Managing vendors is as easy as 1-2-3

In the rush to quantify vendor relationships, little emphasis is placed on measuring the total cost of ownership other than calculating the price of an application and an ongoing service contract.

What Terry Burnett, a former IT executive at AT&T Corp., calls "shadow costs" rarely get any scrutiny. Over the life of a contract, "incremental costs can drastically alter the total cost of ownership," he says.

These shadow costs include lawyers to draw up new contracts, hardware and software testing, personnel training, even the time and routine to contact a vendor if something goes wrong. And these costs continue forever.

So, you've got to get a handle on your true vendor costs.

According to Gartner Inc., by 2003, organizations that implement a strategic vendor-management program will more effectively address business needs and reduce the number of failed projects by 25 percent.

The first step is to segment vendors into one of three vertically ranked groups.

Place key vendors at the top. They're identified by how much money you spend with them and how critical their products are to your business. If your data center goes down because of one company's application, that's a key vendor. These are the ones with whom you wish to have and build strategic partnerships.

The middle group of vendors isn't critical, but their products are easily affordable commodities, and the price of those products is the sole factor in doing business with them.

The final category is vendors you'd like to be rid of ones that lack responsiveness and reliability and whose senior management has trouble understanding your business.

The purpose of strategic vendor management is to move as much business as possible away from those vendors you can't stand and toward those that offer a viable commodity or toward those that you hope will work with you over the long term to realize your business goals.

Burnett says IT organizations should "move away from the bottom feeders and create a value proposition for both the buyer and the vendor."

After ranking the vendors, create vendor account-management teams made up of the people responsible for managing and evaluating a vendor relationship.

These teams meet with vendors' account managers to go over problems or issues. That's what's meant by a partnership.

"Bad vendors can't hide from these teams," says Burnett. "They can't use their personal relationships to go around the business relationship."

The result may be a long-term relationship with a vendor that cares as much about your business as you do. Indeed, good vendors should welcome this scrutiny.

You can contact Pimm at

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