Beyond procurement: Managing supplier relationships to build competitive differentiation

Scott Stewart

Scott is an experienced CIO with over 20 years of ICT experience. He has held senior management and executive positions in both the private and public sectors. These roles spanned both business and ICT functions including CIO of the large industry superannuation fund Sunsuper, and CIO of a large ASX listed stockbroker. Scott has more recently moved into the research and industry analyst sector and is now the Research Director at ITNewcom, a benchmarking, research and consulting practice. Follow Scott on Twitter: @CIOMatters.

While enterprise IT is being bombarded with disruptive changes like Cloud, BYOD, mobility and Big Data the traditional challenges also remain, such as replacing or remediating scores of aging legacy systems that have become deeply embedded within the engine room of the organisation.

As enterprise IT is being pulled in every direction many will wisely pursue expanded sourcing strategies to help cope with the rapid rate of change. As enterprises move deeper into diverse multi-sourcing scenarios, a heightened dependency follows on being able to effectively manage these relationships to deliver against key business objectives and contribute towards a stronger competitive differentiation.

The 2011 ITNewcom annual market study reveals that close to half of the region’s top tier organisations intend to expand their overall sourcing strategies, particularly when it comes to their infrastructure and applications.

The 2011 ITNewcom Annual market Study show increased intention to outsource. Click here for a high resolution image.

Research validates the view that these multi-sourcing strategies will only increase the dependency that organisations have on effectively managing the supplier relationship for achieving desired business outcomes.

Through my research it is clear that within many of the region’s top tier organisations, a specialised discipline has emerged in what is now known as “Vendor Relationship Management” or (VRM).

VRM is much more than a traditional procurement practice and it has a clear business focus of:

• Establishing the goals of the organisation around service, quality, cost, and satisfaction.
• Selecting, managing and focussing the third party suppliers to consistently meet these goals

Early adopters of a specialist VRM practice have typically been large companies such as CBA, Westpac, AMP, Citi, and Cisco Systems, which were often dissatisfied with the services provided by their purchasing organisations.

Traditional procurement approaches prove ineffective in a multi-sourcing environment

Typically, purchasing organisations provide little contribution to the VRM discipline as they focus on what they do best: Getting the lowest possible price, placing orders and approving payments. VRM however has become more about providing business advice, guidance, and expertise to manage the sourcing of strategic business investments in services and technology.

The goal of VRM is to be an enabler and facilitator, not an obstacle or another layer of bureaucracy that suppliers, stakeholders and clients are forced to deal with. A key objective of VRM is to ensure that there is a co-ordinated alignment of supplier efforts towards the achievement of organisational objectives.

Given that the discipline of VRM has become increasingly strategic, I have observed that many enterprises are forming specific business units to manage the vendor relationship in a centralised business model. Global analyst firm Forrester reports that half of companies have a centralised vendor relationship management function or VMO, with an additional 11 per cent planning for one in 2012.

Enterprises are implementing a ‘Single Door’ approach by establishing the Vendor Management Office

In order to better facilitate VRM ‘best-practice’ within large organisations my research reveals a dominate trend for the establishment of a centralised Vendor Management Office or VMO.

My definition of a VMO would be:

A Vendor Management Office (VMO) is a strategically focused purchasing organisation comprising highly-skilled business advisors who are entrusted with strategic sourcing and management of vendor relationships such that investments in key commodities are maximised to the fullest extent and risk to the business minimised.

The ‘Single Door’ VMO takes a central position in the outsourcing business model

An effective VMO will be central to the outsourcing business model and will undertake the following functions:

• Demand and forecast management.
• Opportunity and Initiative management.
• Service level and Contract management.
• Process and Change management.

Click here for a high resolution image.

Some things to ponder.

1. Organisations expanding their outsourcing strategies need to assess their ability to effectively deliver on the VRM discipline as it will become a clear criteria for success.
2. Managing vendor relations through a procurement office is sometimes akin to managing customers through the debt and collections office.
3. Enterprises need to place the same value on their VRM as they do on their CRM.
4. In multi-sourcing scenarios an effective VMO will maximise the business value from the vendor relationship and ensure the vendors are collectively focussed on the delivery of business value and competitive differentiation.

Scott Stewart is Research Director and Senior Industry Analyst at ITNewcom. Follow Scott on Twitter: @CIOmatters.

Tags: procurement, vendor relationships, multi-sourcing, vendor relationship management