How to Create a Vendor Management Program
When information technology (IT) doesn’t manage vendors correctly, it doesn't just increase the risk of contract violations and cost overruns. It threatens your organization's ability to deliver mission-critical services and make headways on business objectives.
A poorly executed vendor management program can erode performance levels, the quality and reliability of your services, and the value given to your members in the long term. And ultimately, IT is left accountable.
In the association and non-profit industry, there are so many IT vendors that it’s impossible to give everyone the same level of attention. Even if there are a few vendors that are clearly the most important, navigating the rest of the IT vendor playing field isn't so clear. Yet, keeping tabs on what's out there and maintaining healthy vendor relationships is essential in the long term.
We spend a good deal of time and resources on the vendor selection part of the vendor lifecycle. Just think about the amount of time we invest in our AMS selection projects. But finding the right vendors to work with is just the beginning.
What is Vendor Management?
Vendor management entails the processes for transitioning new vendors into your organization, maintaining communications, and monitoring performance. It includes activities such as vendor selection, contract negotiation, managing costs, reducing risk, and ensuring service delivery.
Effectively managing vendors allows you to meet business needs without bringing excessive risk or scaling headcount. Plus, cultivating and sustaining a mature vendor program drives an innovation agenda and value creation.
Goals and Objectives
The strategic position for vendor management isn’t securing the lowest price. It’s getting quality and reliability in the long term. The zenith of vendor management is creating a win-win scenario. It requires us to move from a “vendor” to a “partner” mindset.
Too often vendor management focuses on procurement. But this shortsightedness reduces the value of the vendor to that of the transaction itself. Is this a good path to success? Not from a business perspective.
You want relationships with vendors that last long after selection. For a healthy vendor relationship to truly blossom, you need to dedicate intentional effort to nurture the long-term partnership and business case for all parties involved.
This demands that we embrace a systematic approach to vendor relations through a formal vendor management program.
Read More: Vendor Selection vs. Software Selection
The Shift to Mature Vendor Programs
The growth of managed services providers and migration to cloud-based software has made IT increasingly dependent on external vendors. To guarantee ongoing vendor value, we must move away from the old-school, transaction-based approach to vendor management.
What started out as small-minded, transactional relationship planning has morphed into an integrated strategic partnering arrangement across multiple service providers. Today, we must evolve our vendor strategies into a strategic vendor management program.
If you want to cultivate continued vendor performance and long-term growth, then a well-designed, forward-looking program is the gold standard.
The Benefits of a Vendor Management Program
Shifting from a service-level or commodity-based agreement to a formal vendor management program allows you to form and sustain strategic associations with high-value vendors that scale over time.
Effectively managing vendor partnerships with a sophisticated program not only ensures mission fulfillment. It breeds loyalty with high-value vendors. It’s these strategic partnerships that allow your organization to drive systematic improvements and continuous value from collaboration and innovation.
The Vendor Management Process
Where to Invest Your Efforts
It is natural to prioritize the vendors with the largest spend. But the vendors who need the most attention are those who are most integral or unique or who provide a unique service to your organization’s operations.
Invest vendor management efforts where they can deliver the best return. Focus on the vendors that are most important to your business.
Classify and prioritize your vendors to devote your energy where you can make the biggest impact.
Read More: 10 Things to Consider When Choosing an AMS
The Process in a Nutshell
- Stage 1: Prioritize and classify your vendors with quantifiable, standardized rankings.
- Stage 2: Focus on your strategic vendors, and year over year, work through every type of vendor classification.
- Stage 3: Standardize your processes for onboarding new vendors, maintain open lines of communication, and actively monitor performance.
- Pro Tip: Create clear escalation pathways and contingency plans for addressing vendor underperformance.
- Pro Tip: Codify your tailored, best-practice methodology for managing vendor relationships.
Steps to Create a Vendor Management Program
It takes strategy, vision, and experience to tap into the potential of successful vendor management without excessive overhead. We've outlined the essential steps to get you going in the right direction.
Follow these steps to create an elevated and systematic vendor management program. (Note, some folks call it a vendor value management program or vendor relationship management but it's all the same).
Step 1: Gather Vendor Information
Start with the most important parts of your vendor inventory. These criteria should be straightforward to collect and record:
- Vendor name
- Category of service
- Product or service name
- Product/service description
- Spend
- Percentage of IT budget
- Vendor relationship owner
- Vendor Contact and/or Escalation Contact
- Contract location
- SLA location
- Date of first agreement
- Date of contract renewal
Read More: 8 Must-Ask Questions Regarding Vendor Risk
Step 2: Prioritize Vendors
Next, ask the internal vendor contact(s) to score the vendor on the following criteria. Assign each vendor a score out of 5 (5 being the highest) for all five attributes.
- Criticality – evaluate the impact a system failure would have on the association.
- Dependency – evaluate the availability of and feasibility of switching to competing vendors in the space.
- Spend – evaluate the annual spending as a portion of the overall budget.
- Value – evaluate performance for the spend.
- Strategic Alignment – evaluate how well the vendor is aligned with the association’s strategic priorities.
If desired, you can modify the weighting of each attribute to reflect what is most important to your organization. When complete, you'll have prioritized your vendors by importance.
Step 3: Classify Vendors
After you've ranked your vendors by priority, it’s still important to classify them.
Once classified, you can create a vendor management plan for classification. Doing so allows you to focus your attention where needed and quantify why your efforts are spent on a particular vendor.
Commodity
Commodity vendors provide a product or service that is of low or undifferentiated value and can be easily replaced with other offerings in the market.
Manage commodity vendors based on their levels of vendor risk and impact. You still want to consider their value and importance. But generally, commodity vendors are managed on an as-needed basis at the manager, supervisor, or staff level in the organization. Contact is infrequent and predominately electronic.
Commodity vendors typically have the lowest strategic value to the business and also the lowest vendor expense and/or switching costs.
Operational
Operational vendors are those vendors with whom the organization conducts a significant amount of business, but due to the realized value of their product or service are likely to be managed at the manager to senior management level in the organization.
Similar to strategic vendors, operational vendors should be regularly managed, but the focus, while value-oriented, tends to be more on contract compliance and effectiveness gains.
Operational vendors are similar to strategic vendors in that they typically provide a higher strategic value to the business. But operational vendors usually have a lower total spend and/or switching costs.
Tactical
Tactical vendors provide less value than either strategic or operational vendors. These service partners are likely to be managed less closely than strategic and operational vendors and at the supervisor-to-manager level in the organization.
Relationship management involves infrequent but regularly scheduled contract and performance reviews, with the focus being on contract compliance, cost management, and efficiency gains. Occasionally, check in to make sure tactical vendors are focused on your organization and delivering the intended benefits to your members and customers.
Tactical vendors typically have a higher strategic value to the business. But the expenses and/or switching costs are lower and less significant.
Strategic
Strategic vendors are critical to business operations. Relationships with strategic vendors tend to be interdependent and should be nurtured and managed at the executive or senior management level in the organization.
Significant time should be invested in relationship management and include regular and frequent collaboration through contract and performance reviews with a focus on value, innovation, and continuous improvement.
Strategic vendors typically have a higher strategic value to the business with significant vendor spend and high switching costs.
You should only have a few vendors that fit in this category.
Step 4: Create a Vendor Information Sheet for Each
We recommend creating an individual sheet for each of your strategic vendors. This gives you a centralized location to track key details.
Create an inventory of vendor capabilities.
Create a full list of the vendor’s capabilities including products and services not currently leveraged by the organization. This streamlines your selection process, consolidates spending, and increases your negotiation leverage.
Reserve time in your meetings with vendors to allow them to present new offerings and developments with their business.
It is also important to discuss what is important to their business. If you expect the vendor to understand the goals and values of your organization, and help you achieve them, then return the favor.
Keep track of issues with an issues log.
Use an issue log located in the to document issues. This helps you communicate issues consistently with vendors to enable quick resolution. It also makes it easier to follow up until the problem is fully resolved.
The issue log – together with the vendor contact escalation list – ensures that problems and concerns are reported, recorded, assigned, tracked, and resolved.
Additionally, this tool can also be extremely useful during vendor performance reviews. It tracks how many issues have arisen and incorporates each instance as “evidence” for meeting or missing the expectations (SLAs).
Create and record your engagement plan.
Routine check-ins keep your organization on the vendor’s radar. Like any relationship, the number-one way to ensure the relationship is productive and mutually beneficial is to establish open communication channels.
Business review meetings, commonly called QBRs, are scheduled periodic meetings between the vendor and the client to review performance and provide feedback.
A typical QBR consists of reviewing past accomplishments, service levels, as well as current and future activities including KPIs. Be sure to record and track action items developed between the parties at these meetings.
In addition to planning routine meetings and checkpoints, organize your vendor review meetings based on the frequency associated with the vendor classification.
Frequency depends on the vendor classification. Here are basic guidelines to follow. Ultimately, though, it's important to let your business situation and organizational culture shape the frequency:
- Strategic Vendors – Quarterly
- Operational Vendors – Every 6 months to 1 year
- Tactical Vendors– Every 6 months to 1 year
- Commodity Vendors – Ad hoc at best
Select a cutover strategy and record it.
Moving capabilities and services from one vendor to another can be done as a direct move or a staged transition.
- The Direct Move: Realize savings and efficiency benefits more quickly with a direct move transition.
- The Staged Transition: This allows for gradually increasing the level of staffing and direct management provided by the new vendor.
Calculate and analyze the total cost of ownership.
The cost of ownership is the cost of the contract for the term of the contract. But there are also hidden costs which may include:
- Internal resources to negotiate, implement and operate the contract.
- Costs to build and support new environments.
- Costs to set up and operate integrations with vendors.
- Third-party resources to help with implementation or ongoing support.
Step 5: Evaluate vendor performance with a Vendor Scorecard
When scoring the performance of your vendor management program, don't forget to incorporate the feedback of business users.
Ideally, have employees from relevant business units and other important stakeholders participate in the scoring process. If they're unable to participate in the scoring session itself, solicit their opinions prior to completing the scorecards.
Scorecards evaluate performance contractually and operationally. The contractual performance is how well the vendor has lived up to the obligations outlined in the contract. Operational performance is how the vendor’s solutions are meeting the needs of the business.
Below are the 4 criteria for the vendor scorecard:
- Strategic Fit - Evaluate vendors based on their strategic and cultural fit with your organization.
- Performance - Attach clear metrics for product/service fit and delivery to assess vendor performance.
- Risk - Evaluate the future viability of the vendor.
- Relationship - Determine whether the vendor is invested in the relationship.
Getting Started With Your Vendor Management Program
If you’re interested in creating a vendor management program for your IT department or organization, we should talk. We can help you design a well-integrated plan to drive higher vendor performance and ongoing value.
Give us a call or shoot us a message and ask about our Vendor Management Guided Implementation with Cimatri. It’s basically a series of consultant phone calls scheduled around key milestones in your project lifecycle. We have workshops to get your program up and running quickly. These workshops include the tools, templates, and guidance to help you pave a clear path forward.
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