Today, as companies seek to both consolidate their vendor relationships and multisource, they tend to engage with a small number (typically two to nine) of preferred, very large IT services vendors that can be centrally governed. The strategic objectives of consolidation are important: Services clients can prequalify a few preferred suppliers that all users of IT services can easily and safely engage with. However, given the rapid pace of technology change, the need for agility, the new business stakeholders, and the rise of cloud services, a company's IT and innovation requirements are often best met by multiple best-of-breed suppliers.
Vetting privately held vendors can be a big challenge -- so much so that some Forrester clients are required to use publicly traded vendors only for critical services.
However, in this technology environment, that approach will preclude you from accessing some of the best innovations. Instead, companies need a structured yet flexible approach that evaluates the vendor's stability as well as its service, solution, or delivery capability. Sourcing and vendor management (SVM) professionals who are thinking about a services initiative should consider several factors when evaluating their needs versus the needs of the marketplace:
Start with Financial Stability -- It's Just that Important
While different types of services relationships require different types of evaluation criteria, all prospective services vendors must be evaluated for financial and legal stability. The last thing you need is for your IT strategy, data, and resources to be tied up with a vendor that's heading south. A vendor that has problems in any of these categories should be taken off the evaluation list.
Don't overlook the importance of investigating the prospective vendor's track record and talking with references. Companies must be prepared with meaningful questions related to the references' positive and negative experiences with the vendor. Clients should also endeavor to find other clients of the services provider rather than just the vendor-supplied references, since the vendor-supplied references are likely to be the most satisfied clients.
Now it's Time to Evaluate the People -- Human Capital Management
Because services businesses are so people-dependent, it is essential to understand the vendor's human capital management approach and the quality of its people. While this action may be unnecessary for the large cloud-based solution providers (e.g., Google and Amazon.com), it applies to virtually every company you plan to have a personal connection with. Be sure to evaluate the quality of technical personnel, internal training programs, and quality of account management personnel. Customers should also seek to determine how and under what circumstances a supplier will subcontract, and they need to ensure that they approve of all subcontracting activity.
The Supplier Passed the Analysis, But is it the Right Fit for Your Firm?
Once financial and human capital elements are addressed, clients need to consider alignment with their own needs. To maintain a successful relationship, firms and suppliers should be on the same page regarding:
• Methodology/Knowledge Management: Companies should look at methodology as a library of best practices that can be used to provide consistent training for services providers' own internal consultants and as a means of achieving high productivity, consistency, and quality on client engagements. In best cases, consulting firms require and/or compensate consultants for depositing lessons learned into the company methodology or knowledge management system. This practice ensures that the methodology is living and constantly being refined.
• The Ability to Coach and Transfer Knowledge: The ability to transfer competency (e.g., improved development processes) to clients is an important source of value in integration/outsourcing relationships. In the modern world of Agile and software-as-a-service (SaaS), for example, knowledge transfer is still important, if not more so. Many corporate development shops, moving to more Agile-like methodologies, will require coaching to make the engagement work and to prepare internal staff to use a new approach to software development. On the SaaS or platform-as-a-service (PaaS) front, companies have similar requirements since they need to learn how to integrate these services and platforms into their existing IT organization. Make sure that you understand how your vendors achieve the required knowledge transfer and seek references on their knowledge transfer capability.
• Functional Breadth/Depth: Integrators and outsourcers have varying degrees of expertise in their functional offerings. Functional offerings include horizontal capabilities, such as data center outsourcing and desktop asset management. The breadth of functional offerings is significant in large-scale engagements, like full-service outsourcing. In more cases today, the depth of the functional expertise will be a primary consideration. For example, you may be using a vendor such as ThoughtWorks for Agile application development. In this case, you would only care about the depth of its capability in this area and not about its breadth of offerings across the IT stack.
• Vertical Breadth/Depth: Deep vertical business expertise and technology capability is required to help clients optimize or innovate. Customers should evaluate a vendor's vertical capability not just by looking at revenue per vertical segment but by also looking at the credentials of the vendor's vertical consultants/experts and the customer references.
• Scalability: Companies must make sure that a prospective vendor is sufficiently large (or small) to accommodate their project. If the largest similar project the vendor has dealt with before is significantly smaller than the one you are considering, you need reassurance that the vendor can step up in terms of staff, infrastructure, and process. Conversely, if your project is much smaller than the vendor's norm, this is also a risk. Clients that fall into the "small fish in a large pond" category rarely receive sufficient management attention.
Remember that some criteria will matter more to your internal IT and business contacts.
While methodology may not seem as important as it relates to cloud providers or even very niche services providers, it is still very important to your internal customers. These customers will need to understand how to implement and integrate their cloud solution, and they will need to ensure that their niche services providers have the ability to consistently deliver on their promises.
Stephanie Moore is a Vice President and Principal Analyst at Forrester Research, serving Sourcing & Vendor Management professionals. She will be speaking on the services innovation mandate onstage at Forrester's upcoming Sourcing & Vendor Management Forum, May 24-25, in Las Vegas, NV.