizations. The main criterion is whether the customer is trying to use Lotus technology to differentiate itself from its competition by pushing a particular Lotus technology to its limits. Also key is a willingness to commit to the partnership. For example, one strategic customer worked with Lotus to develop a state-of-the-art mobile messaging product for its field sales force.

The INCC convenes several times a year in person and also holds teleconferences to advise Lotus on strategy, administration and application development. The group discusses key themes, features and customer requirements for new products "before we even put pen to paper," says Jeanette Horan, vice president of worldwide development and support at Lotus. For example, the INCC helped Lotus understand the need for a more dynamic user load-balancing capability in Domino to accommodate the trend toward server consolidation. "They like to get more users on larger, more powerful servers for better price/performance," Horan explains.

Lotus executives also develop personal relationships with INCC members, and the company encourages them to join the top tier of its beta program. Lotus sometimes assigns "outreach" development engineers to work with customers at their sites. Unlike Dell, Lotus includes its sales representatives in all its strategic customer interactions to keep them apprised of customer needs.

Countrywide Home Loans, a subsidiary of Countrywide Credit Industries Inc. in Calabasas, Calif., joined the INCC nearly two years ago, after giving unsolicited feedback on a new release of Domino software. Lotus was very interested in the feedback, which stemmed from problems Countrywide was having with its software, and invited Countrywide to join the strategic group. They have worked together ever since as strategic partners.

Microsoft Corp.

At Microsoft, strategic customers are much more than advisers or development partners; they're literally business partners. "A strategic customer is one with whom we have a mutually beneficial, multilateral relationship," says Jonathan Murray, Microsoft's vice president of global accounts and executive sales.

The business interests of strategic customers intersect with Microsoft's interests at many points. Strategic customers share many different kinds of business relationships with the software vendor, from commercial licensing agreements to services, consulting engagements, MSN alliances, equity partnerships and even joint ventures. For example, one major financial services company provides payment services for MSN properties and is also an early adopter that is pushing the limits of Microsoft's .Net technology for use with its own customers.

Strategic customers aren't nominated; they're developed. Of the 40 customers in Microsoft's global division, about a dozen are already at strategic status, and two-thirds of the rest are "well on the path," Murray says. "It's a matter of investing the resources and time and energy."

For its efforts to link with other businesses in as many mutually beneficial ways as possible, Microsoft gets stable, long-term relationships with global customers that will be early adopters and public advocates for its strategies. Its customers get input into Microsoft's product and service strategies. They also get high-level engagement throughout their businesses and personal relationships at the executive level. That, says Murray, means that if something goes wrong with the software or any business transaction, the strategic customer's CEO can just pick up the phone, have a word with his Microsoft counterpart, and cut through the red tape to get the problem solved.

Tips for Finding the Vital Vendors

- Don't waste time on vendors that don't want to work with you.

- Determine whether the vendor has a quality process with solid metrics.

- Ask if the vendor can ensure that its senior leaders will stay involved after you sign the contract.

- Find out if the vendor can deliver wherever your company operates.

Getting Your Foot in the Door

Here's what it takes to be a strategic customer at the advisory, collaboration and multilateral levels:

Level I: Advisory

- Show interest in the evolution of the product.

- Maintain a high order volume, or explain why you don't.

- Bring problems to the vendor's attention.

- Express a willingness to work with it.

Level 2: Development Collaboration

- Use the vendor's technology as a key differentiator in your business.

- Push the technology to its limits; show the vendor where it falls short.

- Bring problems and challenges that may affect your customers to the vendor.

- Give constructive feedback.

- Express a willingness to work with the vendor on development.

Level 3: Multilateral

- Work with the vendor on many levels and areas, from software to equity partnerships and strategic alliances.

- Express interest in developing the relationship further.

- Get CEO-level commitment.

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