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5 Vendor Management Problems Causing Value Leakage
By Mike Thompson, Managing Consultant, Alsbridge, Inc.

Over time it is not uncommon for organizations to find themselves with a large number of service providers supporting their global IT requirements. Some of these providers are no doubt strategic to the business but for the most part, many perform routine, commodity type services that the enterprise has chosen to contract for rather than use internal resources.

For some firms a "large" number of vendors may be in the hundreds while for others twenty to thirty might be considered large. Whether the total number of suppliers supporting an enterprise number in the tens or in the hundreds, multi-vendor management is complex, time consuming and inherently very costly.

Quite often we find that our client organizations have developed a sizeable overhead organization and infrastructure to support many different contract types including service request and fulfillment processes, resource tracking and reporting requirements, pricing models and billing arrangements. Not to mention the amount of leadership time and energy that is expended trying to manage so many providers.

Alsbridge's experience supporting clients further demonstrates that as the number of vendors under contract within an organization increase, so does the probability that vendor management will "get out of hand" leading to inefficiencies and ineffectiveness across the vendor community and higher sourcing costs to the enterprise.

Poor Vendor Management Leads to Value Leakage

Problems associated with poorly managed supplier relationships go beyond operational inefficiencies and higher sourcing costs they put at risk the very business case that supported the decision to outsource services to a supplier in the first place.

Alsbridge research in 2011 confirmed that between 25% and 50% of the inherent value (i.e. savings, deferred costs, efficiencies, productivity improvement, etc...) in a sourcing initiative is lost due to poor vendor management. The top six reasons for value leakage related to poor vendor management include:

  • Lack of visibility to the client's business strategy across the supplier community
  • The provider's service delivery footprint has eroded over time and is no longer aligned with the client's service requirements
  • There is little or no competitive tension between providers
  • The client organization does not measure providers against Conformance to Quality (CTQ) metrics
  • There are few incentives for providers to improve performance levels over time
  • There is a lack of partnership for innovation across the different provider types and relationships

Perhaps not unexpectedly the research also showed that client organizations are most often responsible for poor vendor performance due to poor vendor management and misaligned metrics/incentives. So what are the signs that things are, or could be, spiraling out of control with respect to managing your vendor community?

Multi-Vendor Management Challenges

While there are many challenges to multi-vendor management, Alsbridge research reveals five very solid indicators that value leakage is occurring and suggest that a company should seriously consider undertaking an effort to rationalize the number and type of suppliers supporting the organization.

These five challenges include:

  1. Fragmentation - The fragmentation of supplier effort across multiple locations and limited sharing of best practices across the supplier community
  2. Misalignment - The misalignment of client sponsorship, resource priorities, services, delivery models and differences in processes and systems between countries and/or geographic regions within a country;
  3. Lack of vendor innovation - Lack of vendor innovation is due to ineffective SLAs or inconsistent mechanisms to hold providers accountable for their performance, vendor complacency and unwillingness to identify opportunities for innovation, and growing dissatisfaction with supplier capability, cost, quality or speed of delivery
  4. Lack of standardization - A lack of standardization in service delivery platforms and client business models across geographies and business units, proliferation of disparate systems dictating different strategies for supplier portfolio management and under investment in governance, process and technology
  5. Sub-optimization - Sub-optimization of key functions as a result of ambiguous roles and responsibilities, confusion regarding service line requirements, lack of clarity regarding investment decisions and the absence of a mandate to drive more effective spend through better multi-sourcing supplier management

Vendor rationalization is but one way to consolidate the effort an organization applies to vendor management. Consolidating vendor management effort allows an organization to better leverage its' supplier spend and improve service delivery outcomes regardless of contract type or supplier relationship. Such efforts also help to insure that the business case for outsourcing is realized; that operational alignment with suppliers across countries and geographic regions occurs and introduces metrics that help ensure suppliers conform to desired quality and cost measures.

In Conclusion

While many factors contribute to value leakage, experience suggests that there are a limited number of signs that vendor management has "gotten out of hand" within an organization. If a company recognizes one or more of these multi-vendor management challenges across their organization we would encourage them to consider undertaking an effort to consolidate or rationalize the type and number of suppliers under contract.

Look for my next article on this topic regarding what vendor management strategies really work and how supplier rationalization can help prevent value leakage and improve your ability to maximize the value in your outsourcing relationships. In that article I will identify common Conformance to Quality (CTQ) metrics and demonstrate how they can be used to assist in the Vendor Rationalization process.

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