Strategic IT Vendor Management Demands a Formal Structured Program

Transcription

1 G Strategic IT Vendor Management Demands a Formal Structured Program Published: 18 February 2015 Analyst(s): Christopher Ambrose Tactical and reactive approaches to vendor management cannot improve performance or mitigate risk. IT vendor management leaders must apply a strategic and structured approach in managing their IT vendor ecosystem to guarantee success. Key Challenges IT vendor management leaders are challenged to demonstrate the value of vendor management beyond incremental cost savings. IT vendor management leaders face difficulties when mitigating the aggressive, sometimes adversarial, and seemingly monopolistic power of their largest vendors. IT vendor management leaders face obstacles when attempting to transform transactional vendor engagements into strategic opportunities. Recommendations IT vendor management leaders must: Create a charter for strategic vendor management program in partnership with IT and the business, clearly defining its goals and objectives. Establish a strategic vendor governance model that clearly defines the roles and responsibilities of all parties IT, vendor management, strategic vendors and internal stakeholders. Develop clear criteria for classifying strategic vendors with an emphasis on expected "partnerlike" behaviors and rules of engagement between all parties. Define business-aligned performance metrics and methodologies for sharing dashboards and/or scorecards that align performance and risk data with enterprise goals and objectives. Table of Contents

2 Introduction...2 Analysis...3 Implementing a Strategic Vendor Management Program... 3 Define the Mission and Objectives for SVM...4 Develop the SVM Charter... 4 Create an SVM Governance Model...5 Define the SVM Organization... 5 Classify the Strategic Vendors... 5 Develop Success Metrics... 6 Managing a Vendor Relationship Strategically...6 Establish Effective Communication as a Foundation of Strategic Relationships... 6 Understand How Your Vendor Evaluates You as a Customer... 7 Use Balanced Scorecards to Evaluate Strategic Vendor Relationships...8 Motivating a Vendor to Become a Strategic Vendor...8 Case Study... 9 Energy Services Provider's View of Strategic Partnerships...9 Gartner Recommended Reading List of Figures Figure 1. SVM Implementation Steps...4 Introduction IT vendor management leaders are challenged with transforming transactional vendor relationships and a historical event-driven approach to vendor management. Events like the signing of a large contract, or more often, the failure or poor performance of a vendor-led project often act as the trigger to apply IT vendor management at a tactical level. This reactive, transactional interaction with vendors can work with noncritical suppliers, but doesn't work with business-critical strategic vendors. These relationships require a strategic approach that changes the dialogue, the control and the focus to directly influence performance and compel the required outcomes. With a growing awareness and acceptance that vendors are a critical member in the IT supply chain or ecosystem, enterprises must seek to apply a disciplined, programmatic approach to strategic vendor management (SVM). 1 Although SVM is not a new concept, it's still an immature discipline for many IT organizations. 2 SVM formally establishes ongoing relationships with the vendors that are most critical to an IT operation, overseeing the full life cycle of those relationships from contracts, performance and financial management, to operational, geographic and compliance risk. It requires disciplined communication Page 2 of 12 Gartner, Inc. G

3 and collaboration between the strategic vendor and client, with both intended to act as partners in creating mutually beneficial business results. An SVM program is intended to improve the quality of vendor interactions, drive innovation in vendor relationships, and align vendor delivery to business goals. It replaces inconsistent, nonstandard and ad hoc vendor management with a collaborative portfolio management approach. Analysis SVM starts with a fundamental acceptance that certain vendors are an integral component in the delivery of IT services and that they support or enable success of the business or mission. This acceptance is based on the understanding that IT and the business are heavily reliant on these vendors, and failure to proactively manage these relationships can lead to business disruption or business failure. However, it's not just a risk management issue; there is an opportunity cost of failing to leverage innovation from critical vendor relationships. 3 Performance, quality and viability all become issues that determine the ultimate success of the relationship and this oversight cannot successfully be performed on an ad hoc basis. Vendor reliance is exacerbated by the trend toward assigning fewer, larger IT vendors a greater portion of the IT service portfolio. While there may be fewer vendors to manage, aligning too much of a business's processes, or architecture of infrastructure with a small number of powerful vendors increases dependency, which increases risk. When viewed with a critical eye, it becomes apparent that those vendors that fall into the strategic category are often the ones that have the most influence over IT organizations. IT vendor management leaders must candidly analyze their level of dependence on strategic vendors, and instill processes and rules of engagement to improve their controls wherever possible. For example, many IT vendor managers lament the fact that their largest strategic vendors have multiple (and highly influential) internal contacts with the ability to direct work. This all too often leads to unanticipated costs and performance issues, ultimately contributing to a failure in optimizing vendor value. Implementing a Strategic Vendor Management Program IT vendor management leaders often begin to implement an SVM program in one of two ways: 1. Pick a single vendor and pilot an SVM program. 2. Apply the SVM program across the portfolio of IT strategic vendors. Either way, a set of steps should be followed in the prescribed order to establish this discipline. Figure 1 defines a six-step structured approach to the implementation of an SVM program. 4 Gartner, Inc. G Page 3 of 12

4 Figure 1. SVM Implementation Steps SVM = strategic vendor management Source: Gartner (February 2015) Define the Mission and Objectives for SVM The first step for IT vendor management leaders is to establish a set of goals for the program. This is accomplished by defining what is expected to be gained by implementing SVM. For some IT vendor management leaders, this could center on developing a more mature relationship model with strategic vendors. Some might be more focused on aggregating strategic vendor spend and performance data, while others could be looking to control spending and drive greater value from vendors. Regardless of the drivers behind establishing SVM, it must be made clear to all stakeholders and the vendors exactly what is intended to be accomplished and how success will be measured. Then, the initiative can be created for success, and achieving employee and vendor "buy in" becomes that much more achievable. (See "Establish an IT Vendor Management Mission to Avoid Conflict and Drive More Value From Vendors.") Develop the SVM Charter Subsequently the IT vendor management leader should create the SVM charter, which formally documents goals and objectives for the program, defining what is and what is not its responsibility. It includes key objectives and expected outcomes of vendor management, defines stakeholder's Page 4 of 12 Gartner, Inc. G

5 responsibilities, program and process requirements, program deliverables and the metrics that will prove its success. It takes into account which aspects of vendor relationships are most important to achieving business goals through IT, and addresses technical, commercial and financial components of vendor relationships. The charter lays the groundwork for a proactive and effective SVM program. (See "Toolkit: Establish a Vendor Management Mission and Charter.") Create an SVM Governance Model Governance is critical to successful SVM implementation. SVM introduces new engagement models with vendors and often disrupts the decision authority that's been "presumed" within existing organizational boundaries. For instance, procurement may believe that it owns the SVM relationship because it may already own the commercial relationship. However, it is the CIO or a business unit leader who has overall accountability for the vendor's performance and value, so should therefore have primary responsibility for relationship management. IT vendor management leaders must establish and communicate clear lines of authority between organizations, with an understanding that many people may likely interact with a strategic vendor, but only specific individuals will be delegated decision-making authority. (See "2014 Strategic Road Map for Vendor Management" and "Ill-Defined Authority Between Vendor Management and Procurement Creates Unrestrained Costs and Risks.") Define the SVM Organization Many IT vendor management leaders struggle with the right balance of centralized and decentralized decision making, as well as vendor management responsibilities. Some adopt a command and control model, operated centrally with limited flexibility or autonomy. Others operate in a different style, with business unit autonomy as the driver for IT acquisition decisions. Some are developing hybrid approaches based on their decision styles, focused on centrally developed and standard processes and principle, which allow for flexibility regionally or by business units. The key is for the IT vendor management leader to strike the right balance and align SVM responsibilities to ensure that all vendor management activities can be performed without the pressures or bias related to budget or operational responsibilities. The reason for this separation of duties is that the pressures of operational issues can often cloud the relationship, making it difficult to present a balanced and objective view of the vendor capabilities and performance. (See "Choosing the Right Organizational Structure for Vendor Management Is Crucial to Operational Success.") This can lead to unrealistic or missed expectations by either or both parties. Classify the Strategic Vendors Relationships vary from tactical to strategic, so management attention and technique should not be identical in all cases. IT vendor management leaders must be careful to distinguish between the intent of various vendor relationships. IT organizations' relationships with vendors vary greatly, from the commodity and tactical, to the business-critical and strategic. Between these two ends of the vendor spectrum exist a wide range of vendors that are small, large, new and nascent, niche, or broadly leveraged. In addition, it must be recognized that within each IT category for software, hardware, telecom and services, vendors operate at various levels of maturity and competency, Gartner, Inc. G Page 5 of 12

6 with relationships established at differing levels within the buyer- and supplier-side organizations. This illuminates the need for segmenting vendors into specific classifications based on a set of predetermined criteria. The classification system within the IT category separates the strategic from the nonstrategic; and establishes a framework for applying different (yet appropriate) management controls, based on performance and risk characteristics and requirements. These are classified as tactical, emerging, legacy and strategic. Once successfully categorized, most strategic vendor management programs begin with a handful of truly critical suppliers and expand over time. It is highly recommended that the review process be revisited periodically, rather than being perceived as a one-time event, since the ecosystem is continually evolving. The process must also adapt to new strategic vendors that are added or "promoted" to strategic, ensuring they are onboarded from the start. (See "Classification of IT Vendors Yields Focused and Effective Performance Management.") Develop Success Metrics As business and technology integration increases, organizations look at the cost of maintaining, integrating and managing technology using various methods to measure value. To measure the business impact of a specific project, return on investment (ROI) is emerging as the most appropriate measure of impact. IT vendor management leaders must develop objective measures of value when evaluating the return on investment of their strategic vendor management programs. Cost savings or cost optimization are still important measures, but strategic vendor management programs look beyond cost and evaluate the more intangible and often difficult-to-quantify measures around innovation, collaboration, relationship value, and so forth. Metrics that prove vendor efficiencies should be combined with a view into improving vendor productivity, quality, overall performance and contribution to business success (as applicable). (See "Aligning Vendor Management Metrics to Business Value Proves Program ROI.") Managing a Vendor Relationship Strategically Relationship levels are defined by the degree of focus on joint accomplishment and shared risk. The key is in recognizing the extent to which the vendor is directly impactful to specific business objectives and establishing reasonable incentives to assure shared risk and reward. Some strategic vendor relationships may be elevated to the level of "partner." Emotionally, the concept of a partner holds greater importance, as its connotation is one of collaboration, shared objectives and commitment on both sides. As one CIO phrased it, "I have many suppliers and vendors, and a few trusted advisors, but I will only trust my operations to one partner." Establish Effective Communication as a Foundation of Strategic Relationships IT vendor management leaders should invest in strategic vendors as part of a long-range strategy, provided there is a mutually beneficial relationship. A strategic vendor should be motivated to sell you the solutions and services that align directly to your business strategy, provided that your success increases the likelihood of their success. However, one-sided expectations and communications can thwart these efforts easily. For example, some enterprises send ultimatums threatening to replace vendors unless they reduce costs by a target percentage. Although it can be worded in many different ways, this message is typically far more successful when used as an Page 6 of 12 Gartner, Inc. G

7 ethical notification out of courtesy and as a reasoned plea for cooperation to solve mutual economic challenges. As a leveraged threat, it risks defensive countermeasures, such as tighter controls to the "letter" and not the "spirit" of the contract. Threatened salespeople may respond by demonstrating control of their accounts, margins and revenue. The best responses from strategic vendors arise from customers providing a business case to the vendor that encourages investment in the customer's future success. Collaboration and open dialogue is what fosters strategic and partner-like relationships. Strategic partnering requires honesty, loyalty and generosity mutual respect is required for parties to work together and address their respective business goals without harming each other. Integrated performance targets, compensation that's tied to group as well as individual performance, camaraderie and recognition for team collaboration, all contribute to partnership behavior. For those accustomed to traditional crisis management or ad hoc based vendor management approaches, this can sound counter-intuitive, but the benefits of these relationships are worth the investment. Understand How Your Vendor Evaluates You as a Customer Most IT vendor management leaders that scorecard their vendors, fail to ask their vendors to provide a 360-degree review of them as a customer. While not commonly done, more IT vendor management leaders are providing their strategic vendors with a more formalized opportunity to discuss what works and doesn't work for them within the relationship. Vendors thereby have a neutral, formal communication channel to voice concerns about the relationship back to the customer, enabling correction of internal issues that may be impacting the vendor's ability to deliver (for example, demand management deficiencies). Critical to having this 360-degree conversation is the need to fundamentally understand what the vendor examines when evaluating a customer. There are four commercial metrics all vendors are concerned with. These metrics become much more critical, particularly the larger and more critical the contracts and relationships are with those strategic vendors. 1. Revenue The vendor has an estimate of the revenue to be driven out of your contract, and has built that into the business case well in advance of their contract negotiation. It may likely have changed over the course of a negotiation, but it's important to understand just how much revenue the vendor expects to receive monthly, quarterly, annually, and over the life of the contract. 2. Profit While revenue is always important, for many vendors "profit is king." You should understand what the profit margins typically are for a solution or service and whether your contract is achieving those margins for the vendor. (Software margins are significantly higher than services margins, in some cases by two or three times the services margins.) It's critical that we allow and help our strategic vendors meet their profit goals, assuming those goals are fair and in line with current market conditions. 3. Growth Every IT vendor is a growth company, and every account manager or sales executive has a growth target. Vendors will evaluate their prospects and customers based on not just what they earn from them today, but how they can expect to increase it in the future. Many organizations that have identified vendors as strategic are also actively engaged in Gartner, Inc. G Page 7 of 12

8 understanding how they can help that vendor grow within their company or enterprise, as well as in the market. Their view is that a successful vendor will be a more innovative and potentially accommodating vendor. 4. Predictability While all of the previous metrics are important, for some vendors and especially service providers predictability may at times be their most important commercial metric. These vendors operate most effectively when their work stream from customers can be forecast particularly when those forecasts often prove accurate. When demand is erratic and continually fluctuates, these vendors may exhibit inconsistencies in resourcing and delivery quality. It's important to periodically engage your strategic vendors in understanding how your deal and relationship are performing against these measures. Some might assume that the vendor will always claim it's not earning enough with your contract. Sometimes that may be true, but avoiding the conversation will only lead to speculation and ultimately distrust in the relationship. Use Balanced Scorecards to Evaluate Strategic Vendor Relationships Many IT vendor management leaders struggle to come up with effective balanced scorecards, so consequently, many vendor scorecards look more like report cards. The vendor and the client often dread the creation of these scorecards since they usually only address operational performance and cost. While these two items are very important, they aren't the only measure of a strategic relationship or of a critical vendor's performance. IT vendor management leaders should use a balanced scorecard approach and limit the number of vendors they monitor at this level to the most strategic. Beyond the typical scorecards, measures of cost and quality, metrics around innovation, collaboration and customer satisfaction should be included. Additional measures that address the levels of trust between both parties are also useful. These can provide a measure of intangible relationship benefits or relationship challenges. Scorecards should not be viewed as a conclusion to the performance and relationship management process. Too often, we are seeing organizations become dissatisfied with their scorecard process. It becomes an administrative task and then a burden. Organizations start to treat the scorecard as just another relic of a bureaucracy and begin to just "check the box" so the scorecard is complete. Many others simply rely on their vendors to "self-report," leaving the customer without objective insight into how a vendor relationship is performing. The scorecard should be treated as a relationship management and improvement tool that generates communication, looks for common opportunities, and ultimately creates that "win-win" relationship so many clients want, yet fail to achieve. (See "Assessing Your Outsourcing Relationship's Health.") Motivating a Vendor to Become a Strategic Vendor Most vendors would jump at the opportunity to be classified as "strategic;" however, not all vendors fully understand that this designation is actually so much more than a sales or marketing term. The best way to ensure vendor cooperation is for IT vendor management leaders to grab their attention through a better, more comprehensive understanding of your organization. This would include periodically communicating your business goals and strategies, and also opening a dialogue about how the vendor can help deliver against these goals. This should be accomplished in regular Page 8 of 12 Gartner, Inc. G

9 business reviews or specific vendor events on a more formal basis, then reinforced through regular interactions with the vendor's executives and leadership. Additionally, you will need to understand how the vendor views your organization as a customer. Are you considered strategic, or just another customer? Improved knowledge will be the first step in capturing vendor engagement, which will lead to the vendor offering continuous improvement and innovation. This improved knowledge will also help vendors to better manage their accounts, thus increasing attention on your deal. Once attention is focused, maintaining the vendor's interest occurs through a combination of reliable communication and rewards for "above and beyond" performance. IT vendor management leaders can ensure that participants are included on shortlists for request for proposals (RFPs) where appropriate functionality is established. It is important to note that this does not guarantee any business, but it ensures a seat at the RFP table. Additionally, by virtue of participating, there is also an increased likelihood that as point solutions or particular products are required, strategic vendors will get the business. Additional elements that can be included in a strategic vendor management program are strategic vendor days (that is, guaranteed IT management participation in vendor presentations periodically). Quarterly or annual meetings with the CIO or senior management and established escalation paths for problem resolution are also important. (Note: this can be a two-way street when internal politics are stymieing vendor participation in acquisitions.) Collaboration with strategic vendors is a key element to a successful program; it requires both parties to enter into, and operate, their relationship under a principle of collaboration. It's important that vendors understand what is required to become strategic and to remain strategic. Strategic doesn't necessarily mean "better" or "privileged" status, and this should be communicated among all vendors and stakeholders. However, it does increase expectations and obligations for all parties. Vendors often communicate among themselves, so inclusion on the strategic vendor list provides an opportunity to improve overall status, thus providing an "elite" qualifier to participants and a driver for nonparticipants to get onto the list. Finally, the implicit threat of removal from a strategic vendor management program (and all the accompanying benefits) provides an additional incentive to ensure best participation in the program. Case Study Energy Services Provider's View of Strategic Partnerships An energy provider CIO believes that vendors are critical to IT and to the business, so require a different model for management than traditional transactional approaches. The expectation is that the strategic partners do more than just deliver to their cost and quality metrics they are expected to take on added responsibility. With these strategic vendors labeled as "partners," there is an expectation that the energy company has access to the partner's R&D labs to understand the strategic product/solution/service plans of their partners. They want to become more than just a customer they want a true partnership. Gartner, Inc. G Page 9 of 12

10 This also required a change to how IT is viewed, moving from a delivery organization to a demand management organization; and one that owned the responsibility for delivering solutions whether enabled or supported through the use of strategic vendors or partners. They also took a more business-oriented approach, where the business was given a voice in contract decisions, and was included in the drafting of the contracts. The intent was to move away from multiple contracts with the same vendors to a single contract for everything a partner would deliver. The key to success was an effective model that provided a clear decision-making process between the business and IT, along with a new governance model. Additionally, any strategic partner arrangements were entered into jointly, inclusive of IT and the business, ensuring that the enterprise goals not just IT goals were being addressed. Decision making and communication in these relationships goes beyond IT, or the CIO, or even the business leaders it goes to the board level. This approach has standardized and centralized the management of strategic partnerships and leads to more in-depth discussions around how the partners can help the business, which go beyond discussions of just the commercial aspects of the relationship. Success isn't just measured on one side, it's measured in terms of the success of both the energy company and its partner. Acronym Key and Glossary Terms CIO chief information officer R&D RFP ROI SVM research and development request for proposal return on investment strategic vendor management Gartner Recommended Reading Some documents may not be available as part of your current Gartner subscription. "Comprehensive IT Vendor Management Framework Builds the Foundation for an Effective Program" "First 100 Days: Head of IT Vendor Management" "2014 Strategic Road Map for Vendor Management" "Use Sales Psychology to Develop Best Practices in Vendor Relationship Management" Page 10 of 12 Gartner, Inc. G

11 Evidence 1 On average, nearly 60% of IT budgets are spent on vendors for IT, hardware and services (see "IT Metrics: IT Spending and Staffing Report, 2013"). 2 As revealed in the 763 assessments carried out over September 2010 through June 2014, nearly 75% of those completing the assessment are at Level 1 or Level 2 maturity in Gartner ITScore for IT Vendor Management. Many of these organizations are launching or are in the early stages of implementation of their IT vendor management programs. 3 Over 380 Gartner reference interviews in North America for data center and end-user outsourcing Magic Quadrants in 2012 and 2013 indicated that after pricing, the second largest concern was innovation delivered by the external vendor. This 80% dissatisfaction level with innovation is a significant concern for IT organizations. 4 In the rolling 12-month period ending January 2015, Gartner analysts engaged in 135 interactions on the topic of strategic vendor management. Gartner, Inc. G Page 11 of 12

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