360° Vendor Management

Outsourcing Vendor Management Organizations

There are as many different organizational designs as there are flavors of ice cream.  We couldn’t dream on commenting on every imaginable formation of vendor management organizations, but today we’ll attempt to describe the major types.Before we get started, let’s ground ourselves in some common definitions:

• Vendors - The companies who perform outsourcing services
• The Business - The internal organization which ultimately responsible for business outcomes created by the vendors
• Vendor Management Organization (VMO) - A dedicated internal team assigned to managing vendors
• Vendor Managers - The internal resources that are assigned to managing outsourcing vendors

In-Line Model - Frequently, Vendor Managers are imbedded in The Business.  The results are clearly controllable outcomes for The Business and Vendors who clearly understand who their stakeholders are.  However, this type of organizational model definitely has shortcomings.

• In particular, in large organizations where few Vendors are shared across business units, it becomes difficult for internal business units to coordinate activities and perspectives.
• If the Vendor fails to meet one group’s Service Level Agreements (SLAs), the Vendor often has little accountability to the other business unit, regardless of program sizes.
• Internal organizations also have difficulty sharing and enforcing the use of vendor management best practices.  The disconnects are so great that sometimes different business units will establish independent contracts.
• Vendor Managers do not have clear career tracks, and are often left to managing Vendors and therefore not given promotion opportunities typically left for employees with deep internal operations management experience.
• To the Vendors, multiple stakeholders raise the cost of supporting The Business - and the cost savings are left on the table.

In-Line VMO - With increasing frequency, organizations are realizing the shortcomings of approaching Vendors differently.  To ensure best practices are leveraged, Vendor Managers within a single business unit are consolidated into a single VMO reporting to The Business.  The Business therefore develops shared best practices, improves Vendor relationships, and improves the operating efficiencies of the Vendor while maintaining control and creating career development opportunities for Vendor Managers.  However, The Business still fails to achieve synergies that could be gained from leveraging Vendors in other business units and little coordination between the teams develops.  In fact, we’ve seen more BPO vs. ITO organizations developing than ever before.VMO Governance Teams - Large companies that are removing intra-departmental silos through re-organizations or that are seeking greater savings opportunities/better vendor management controls are building small corporate VMO governance teams that assist In-Line VMOs with information sharing.  Corporate VMO’s accelerate vendor management best practices and can serve as corporate level governance, depending on the amount of decision-making control granted to them.  It’s exactly this decision-making control that creates conflict among In-Line VMOs and different business units.  While the corporation as a whole benefits from lower vendor costs, improved decision-making, and better controls in contracts and vendor performance visibility, the different business units begin to lose decision-making authority.  Operations management teams who typically hold traditional viewpoints on keeping decision-making power close to operations leaders are left in an uncomfortable situation where outcomes are decided by corporate employees with different incentives - and The Business will often express this quite vocally, creating an internal power struggle that erodes the ability of best practices to take hold!  In addition, in the business environment where CFOs believe less is more, Corporate VMO Governance teams have a business value that is hard to quantify.Centralized Corporate VMOs - Some organizations are consolidating all In-Line and Corporate Governance VMOs into a single Corporate VMO.  These teams are held responsible for creating outcomes for their respective internal business unit stakeholders and are better able to leverage vendor relationships by focusing on fewer relationships.  The results are more uniformity in vendor results, lower costs, and deeper vendor relationships.  In addition, with the growing complexity of outsourcing contracting, Centralized Corporate VMOs are better able to leverage high-end skills and develop new skills.  The challenges with this model are clear: The Business Unit is left out of the picture (a point it will make clear whenever results are below expectations) and improperly managed VMOs create massive failures.  Centralized VMOs are also challenged with budgets and business unit chargebacks - especially where vendor fees are intermingled across different business units (e.g., call center and mailroom environments).  The other challenge is aligning internally managed operations with VMO managed operations.What model is best?  We don’t believe any single model is best.  However, we would recommend that business leaders employ an organizational model that best fits the immediate strategic needs.  If you’re failing to achieve synergies among the widely distributed supply base or achieving common results, centrally governing or managing vendors is a good idea.  If you’re facing a business environment where local differentiation is essential, give your business units high degrees of autonomy by placing VMO teams close to the day-to-day operations leadership.  If you’re looking for a compromise, the VMO Governance model is a great way to facilitate best practices and place controls on certain aspects of vendor management (e.g., contracting, IT support, and vendor selection).Do you have a perspective you’d like to share?  Share your ideas in a comment below!

This entry was posted on Monday, March 26th, 2007 at 7:50 pm and is filed under Outsourcing, Outsourcing Vendor Management, Vendor Management Organization. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.