A New Way to Manage Vendors

Are you looking at increasingly complicated negotiations with a growing stable of vendors? Bring on the horse whisperer: the vendor management office.

Reader ROI

• How to set up a successful vendor management office
• What a VMO does
• The benefits and pitfalls of a VMO

When Carl Ascenzo took over as CIO of Blue Cross Blue Shield (BCBS) of Massachusetts four years ago, the health insurance company outsourced most of its data centre operations, help desk and code programming to a single vendor: EDS. Today, however, EDS is only one of four large technology providers working with the health insurer.

In order to handle the increasingly complicated negotiations with his growing stable of vendors, Ascenzo expanded a group within IT known as the vendor management office (VMO). Although a rudimentary VMO existed when he arrived at BCBS, Ascenzo added to its responsibilities, building a group that oversees RFPs, works with legal counsel on all contracts and maintains relationships with all vendors. Whereas the initial vendor management group dealt with invoices and back-end activity, the VMO now gets involved at the start of negotiations and helps IT managers make informed decisions on which vendor can offer the best deal and the best service for a particular project. BCBS's VMO - led by a manager with financial and IT experience - also makes sure the vendors know about each other in order to foster healthy competition among them, which ultimately leads to better products, services and pricing for BCBS.

"When we moved from being a single-sourced company to a multivendor model, it became clear we needed an expert who knew all the vendors, was out in the marketplace all the time, and was well-versed in contracts and negotiations," Ascenzo says. "The result is that the prices we are getting are always competitive, and the quality of the work has improved."

BCBS's use of a VMO is not uncommon. Organizations grappling with more complex IT offerings and juggling multiple vendors are increasingly forming VMOs within their IT departments. They are looking for cost savings but also better service and more control over the technology buying process. With a quickly changing technology market and a shift toward more outsourcing and multiple vendors, CIOs are often uncertain whether they are getting the best deals from vendors.

"The market today has become very sophisticated, especially with the increase in outsourcing," agrees Cassio Dreyfuss, a Gartner vice president of research based in Sao Paulo, Brazil. "The dream of any VMO [head] is to offer his or her enterprise exactly the combination of resources and services that are needed, and to pay for exactly what you are using. It's not that the IBMs and Hewlett-Packards of the world are dishonest; they just don't know your company."

VMOs started to appear on the US corporate IT landscape after 2000, when the economy soured and CIOs were forced to justify IT spending. In order to get the best deals, CIOs subsequently began working with a greater variety of vendors. The increase in outsourcing has also pushed more CIOs to consider centralizing their IT procurement. After 2000, some companies began to form "sourcing offices" that oversaw spending on IT services. And large vendors - such as IBM and HP - started to bundle IT services with hardware and software to meet individual companies' needs. "This means that buying IT now requires a deeper knowledge of different aspects of technology," Dreyfuss says.

With a dedicated VMO within the IT department, a CIO can more easily manage relationships with multiple vendors, keep track of metrics and vendor performance, and negotiate discounts on IT services and products. While a project manager may know best what technology is needed for a specific project, a VMO can help make sure the company gets the most competitive offers from vendors. That's precisely why having a VMO within your organization can be a good idea. And it's also why we've asked three CIOs with experience managing a VMO for their tips and advice.

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