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vendor consolidation

When Vendor Consolidation is Necessary and How to Properly Implement It

Among the day-to-day activities, business advancing initiatives, and bleeding-edge technology decisions that enterprises must make when utilizing their external resourcing program, it’s not hard to find functions and organizations that require vendor consolidation.

Vendor consolidation (VC) outcomes are not narrowly confined in scope. The primary objective is to amalgamate the number of vendors that an enterprise utilizes in order to get the work done – essentially resulting in fewer bigger fish in a smaller pond.

By executing the same work across a smaller number of vendors, numerous benefits are expected, with the most common being cost reduction. Executing vendor consolidation is usually an initiative that has structure and predictability, with some vendors having a much higher chance than others at surviving within the enterprise.

Why is Vendor Consolidation Needed?

VC does not normally make it to the top of priority projects for the year. In fact, it often struggles to get funding through normal channels. Instead, it often becomes one of those self-funded projects that spring up from time to time and often for unclear reasons.

The purpose of vendor consolidation is often influenced by which function was the source of initiation. When it is initiated from the procurement or sourcing departments, which is quite common, it is usually a cost-savings play aligned to the functions that are primary guiding metrics. When it originates from legal or contract management, its focus is an administration simplification. When IT calls for it, it is usually an external resourcing process improvement or a desire to build deeper and wider relationships with the best vendors, whether or not they are already installed.

Vendor consolidation should never be the project itself and it shouldn’t be the originating business objective. Instead, there should be a much larger and more specific business priority defined within the enterprise for which vendor consolidation is a component of that goal.

A common priority is a reduction of costs, but other benefits can also be sought. For example, control of vendor risk, improved governance, or a means to advance technologies within the enterprise. Whatever the case may be, vendor consolidation should be considered a solution to business priorities and not the objective itself.

Achieving Buy-In for VC through Proper Execution 

When VC is its own project or initiative, a frequent problem is that not all functions are on board. Those recipients of external resourcing models in IT, for example, may object to the possibility of ‘losing’ their favorite vendor or someone they have invested time in. Meanwhile, procurement may be seeking savings from a smaller number of vendors who perhaps provide price concessions or volume discounts for the opportunity to pick up work from their competition.

Getting buy-in from managers that have become accustomed to the vendors that may be impacted by vendor consolidation is sometimes a challenge. There surely are consequences for elimination or consolidation of vendors, but properly planned and executed those risks can be mitigated.

Vendor consolidation on its own may not actually provide any benefit, or may even be on the wrong side of cost/benefit, unless it is abundantly clear which metrics need to be improved. That is why there should be an enterprise objective or a corporate goal in which VC can be implemented as part of the solution.

Such broad objectives are usually accompanied by a thorough business case, around which are defined metrics that exist today and are targeted for improvement. When positioned this way, it is far more likely that all functions will be on board and aligned with the process and outcomes of vendor consolidation.

After Vendors are Consolidated, What Comes Next?

The success of any sort of VC initiative should never be claimed unless there are proper controls in place, as this prevents a cyclical need for VC to reoccur.

These controls might involve more rigor in the process of new vendor evaluation and acceptance on vendor slates. It might also involve more upfront vetting of business requirements to ensure the best execution model is selected.

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The key is to implement controls that ensure the VC solution you have chosen sticks, yet still has the flexibility to have controlled change aligned to business evolution.

VC can be a highly effective initiative if properly positioned as part of a larger enterprise objective. It should focus on specific existing metrics that are targeted for improvement, as well as being planned, communicated, and executed in a way that is measured against those same metrics. Upon completion, just be aware that there may be new metrics to maintain and hopefully new controls to ensure sustainability.

Tim would like to thank Andy Dzierga, a General Electric (GE) veteran of 36 years, for his support in writing and editing this article. 

Tim Norton

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