Outsourcing - Six Rookie Mistakes in Vendor Management

In the May (05/2009) print edition of CIO insight, there was an interesting article on "Vendor Management." It included a list of six mistakes that tend to be very common in outsourcing where the client-vendor relationship is not as mutually beneficial as it can, and should, be.  I think it's a good list so I have included it here with some commentary and examples of my own: 1. Failing to speak with one voice Basically, the vendor is confused by mixed signals coming from the client.  I have seen this happen most often when  there is a power struggle between a central procurement or sourcing group and the IT team that works day-to-day with the outsourcing vendor.  This is a classic IT Governance problem and there is no right answer (although I know who I think should win).  The important thing is to resolve it unambiguously for all the participants including the vendor. 2. Skipping the homework I see lots of examples of this but the one that really bugs me is the lack of attention to how success (or indeed failure) will be measured before the deal is signed.  Often, this is exacerbated by the need (?) for secrecy around the small team doing the deal.  The small team sometimes doesn't have the breadth of knowledge or experience to put together a robust but flexible set of metrics for management of a contract over several years.  I always recommend including metrics experts or the team that will actual manage the contract in the negotiations AND allowing time for baseline and/or benchmarks metrics to be developed. 3. Fixating on price Too often, I have to bite my lip to stop myself saying, "You get what you pay for."  More seriously, it is important to think of the total profit of the vendor and savings by the client as a "Value Pie."  If one side or the other is not getting enough of the Value Pie then the relationship will deteriorate.  It is important to develop metrics that reflect the whole Value Pie. 4. Using too few suppliers More and more, I m coming to the conclusion that the best control for vendor management is having other options.  The simplest other option is to have another vendor ready to do the work. In a single vendor arrangement, There is a real risk of mutual dependence leading to distorted behavior leading to mutually assured destruction.  The single vendor option may seem to be the way to get the lowest price in the short term but it seems to be that any sort of monopoly is likely to become inefficient fairly quickly. 5. Only dealing with large vendors Following on from my comments under #4, above, the best practice that I have seen is to separate potential vendors into  a few (2-4) groups e.g.  Large vendors, small vendors, Indian-based Vendors, Eastern European vendors, etc. This allows the RFP process to compare like vendors for value for money and, potentially, pick the right risk management mix of vendors based on size, politics, price, specialist capabilities or whatever. 6. Signing and forgetting This is another symptom of having too few people involved in the original deal.  What it boils down to is that the IT team who have to make the agreement work on a day-to-day basis CANNOT ignore the vendors.  In outsourcing arrangements where I have seen the most heat and light generated, it is because a bubble of frustration builds up amongst the team as they try to operationalize an agreement that is not as strong or flexible as it should be. At some point, this bubble bursts over the small group who signed and forgot.

Written by Michael D. Harris at 17:26

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