Creating Vendor Competition

Guth also notes that the VMO allows Aflac to minimize risk by creating its own purchase agreements; the majority of its deals have contracts drafted by Guth rather than by vendors. While such an approach isn't restricted to a VMO, Guth's expertise with legal and financial issues has helped him put this practice in place. This is another good reason to hire the right person to head a VMO.

"When I got here, all of our contracts were on supplier paper, whether they were software licences or services," he says. "They were all slanted to the supplier. By getting our own form agreements, we help reduce legal risk and operation risk." Microsoft, for example, has negotiated agreements using Aflac's contracts, he adds, giving Aflac protection against possible proprietary rights infringement and any other contract-related risks. Guth speaks with pride about this accomplishment but admits that vendors haven't always liked working from Aflac's contracts. He stresses that his legal background led him to insist that Aflac use its own contracts wherever possible and also notes that vendors have been willing to accept the unorthodox arrangement because Aflac treats vendors fairly - not always driving for the rock-bottom price.

What's more, vendors working with companies that have VMOs are more likely to perform competitively, Ascenzo says. "We like to make sure our vendors know about each other in order to maintain a competitive environment and drive down costs," Ascenzo says. For example, EDS, which does middleware integration for Blue Cross Blue Shield, knows that BCBS uses other software developers to work on its Web browser interface. EDS has bid on that work as well.

Joe Fraser, an EDS client delivery executive who spends most of his waking hours working with Ascenzo's VMO, confirms that thought. "We are a preferred vendor right now, but by no means are we entitled to all of the IT work that comes down the road," Fraser says. "Carl [Ascenzo] has created a competitive environment among vendors." Despite this added competition, Fraser says working with BCBS's VMO has saved time because he now deals with one VMO director instead of multiple IT managers. But he admits he had to work out some kinks in the beginning.

Initially, Fraser spent some time explaining the new process to his staff, and reworking his documents and templates to fit BCBS's standardized approach. He has also worked closely with Tony DeGregorio, BCBS's VMO director, to make sure both sides were communicating well. Now, for example, he says, both EDS and BCBS are better able to prepare a 2005 budget analysis because they can better predict costs and revenue.

Beware of the Pitfalls

When Clarke set out to create a centralized VMO at the American Red Cross two years ago, the radical change in how the organization treated its technology vendors created some internal disquiet. "There was some concern and confusion from the line managers that the VMO would exercise complete control," Clarke says. "That was not the intention, but we needed to clarify the VMO's role." Line managers, says Clarke, said they didn't want to be shut out of the buying process, and were relieved to learn that they were still responsible for procurement. The vendor management office tracks spending and provides that information to the management team, which in turn can secure better deals.

Clarke's VMO serves as a centre of expertise for IT's role in the overall contracting process, analyzing IT spending and vendor performance. But it is a sort of information clearinghouse that ultimately defers to the organization's national contracting office when negotiating contracts.

"We view the VMO as a bridge between technology and business requirements and contracting requirements," he says. Clarke stresses, however, that they did not want to create a bottleneck in which all contracts must be signed off by the VMO. At Aflac, where the VMO plays more of a leading role, Guth says, some IT managers and technology users miss negotiating with vendors. "Internal customers really enjoy negotiating with suppliers," he says. "So we try to bring them into the process. We at the VMO are tightly coupled with our [technology] customers."

Clarke and Guth stress that organizations setting up VMOs need to be sure that managers who have had control over vendor relations in the past understand the change and that IT users be brought into the process whenever possible. Wayne Bennett, a partner in the commercial technology area of Boston law firm Bingham McCutchen, cautions that VMOs could cause problems if they leave business owners out of the IT purchasing process. If those who need the technology aren't part of the buying process, he reasons, they might feel left out and less motivated to successfully implement their project; they might also feel as if they didn't get the technology or service they really needed. "The success of most complex IT projects requires the intense participation of not only the CIO and key IT personnel, but the business owners of the process as well," Bennett says.

Once a VMO is firmly in place, convincing vendors to work with the office can also prove to be a challenge. "If vendors are used to dealing with a number of people, they will try to use a divide-and-conquer approach," says BCBS's Ascenzo. They may also, in some cases, try to go around the VMO altogether in order to make a sale to the person who they think holds the purse strings. To avoid such problems, Ascenzo and other CIOs with VMOs go over the process carefully with vendors. Ascenzo says he has consistently repeated to vendors that DeGregorio at his VMO is in charge of vendor management. "You have to make sure that the VMO is of equal power to the rest of the direct reports to the CIO. And the vendors have to know this," Ascenzo says. "I continually endorse that Tony [DeGregorio] has power and authority."

Aflac's Lester adds that CIOs need to be prepared to be tough with vendors who don't cooperate. "We've had to replace some vendors who did not want to work with the VMO or with IT in general," Lester says. In one instance, he says, Aflac saved over $2 million by rebidding a contract held by a vendor that refused to work with the VMO.