360° Vendor Management

International Trade Concerns

Vendor managers who manage international operations need to keep abreast of foreign trade disputes.  Obama’s bizarre anti-outsourcing comments, even if they do lack concrete strategies, should be enough to get your attention.

The same fear-driven, job protectionist attitude affects a wide ranging  industries.  If you haven’t witnessed this yet, check out Jason Busch’s article on Anti-Dumping.

Vendor Managers Can Satisfy Internal Stakeholders

Before outsourcing, internal operations teams usually spend significant effort appeasing senior management by explaining every reason why deviations from performance were outside their control.

Marketing launched a new campaign. IT’s servers were slow. The telecommunication vendor’s T1 was hit by a backhoe. The competitor launched a misleading campaign. The weather shutdown deliveries in Chicago.

Well, have you noticed the change in tone after the call center or backoffice team was outsourced?

Customers don’t like foreign accents. The vendor cannot manage attrition. Prices are more expensive than they are [insert nearby city]. Quality is bad. The contract is the problem.

In a classic Dr. Jekyll/Mr. Hyde transformation, internal stakeholders apparently have no qualms with scorching the earth with “it’s the vendor’s fault” or “outsourcing was a bad idea” type comments. Frankly, its disingenuous and doesn’t contribute to the success that is so necessary for today’s competitive environment.

Believe it or not, vendor managers can satisfy internal stakeholders. They can create a productive, opportunity-seeking environment. Use best practices to paint accurate, compelling pictures of your vendor-managed operations.

Here’s how.

Read the rest of this entry »

Removing Key Vendor Personnel in Outsourcing Relationships

Dealing with under-performing or culturally incompatible vendor personnel is one of the most delicate matters facing vendor managers.  Certain vendor personnel are critical to operational success.  When they don’t deliver, performance deteriorates.  When friction or distrust develops, relationships go sour and communication doesn’t freely flow.  Frankly, it’s an awkward situation.

The problem is that you’ve outsourced your operation and, while you’re still responsible for ensuring the vendor delivers, you did abdicate certain recruiting and hiring choices.

With that said, if you negotiated your contract thoughtfully, you have retained the right to remove certain vendor personnel from your account.  And isn’t that great…you can simply send a letter and the person of your ire will disappear forever.  In fact, it’s easier than terminating your own employee.  It’s also far more devastating.

Keep in mind that you should never have arrived at this point.  Here’s an ounce of prevention:

• Interview Key Resources - No matter how wonderful your vendor claims certain people are, you must interview these resources before accepting their appointment to key positions.  These interviews must occur face-to-face, even if the resource resides in another country.  Telephone interviews are insufficient.  Furthermore, depending on the role, more than one interviewer should speak with candidates.
• Use the RFP/Vendor Selection Process - Effective RFP processes require actual key personnel to present key topics and respond to questions.  These are opportunities to evaluate the potential key resources.
• Require a “Succession Plan” - Every key role should have a solid succession plan and developmental goals that must be achieved each year.  The reason is simple: after a couple of years, most account teams experience turnover or promotions to greater opportunities.  Vendors need a plan to ensure key roles are never vacated for long periods of time.
• Provide Regular Feedback - Your job isn’t to develop vendor employees or submit feedback on performance.  After all, the vendor’s performance should be directly correlated to SLA and milestone performance.  However, every key vendor resource should be required to participate in 360 degree performance feedback, including feedback from clients, at least semi-annually.

Despite preventative actions, sometimes things don’t work out.  However, clients should be careful about the use of formal removal procedures, except in clearly dire situations triggered by ethical issues or significant performance problems.  Rather, vendor managers should informally communicate concerns to senior vendor leaders and give these leaders opportunities to resolve issues behind the scenes.  Often times, problematic situations can be resolved through a vendor reorganization that shift roles or moves certain people onto other accounts.  In addition, it gives the vendor time to find qualified replacements.

When the time does to give formal notice, after multiple warnings have not been heeded, vendor managers should be firm and expect immediate removal.  The communication should be done discreetly to key senior resources in order to avoid impacts on vendor morale and performance.  The vendor may ask for more time and the client should listen to this feedback carefully.  Also, timing should be considered - do not remove certain resources at critical junctures, as the impacts could be devastating.  However, the client has every right allowable within the contract, and there are times when formal action needs to be taken.

Finally, the removal needs to be done tactfully.  No matter the situation, the client is impacting a person and his or her team members…and empathy is important.  How you handle the situation reflects on you and your company.  If your goal is to become a strategic client with your vendor, managing this situation carefully is an important step toward remaining in good favor with vendor agents and leaders.

Here’s another article on the same topic was written by Carter Santos

Have you removed key vendor resources?  How have you prevented this from occurring?  When the time came, how was the situation handled?  Share your stories with the ever growing readership here at 360 Degree Vendor Management.

Dispute Resolution Follow-Up

Earlier we published When Roads are Rocky: Dispute Resolution in Outsourcing Relationships. After all, not all vendor-client relationships are blissful partnerships.

Stephen Guth just released a great article on the same subject. Given his legal background, it’s a very good read.

Managing an Outsourcing Vendor’s Financial Instability

One of the principle concerns of any vendor manager is monitoring your outsourcing vendor’s financial instability.  Witness the recent failure of Axium, Hollywood’s payroll vendor and owner of Ensemble Chimes Global, previously one of the leading managed services providers of contract labor.  When Axium filed Chapter 7 bankruptcy, Hollywood clients and a wide variety of their vendor management system clients (which included Fortune #3 General Motors, Fortune #7 Ford, Fortune #21 UnitedHealth, unranked Toyota, and other companies such as Morgan Stanley, Kaiser Permanente, AT&T, and BellSouth) were left with significant vendor management problems that crippled their IT and operations teams.  In some cases, such as several Hollywood production teams, writers, and, believe it or not, swimsuit models, received paychecks that bounced.  It is a classic story of a vendor meltdown that impacts customers.

It wouldn’t be concerning if there wasn’t so much consolidation in the outsourcing industry.  It also wouldn’t be bad if  so many of the vendors weren’t private and therefore not subject to external audit and public disclosure scrutiny.  Finally, it wouldn’t be so critical if companies weren’t outsourcing key business processes - processes and technology support teams that take months or years to climb learning curves and stabilize.

However, the industry is consolidating, the vendors are private (or based in countries with accounting rules that are not as strict as US or European standards), and clients are outsourcing major business processes.  Imagine if you lost your entire application development or call center team overnight?  Scary, right?

The pundits of the total meltdown concept will point to business continuity planning or multi-vendor sourcing strategies.  No doubt, both of these items will ease the pain.  If you haven’t built a business continuity planning or considered a multi-vendor strategy, do it.  Now.

However, the ramp-up curve following a vendor meltdown takes time and customers will feel the impact.  Here are a few items that vendor managers should focus on:

• Create Communication Channels - Simply monitoring a company’s financial statements (assuming they are made public) is insufficient.  There are points of failure that are not disclosed publicly, such as organizational changes, changes in banking relationships, and investor changes (acquisitions, new partners/major shareholders, and divestitures).  Good vendor managers create informal communication channels with their vendors to obtain insight into potential future changes.  Furthermore, financial performance should be part of quarterly reviews (our suggestions for quarterly review are found here).  Remember: just because a company is private does not mean it cannot share financial results with you.  Require audited financial reports be provided on a quarterly basis, as well as disclosure of any material change to the ownership or financial standings of the company.
• Predicting Failure and Advance Notice - With few exceptions, financial failure is not sudden.  While SEC or other government regulatory groups’ rules may prohibit sharing information in advance of public earnings announcements or other irregular communications, financial failure can be predicted.  Use the Z-Score methodology.  Stephen Guth discusses the use and formula here.  Here is Wikipedia’s page.  Every quarter, the VMO should plot the Z-Score of its suppliers and track it, potentially using a rolling three quarter average to predict the next month’s performance.  Staying ahead of failure by predicting is critical to the success of your company and customers.
• Define Failure - One of the most common discussions in contract negotiations is termination for the vendor’s financial insolvency.  This discussion must end with a clear quantitative definition of insolvency.  This could be based on a financial ratio, revenues, sequential quarterly financial trends, liquidity, line of credit usage, or other triggers.  The worst triggers are Chapter 11 or 7 (especially 7) filings.  The reason is that once the company goes into bankruptcy procedures, your ability to obtain concessions for moving work to another vendor is limited.  Of course, just because a company triggers the clause, it doesn’t mean you need to terminate.  However, the financial health of your vendors results in sound operational results and reduced risk is easier to live with.  Sticking with financial failures out of loyalty to them creates unnecessary risk.  You have to fervently believe the company will turn the corner in a reasonable period of time.

Once failure has occurred or has been predicted, vendor managers must act quickly.

• Decide Internally Your Next Steps - Meet with internal customers, executives, and stakeholders.  Present the information, discuss the risks, and decide on next steps.  Do not let internal politics interfere with taking action.
• Failure Doesn’t Require Separation - All companies have bad quarters, years, or cycles.  Misery begets misery, as they say.  However, remember that termination is your last option. Vendors can turn the corner.  They can be purchased by their competitors or other investors.  With that said, during times of financial difficulty, expect the vendor to reduce administrative costs, cut investments, and not work as hard to retain staff.  The results could be delayed implementations, lower service levels due to lower morale and turnover, and possible technology glitches.  While service level credits will reduce the costs of poorly performing vendors’ services, they don’t fully offset the impact to your company or your customers.
• Meet with the Vendor (Frequently) - Meet with the vendor immediately and discuss the situation.  Seek additional information and ask the vendor’s CEO and CFO to participate in the meeting.  Understand what the vendor’s perspective is and ask them for their “Get Healthy” plan.  Review the plan.  Ask questions.  Draw your own conclusions and take next steps.  Remember, the actions you take, particularly if you’re a large client of the vendor, could complicate the vendor’s ability to manage operations, financial relationships, and people.  Coordinate efforts, but be deliberate.
• Plan B - In most large environments, a multi-vendor strategy provides clear alternatives to the financially struggling vendor.  Even in smaller environments, it pays to have a secondary vendor standing in the wings.  This is when parallel negotiations that end with a single winner help - because the loser has an almost fully negotiated contract that can be rapidly finalized.
• Termination - Have your bases covered.  Read our article on terminating an outsourcing relationship here.

Have you walked down lovers’ lane to discover financial instability rocking the foundation of your relationship?  How did you handle it?  Leave a comment and share your thoughts with others.

Good Vendor Managers: A Scarce Commodity

Earlier this week we posted an article describing vendor management job descriptions.  Yesterday day, Tim Minaham’s article on the Supply Management Talent Crunch led us to reflect on the “talent crunch” also facing vendor management.  Let’s face it - good vendor managers are hard to find.  Why?

• The positions require deep operations experience.
• The positions require great relationship-building and alignment-building skills.
• Most vendor manager positions are individual contributor roles, even though they manage operations of hundreds or thousands of FTEs.
• Vendor management positions are typically paid less than their peers managing similar internal operations.
• Vendor management positions require great focus on details: metrics, processes, and contracts.
• Vendor managers must be big picture thinkers with moderate strategic thinking skills.
• Vendor managers rarely have clear career paths.

Sounds like a tough job, right?  It is.

That’s why most vendor managers lack all the skills necessary to perform their jobs exceptionally well.  More importantly, there are few training courses available to them.  Organizations like IAOP sometimes appear to be more focused on developing vendor and advisor sales channels than developing the skills of vendor managers.  The COPC offers good courses, but they aren’t hands-on.  Companies like ICN offer negotiation, selection, and contract courses, but they are tuned for IT procurement/vendor management teams.  All these organizations lack training in the operations or technology that vendors managers typically manage.

Simply put, vendor managers must be developed by building performance management processes that guide activities and gradually increasing the responsibility of vendor managers.   Standardized vendor management processes result in regular, predictable performance.  Increasing responsibilities of vendor managers allows vendor managers to build experience with more complex issues - experience that vendor managers can leverage with delving into root cause analyses, relationship development, and negotiations.

If you lack an experienced vendor manager to develop our processes and resources, it is usually better to hire an external resource or hire an advisory firm tasked with developing vendor management processes, templates, and stakeholders.  Forward thinking executives hire these resources before or during vendor selection, which gives them a leader for transition management and the time to develop the necessary processes in advance of implementation.

Do you have a methodology for hiring or developing vendor managers?  Share our thoughts!

Vendors or Partners?

Phil Fersht, AMR’s outsourcing guru, opened an interesting can of worms today with his blog entry, Is your outsourcing vendor really your partner?

There’s a good conversation, with everyone agreeing that a good relationship is essential, but some divergence over the motives of clients and vendors (oops, guess what our opinion is?).

The thread of comments is definitely worth a read - and be sure to contribute your opinion.

When Roads Are Rocky: Dispute Resolution in Outsourcing Relationships

The valley of despair in an outsourcing relationship is when vendor managers consult with their legal counsels.  Disputes that go “contractual” (the vendor management version of “nuclear”) can irreparably damage a relationship. Your job as a vendor manager or vendor account manager is to ensure the client-vendor relationship never sours.  However, what do you do when it does?

Today, we take a deeper look at dispute resolution.

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Impact of Foreign Currency Exchange Rates on Outsourcing

One of the most challenging aspect most outsourcing relationships are now facing is the impact of the declining value of the US dollar in the face of the growing foreign economies in India and the Philippines. When the US economy was stable with gradual growth, the impact of foreign exchange rates was manageable. However, with divergent directions, many vendors are faced with significant financial challenges - and they aren’t hesitating from discussing the materiality with their clients.

Most US clients have not budgeted for the level of increases they are now experiencing. Furthermore, the financial business cases associated with offshore labor can be shattered by dramatic price increases. Even if higher rates do reflect savings in comparison to US domestic rates, the multiple is no longer as advantageous…and with no end in sight, it is unlikely that US buyers are going to experience 1:6 savings again. 1:2 or 1:3 savings simply isn’t as appealing when one calculates the high cost of telecommunications, vendor management, and the risk a company assumes by outsourcing (which could cost millions to transition).

Most offshore vendors with experienced financial teams have deep experience in currency hedging, but few vendor managers do. Vendor managers should consult their treasury teams to seek a fast education on the available options. We aren’t financial advisors, don’t wish to offer you financial advice, and don’t make any recommendations. Get advice from the experts.

Keep in mind that most vendors do protect themselves from currency fluctuations. Consequently, don’t necessarily allow your prices float based on indices. Everything is negotiable, but also remember that your vendor will provide lower service if they are not profitable. Vendors track project profitability on a weekly basis and over the entire multi-year contract term. Remaining a strategic client means that your vendor must be profitable.

One element that all outsourcing executives should keep in mind is that labor arbitrage is a fleeting opportunity. Outsourcing should provide your company with significantly improved capabilities and performance. If you’re just outsourcing for cheaper labor, you are truly missing out on the greatest opportunity that outsourcing provides.

How do you manage currency risk with your vendors? Leave a note below or send us one.