A Cozy Stable for Outsourcing Vendor Management Professionals

Well, the day has finally come.  The so-called “Mystery Vendor Manager” and primary author here at 360° Vendor Management, has formally joined forces with Horses for Sources, which this week announced its entry into the analyst industry with a unique vision and niche – Horse for Sources is the only BPO outsourcing analyst organization focused on buyers.  This is great news for our readers, as you’ll get the benefit of his close collaboration among a pretty amazing stable of BPO veterans that he has personally have come to know, including Phil Fersht (needs no introduction), Lee Coulter (famously interviewed here, here, and here), and Jason Busch (of SpendMatters fame), in addition to a variety of other deeply experienced outsourcing professionals and analysts that are equally talented.  It really is a great mix of analysts and practitioners.  SageCircle covered the announcement with an objective analysis here.

So, what should you expect?  More frequently blogging here regarding vendor management insights, significant use of social media (podcats, blogs, LinkIn, twitter), some interesting collaboration among other analysts, and, most importantly, the information you need to be a successful outsourcing vendor manager.

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All Quiet for the Holidays

If it seems quiet around 360° Vendor Management, that’s because we’re off recharging our batteries for a busy 2010.  We’ll return in a couple of weeks.  Best wishes to our thousands of vendor management, vendor account management, and other outsourcing professions who regularly read our site and share ideas.

Outsourcing Governance and “Who Owns Supplier Performance Management?”

Procurement?  Operations?  That’s exactly the discussion Tim Cummins relates in his latest discussion on relationships and vendors.  Evidently, at the close of International Association for Contract & Commercial Management (IACCM), the final executive roundtable debated this issue.  As Tim says, they “questioned whether it is a role that Procurement groups are equipped to perform.”  Clearly, it’s a hot topic, as Forrester’s Sourcing and Vendor Management analysts have put governance on their 2010 agenda.  In my opinion, vendor management organizations are a bad design, but what about Supplier Performance Management?

Continue reading Outsourcing Governance and “Who Owns Supplier Performance Management?”

Outsourcing and Vendor Governance Predictions for 2010

Well, the end of 2009 is quickly approaching. Except for the yearend rush of outsourcing vendors trying to claim a final sign-on bonus or their potential clients trying to book severance into 2009’s blood-lined financials, there’s not much left to do, but prognosticate on what 2010 will hold for vendor management and outsourcing governance teams and their offshore and onshore vendors. So, please pardon me as I share my predictions for 2010.

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How Relevant Is Forrester’s 2010 Sourcing and Vendor Management Roadmap?

I’m always interested in the professional analysts’ take on sourcing and vendor management.  Paid pundits who spend as much time with paying buyer customers as they do with their pandering vendors’ analyst relations teams should have an interesting look on the industry, right?  For the moment, we’ll ignore the ability of analysts to be objective (such as the alleged charges against Gartner or the open hiring of analyst relations professionals with the intent to “get better placement on key reports”) or the desire by analysts to replace superstar sensationalists with “ambitious” replacements.  Let’s look at the work they intend to do in the vendor management space.  And, since Forrester was kind enough to openly ask for feedback on their 2010 Roadmap, they get my constructive feedback.

Continue reading How Relevant Is Forrester’s 2010 Sourcing and Vendor Management Roadmap?

Commitment Matters: Outsourcing Contracts Are Worthy of More Thought

Tim Cummins’ blog, Commitment Matters is full of fascinating ideas.  What else could one expect from the founder of the International Association for Contract and Commercial Management and someone who has been in the trenches.

Tim’s article on the complexity of contracting exactly relates to what I’ve seen in outsourcing: a basic legal framework with innumerable details memorialized in hundreds of pages of schedules.  The schedules are drafted by technical experts who generally lack any understanding of contracting.  Consequently, Tim argues,

In IT, outsourcers often bid low initially in the belief that they will later be able to improve margins by exploiting the contract’s or customer’s deficiencies. The obvious point to make is that once the contract is signed, it’s set in stone unless both parties agree its variation. So, if contract development or negotiation is rushed, it’s guaranteed that many unpleasant and costly issues will arise after the paperwork has been signed.

Tim is dead-on accurate.  Many schedules, like service level and pricing schedules, are drafted by authors with very limited contracting experience and very often rushed.  These areas then turn into change orders (aka “death by a thousand cuts).

Tim’s article is a very worthy read.

Offshore Outsourcing Vendor Governance Organizations

So, I’ve definitely been stirring the pot over the last few weeks.  I’ve exposed the errors in the much celebrated Black Book of Outsourcing, shown that the business of outsourcing certification is big business, and explained why vendor management organizations are a bad idea.  This much skepticism could be a bit karmically unhealthy, so let’s turn the attention onto something you actually really need: a vendor governance organization.

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The Horse’s Forecast for Outsourcing in 2010

While there is no way Phil Fersht, the leading BPO analyst-turned-vendor, is correct about England winning the 2010 World Cup, there is a good chance many of his other thoughts could come true in 2010.  Read his predictions for the outsourcing industry here.  There are over a dozen comments on analysis, so the conversation is indeed interesting.

Right from the horse’s mouth, as one would say.

Vendor Management Organizations Are a Bad Design

For some, vendor management organizations are a silver bullet that solve all problems.  For others, vendor management organizations are the source of internal strife.  Bottom line, for many organizations, they are a terrible solution.  They hoard decision-making ability, distance ownership of execution and delivery from stakeholders, and focus on narrow contractual goals instead of broader strategic objectives.

An Artifact of Historical Scarcity

There was a time, a long time ago, when the challenges of outsourcing required a specialized vendor management organization.  Your procurement organization lacked the skills to source outsourcing suppliers, and they rarely displayed the ability to partner with suppliers to achieve long term organizational objectives.  Your operations team had sufficient conflicts of interest that a team with the incentive to make outsourcing succeed was needed.  Your IT and operations team didn’t know how to work with outsourcing vendors.  The complexity and effort required to transition operations required dedicated staff, lest you not achieve your other business objectives.  Your leadership team wanted closer line of sight to management decisions.  You didn’t have sufficient vendor management process or skills.  Maybe there was organizational conflict where the CIO and the CPO didn’t agree.

So, vendor management organizations were an artifact of experience and knowledge scarcity and the need to control decision-making.  Born was an organization that needed it’s own sourcing, contracting, project management, vendor management, strategy, financial analysis, and operational management skills.  It’s objectives could be defined by vendor achievement of contractual service level agreements and, more strategically, the achievement of corporate EBITA and innovation objectives.  It managed a broad group of internal stakeholders, including human resources, IT, procurement, legal, operations, public affairs, corporate communication, sales, and finance.  All groups leveraged the centralized VMO to facilitate decision-making and execution of outsourcing decisions.

Listen to Forrester Research’s Vice President John McCarthy’s comments on “best practice case studies for vendor management” durin the 2007 Services And Sourcing Forum in Orlando:

Wow, these are complex jobs.  Listen to John list all the reasons for VMOs and the stakeholders they serve.  And that was before politicking began…

Let Internal Warfare Begin

Where the VMO resided was a subject of major corporate politicking.  Initially, it was easy.  CIOs wanted to own IT VMOs.  COOs wanted to own BPO and supply chain VMOs.  CFOs wanted to own F&A and indirect procurement VMOs.  HR leaders wanted to own HRO VMOs.  At a more lower level, call center executives, application development and maintenance, IT infrastructure, and every sub-organization created their own VMOs.  The politicking began when the COO or CIO had more than one VMO.  Who would own it?  The app dev VP or the infrastructure VP?  Or would they create a standalone VMO to “rule them all”?  Or  one governing VMO to manage the sub VMOs?

It became more complex when the COO and CIO shared the same vendors.  Companies, like Accenture, with their strong back-door selling (you’ve seen this excellent back-door selling training company, right?) ran circles around CIOs and COOs whose teams couldn’t get organizationally on the same page regarding strategic initiatives.  They had better information than their competitors and limited companies’ decisions by plying this information with internal stakeholders to influence outcomes.  Companies realized this was going on, and sought enterprise VMOs to centralized decision-making.

And then organizations that shared the same functional sub-responsibilities clamored for centralization.  Procurement asked to source and contract outsourcing vendors.  Legal asked to own the outside counsel relationships that supported outsourcing contacts.  Global workforce management teams asked for management of vendor call center personnel.  Contingent labor vendor management organizations wanted to leverage offshore IT labor, too.  Project management offices asked to lead the outsourcing transitions.  Operations leaders, on the line for service levels, performance, innovation, and customer service, asked for greater control over vendor management decisions related to their organizations.

At this point, the VMO was in an impossible position.  It’s once strategic role was being challenged by operations and IT executives who were directly responsible for execution – the problems outsourcing vendors were experiencing, in part due to the internal communication challenges of independently operated VMOs, were causing operations and IT executives to miss goals.  Functional organizations had evolved, bringing more outsourcing experience to HR, Legal, Finance, and Procurement – and these groups wanted to own their functional responsibilities for the entire enterprise, without exceptions for VMOs.

Applying Organizational Design Theory

First, it’s important to realize that organization structure is made-up of 4 key elements (John Child, Organization: A Guide to Problems and Practice, 1994):

1. Assignment of tasks and responsibilities that define jobs
2. Clustering of positions into groups and groups into departments and departments into the broader organizational structure
3. Mechanisms to facilitate top-down and bottom-up communication
4. Mechanisms to facilitate cross-functional coordination

One can quickly see that compromises in clustering (step 2) require more cross-functional coordination.  Structurally, this coordination is created by matrix organization structures.  These matrix organizations go through several structural stages (Richard Hackman and Greg Oldham, Work Redesign, 1980):

1. Traditional structure (the starting point)
2. Temporary overlay, which managerial roles are created to run particular projects, like transitions and implementations
3. Permanent overlay, in which the managerial roles created in the 2nd step become permanent
4. Mature matrix, in which the roles permanently created in step 3 have equal power to the traditional structure

The organizational problems arise in step #3 when the VMO becomes permanent and then shift to a mature model, which requires power sharing.  Traditional structure leaders are challenged to share power, which takes the eye off the strategic objectives of the company.  Also, as outsourcing becomes more pervasive in an organization, matrix designs become more widely adopted by an organization.

This is exactly where the largest strategic problem lies.  Danny Miller matched strategies similar to Porter’s strategies with the best organizational structure:

Matching Vendor Management Organization Structure with Organization Strategy

Type of Departimentalization	Strategy
Functional	Niche differentiation, or focus
Functional	Cost leadership; possibly market differentiation
Divisional or hybrid	Market differentiation or cost leadership at a division level
Matrix	Innovative differentiation

As few organizations have innovation as their primary corporate strategy, they aren’t structured into a matrix organization.  Pervasive use of outsourcing using VMOs arranged in matrix organizations create significant problems because they cause the company to inadvertently change  structures, taking away focus from corporate strategy.

What You Should Do

The bottom line is that vendor management organizations should only be created when the skills and experience don’t exist in a company at the beginning of an outsourcing initiative.  It should be temporary, designed to develop the skills and experience necessary to implement outsourcing projects and manage vendors.  At some point, the day-to-day line responsibilities of the VMO should be shifted back into line organizations, where line managers take responsibility for delivery of objectives by managing vendors to achieve the goals.  Since the service level agreements in the contracts should meet the needs of these organizations, there should be little concern – these organizations should be managing performance and reporting on results already.  The staff responsibilities should be shifted back to the staff functions (procurement, legal, HR, and finance).

The only responsibility that should remain centralized is outsourcing governance.  This governance function, as described in the IAOP OPBOK, should focus on rules of engagement, encouraging cross-functional communication, project prioritization, initial project implementation tracking, high level interdependent planning among divisions/departments and vendors, evaluating enterprise-wide vendor performance, and the sharing of outsourcing best practices.  That means the other 9 categories of responsibilities defined by the IAOP should be temporary or distributed through other organizations.

Counter Arguments

Outsourcing advisors and experienced clients may disagree with the recommendation above.

There may be situations where outsourcing for cost reduction reasons is an imperative and such should be centrally managed to ensure EBITA objectives are achieved.  I wouldn’t argue against this, except to suggest that even this should be temporary and that, at some future point, the organization work toward developing the vendor management competency in all parts of its organization in order to deliver on its new reality – outsourcing isn’t just a project, it is a long term manner of delivering, and decentralizing the management of its delivery mechanism outside of the delivery leadership makes little long term sense for the reasons listed above.

There may be situations where the focus of outsourcing is sufficiently large such that few internal operations remain.  For example, I worked for a west coast savings and loan bank fifteen years ago that had exactly six IT employees – the CIO, his admin, his VP of strategy, and some assorted junior staff members.  The rest, including most leaders, were entirely outsourced.  In this case, staff functions should still be allocated to procurement, HR, and legal organizations, but the day-to-day line vendor management responsibilities should be centralized.

Some people may argue that managing a matrix organization is the role of an outsourcing VMO.  That’s great, but see all the problems listed above.  Why go through that if you don’t need to?

Finally, some people would simply argue that outsourcing management and vendor management skills are insufficiently available within an organization to distribute the responsibilities.  Well, it is absolutely the responsibility of any organization undergoing an outsourcing transformation to take this internal development opportunity seriously.  Upgrade talent, use training organizations to build skills, and seek professional development at major organizations to develop your staff.  Simply housing the talent in a single organization is destined to failure in the long run.

The Business of Outsourcing Certifications

It is highly likely that you’ve sought professional development to improve your vendor management and outsourcing management skills. There are very, very few resources available to vendor management and outsourcing professionals.  As a result, you’ve probably encountered a few companies out there that specialize in training for vendor management professions.  Have you noticed the pricing?  Developing certifications for outsourcing professionals is definitely a big business.  Is it worth the investment?  If so, which should you select?  Let’s delve into what’s available and whether it is worth the money.

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