Effective vendor management requires more than monitoring service level agreements and keeping a watchful eye on things after the contract has been signed. Buyers can save themselves a lot of grief by examining certain criteria in advance that might not currently be part of their due diligence process.Many companies seem to be aware of the fact that they need to improve their vendor management processes. In the latest Forrester’s Forrsights Business Decision-Makers Survey, Q4 2010, 48% of the respondents indicated that they will expand their vendor management capabilities.
And 56% plan to have a special innovation council in place within the next 12 months. In most cases, this council will include internal employees and external suppliers and a strong role for the most strategic suppliers within the organization.
The Forrester report suggests a variety of things a vendor manager should to to guarantee a productive, cost-effective relationship with a provider:
- Examining the vendor’s financial stability
- Soliciting feedback from the vendor’s current and former customers
- Acquiring information on the vendor’s wins/losses
- Monitoring the vendor’s product strategy
- Understanding the vendor’s industry/geographic focus
- Gauging the supplier’s flexibility and willingness/ability to be a partner
Nearshore Americas discussed details of the report’s findings with Lutz Peichert, Forrester Research Vice President and Principal Analyst.
NSAM: What is the most important thing that customers should be watchful for when managing vendors?
Lutz Peichert: In general there are two things to observe: the delivery performance of the vendor and establishing a good relationship with the account manager. Delivery performance is being monitored anyway as part of the vendor management duties. And not only monitoring the performance to ensure “what we get is what we pay for,” but analyzing performance consistency and stability over time gives an indication of the vendor’s stability in the area we source. And a good relationship with the account manager or the account team will provide an information channel that can add a lot of insights when used in the right way. Through this channel a client may receive information about management moves and changes, product strategy changes, and other information.
NSAM: Do you recommended not using new vendors and only those with a track record?
LP: Not at all! For sure new vendors can’t provide a long-standing financial track record. But not using them would sacrifice any innovation, as new vendors fuel the market with innovative ideas and solutions. Financial stability in respect to the research I have published does not mean that we will not utilize “new kids on the block.” We will simply have a closer look at those vendors – i.e., the time between the financial analyses of those vendors would be shorter than the frequency in which we check “established” vendors. When Forrester supports clients in vendor selection activities we propose to ask for a three-year financial track record. But if there is a vendor in the market that is not in business for that period but the solution will help to better do business – we would take this into account when defining the risk mitigation strategy.
NSAM: How many customers should be consulted in order to get a good picture and understanding of the vendor?
LP: This can vary heavily. In most cases – for the large vendors – the professional network of the sourcing and vendor management (SVM) manager will provide sufficient information through regular meetings. Other than that most vendors provide “user groups” or “customer advisory boards” as well, enabling the SVM professional to get in touch with peer clients of those vendors. Having a good relationship with three to five other clients shall be enough if the other sources are not sufficient. But it is important that those clients are selected by the SVM professional – not by the vendor.
NSAM: How do clients find information on the vendor’s wins and losses?
LP: SVM professionals will need to tap into various sources. Press, Internet, or analyst firms will provide such information. A good relationship with the account team can be used as a source as well. And the relationships through customer advisory boards, user groups or other professional networks will help.
NSAM: Is it more important to ensure the vendor can provide the products needed by the client as opposed to understanding the product strategy?
LP: For me as a client it is most important that there is a stable product strategy in place for the goods and services I purchase as my ability to deliver relies on those solutions. If the vendor’s strategy changes, this may have a negative impact on his delivery performance for the products I use. And understanding and monitoring the product strategy will allow a client to discuss any contingency plans with the vendor early enough – if the vendor doesn’t automatically inform the client about upcoming changes.
NSAM: Should it be required that the provider advise the client well in advance of changes in its industry/geographic focus?
LP: Sure – in an ideal world, yes. But broadly forming strategic relationships is new to the market. When a real relationship is formed – all of those discussions may go away as there is a trust level between both parties. Or all of the mentioned information is provided by the vendor and openly discussed as part of the relationship. But until this level of trust is established, the SVM professional is the responsible person for vendor analysis. And it is his sole job to monitor and manage the external supply.
NSAM: What is reasonable to expect when it comes to supplier flexibility? A client could make too many changes or demands that the vendor is unable or unwilling to comply with.
LP: Yes – but as said in my research document – it is the holistic view on the vendor’s behavior. And professional SVM managers do know the line between “reasonable” change requests and a demand that will require an addendum to an existing contract or even new contract negotiations. The intent of this measure is not to ask the vendor for all we need for free. And I am not saying we want it all for free. Flexibility can mean as well that the vendor moves first and the client and the vendor will find a mutual agreement after solving the issue. Rather than the vendor asking for a contract before moving at all. The notion of all of this is a level of partnership that needs to be established. And a partnership requires investments from both sides.
It is important to mention that all of the above points have to be seen in a holistic approach. The main reason for performing those activities is to enable clients to get indications if something changes on the vendor side. So a single indicator may not tell a big story – but comparing it with other facts and analyzing the information in relationship will provide a holistic picture. And will enable the client to take actions before something happens. Or at least be warned to react fast if something happens.