The six million dollar vendor

Between 2005 and 2010, Gartner estimated IT managers and executive decision makers have gone from dealing with an average of 3.7 vendors to 10. The onset of Cloud computing as well as the revival of service outsourcing in wake of the economic downturn have only exacerbated this as companies increasingly look to multi-source their services to obtain the functionality they need at a cost they can afford.

If Gartner is right, CIOs are in for a hell of a ride.

But it is an area that Gilbert + Tobin partners, Sheila McGregor and Bernadette Jew, believe CIOs are yet to get a handle on.

“You often hear the vendor blamed but there are a lot of things the customers can do themselves,” Jew says.

Both partners of the law firm hold US and Europebased telcos and financial institutions in a high light in this regard; executives are unlikely to soon forget the effects of the economic downturn.

For organisations in other verticals, however, and particularly those in Australia, the problem remains. Despite the gradual recognition of the importance of managing vendor relationships properly, McGregor warns companies are yet to understand the management involved in vendor contracts.

Read more about partnering with vendors in vendor management 101.

“It’s not just about dotting the Is and crossing the Ts and checking the invoice everyday... it’s a strategic relationship.” Instead, CIOs must break through the traditional issues that mar vendor interactions and redesign the relationship. Before it’s too late.

Flying into danger

Vendor relationships, like any, carry with them an inherent risk.

Virgin Australia’s (then Virgin Blue) contract with Accenture subsidiary, Navitaire, for an outsourced booking management system wasn’t out of the ordinary. Most of its regional competitors — including Jetstar, Tiger Airways and AirAsia — also use the company’s products and services. It’s one of the only low-cost options in a business that is all about saving pennies. But when a vendor-side hardware failure caused an 11-day outage in 2010, just a year after implementation, Virgin was forced to delay and cancel multiple flights, losing up to $20 million in pre-tax profit.

The airliner foreshadowed court action against Navitaire but, in April 2011, the two organisations reached “mutually satisfactory” terms of agreement. According to Gilbert + Tobin’s McGregor, only five per cent of vendor disputes ever reach court, but the story is one of several instances of airline systems outages that can cause havoc to vendor relationships. For Navitaire, the outage had an effect not only on its relationship with Virgin, but also with competitors across the region. Jetstar, though retaining the system, has worked to implement second and third measure contingency plans in the event of such a failure.

Thankfully, Stephen Tame has a plan. Since joining Jetstar in 2004, the CIO has led a policy of outsourcing 100 per cent of the low-cost airline’s IT to third parties.

The Qantas subsidiary could hardly be called a start-up anymore, but Tame still only counts five internal staff in his IT team.

The company outsources to a current stable of 12 providers — seven Australian companies and five Indian firms — managing the entirety of the company’s IT. He’s eager to welcome more into the fold, too, with recent moves to push human resources functions to a Cloud solution from SuccessFactors.

The heavy reliance on third parties to manage the IT would prove a headache for any CIO, but Tame says the situation not only cuts costs, it allows him to deliver projects faster and, in some cases, with more accountability than an internal process could afford.

Take one recent project — a new boarding and self-tagging manager, in the process of deployment across Jetstar terminals at Australian airports. The software was developed by a cohort of six staff at Melbourne-based Vedaleon.

It helps that they came from former Australian airline Ansett but the outcome, Tame says, was far better than he could hope from traditional outsourcing behemoths such as Tata or IBM.

“Would I get [Vedaleon] to manage my entire operations systems? Probably not,” he says. “But could I have them develop a specific piece of software for me? These guys can get it done in a week, whereas it would take everybody else about four months.”

Tame is ever-mindful of the relationships required to keep his contractors in line. Each area of technology is clearly delineated from others and combined with a business process that is assigned to each of his five direct reports. From there, the service portfolios are negotiated and contracted to one or more vendors.

Tame’s philosophy is simple: “Never one, never exclusive and never all.” Mindful of the pressures of providing all of Jetstar’s business intelligence data to a single third party, Tame has provided equal portions of the data flowing out from the airliner on a daily basis. Though one is clearly defined as the ‘A team’, the multisourcing agreement has given Tame the upper hand to negotiate more stringent terms, should the contract not be met. “Both suppliers know that if they’re not living up to cost, quality and delivery expectations I have the option to reduce the work I give them,” he says.

Paramount to Tame’s handling of vendor relationships is his focus on the exit strategy in every contract, an aspect McGregor and Jew are also quick to urge.

“This goes to the idea of developing a centralised repository of learning on the project,” Jew says. “That way, if things go badly, you do actually have enough information to exit that vendor and move to a preferred vendor.”

Ensuring an exit strategy is, of course, something that must be handled carefully. While contractual negotiations between client and vendor are clearly of a business-like nature, both McGregor and Jew have seen numerous examples globally of communication breakdowns, emotional upsets and ultimately human mistakes that can bring multi-million-dollar projects crashing down.

The right people

Regardless of risk mitigation and exit strategies CIOs could put in place, process is merely a means to an end rather than the end itself. Vendor relationships are doomed to fail without the right people managing them.

“It’s becoming less relevant about whether you’re talking about the systems or the process or the people,” Tame says. “Most organisations are just interested in the outcome.”

McGregor says focus must be placed on the middle management layer; the people most likely to facilitate the day-to-day communication with vendors. Of course, that is likely to play on the eternal skills development problem — do you teach or do you buy those capabilities?

Join the CIO Australia group on LinkedIn. The group is open to CIOs, IT Directors, COOs, CTOs and senior IT managers.

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