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Mike Cooke Stephen Chen Guy Bising Perspective World-Class IT Vendor Management An Essential Capability for Maximizing Outsourcing Value
Mike CookeStephen ChenGuy Bising
Perspective
World-Class IT Vendor Management An Essential Capability for Maximizing Outsourcing Value
Contact Information
BeirutRamez [email protected]
ChicagoMike CookePartner +1-312-578-4639 [email protected] Syed [email protected]
Aveek [email protected]
Steven Waller Principal [email protected]
DallasStephen ChenPrincipal +1-214-746-6504 [email protected] Denton [email protected]
DCJordan [email protected]
Guy BisingSenior Associate +1-703-905-4019 [email protected]
Frankfurt Dr. Germar Schrö[email protected]
LondonRami [email protected] Oliver WrzesinskiPrincipal+44-20-7393-3581oliver.wrzesinski MelbourneMark [email protected]
MunichJohannes [email protected] Stephan Dresel [email protected]
RomeMatthew W. [email protected]
SydneyDavid [email protected]
Booz & Company
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EXECUTIVE SUMMARY
Ensuring success in IT outsourcing on a large scale requires a variety of capabilities, perhaps the most important of which is vendor management. Indeed, vendor management is being recognized as a capability that’s increasingly critical to the overall value a large IT department delivers.
A truly outstanding vendor management capability comprises five essential elements. First, the vendor management function needs to be imbued with a strong culture of collaboration, enabling it to work together with every stakeholder—not just vendors but also the internal business units and functions that depend on their services.
Next, the requisite policies, processes, and procedures must be defined, again in collaboration with all stakeholders, and then roles and responsibilities must be assigned. Third, an organizational model must be designed to ensure that the vendor management operation runs smoothly and is staffed at levels adequate to the task. Fourth, the right talent—the right people with the right attitudes to support the culture, and the skills to carry out their missions—must be in place. Finally, the vendor management function must include the support systems necessary for operational management, performance monitoring, and the general oversight of vendor activities.
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Despite more than 50 years of IT outsourcing as an integral function of large IT departments, many execu-tives, including IT executives them-selves, still struggle to realize its full potential. The initial attractions of IT outsourcing—quick cost savings due to labor arbitrage and economies of scale—have long been understood, but sustaining and improving on those savings over time remains a challenge. Moreover, the many fur-ther benefits of outsourcing—access to flexible, specialized, and scarce capabilities; geographic reach; and the ability for a retained IT organi-zation to act more strategically as commodity skills and capabilities are shed—rarely seem to materialize.
In our view, companies don’t suc-ceed in capturing outsourcing’s full potential primarily because they do not fully grasp the importance of a critical aspect of IT outsourcing: vendor management. Meanwhile, the very nature of vendor manage-ment has changed. Simply monitoring a few vendor contracts and setting penalties for poor performance is no longer adequate. The best IT shops understand that vendor management is heavily dependent on close collabo-ration with vendors, and also with internal units and functions. Only companies that have this understand-ing can fully realize the expected benefits of IT outsourcing.
WORKING WITH OUTSOURCERS
Simply monitoring a few vendor contracts and setting penalties for poor performance is no longer adequate.
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Source: Booz & Company analysis
Exhibit 1 IT Vendor Management Design Elements
OF THE PAST THREE YEARS WAS HELPFUL BUT NOT SUFFICIENT TO PUT THE U.S. AUTO INDUSTRY BACK ON TRACK.
60%
50%
40%
30%
20%
10%
Industry restructuring put the industry on a path to achieving
full return on invested capital
Industry restructuring helped to address fundamental weaknesses
but did not go far enough
Industry restructuring was a missed opportunity to address
fundamental structural weaknesses
37%35%
53% 52%
11%13%
OEMSupplier
Per
cent
age
of R
esp
ond
ents
Marketing
- The right culture can positively affect the ability to effectively and efficiently buy outsourced services- There is a reasonable balance of compliance and operational flexibility- A spirit of partnership exists between line organizations, support functions, and suppliers
ESSENTIAL ELEMENT VISION
Culture & Attitudes
- Procurement solutions are in place to support the VMO - VMO leverages the latest technology to improve servicesSupport Systems
- VMO is structured to support the business and key stakeholders - Individuals have clear accountability for top-priority VMO functions and services- Decision rights and responsibilities are clearly defined and documented
Organization
- Key roles are filled with staffers who make a good fit with required competencies- VMO team members are viewed as expert advisors- Employees are encouraged and given time to upgrade their skills, as necessary, by leveraging effective training programs
Talent
- Policies are designed to manage risk, maximize economies, and effectively support the business in securing services- Effective processes support early, proactive monitoring of key services and capabilities - Contract award and management processes are well defined and implemented- A dedicated IT VMO coordinates effective supplier evaluations and uses standard processes for establishing contracts and structuring service-level agreements (SLAs)- Adequate controls are in place to manage large contracts
Policies & Processes
Given the importance and sheer size of IT outsourcing in many IT organizations, the ability to assess, choose, negotiate with, and oversee relationships with a wide variety of outsourcing vendors is a critically important capability. We define a capability as a combination of interconnected people, knowledge, systems, tools, and processes that merits ongoing investment and development. Some world-class IT shops treat superior vendor management as a strategy for outperforming others in their class
and for enhancing the value they deliver to the businesses they serve. If a vendor management program is to become a truly world-class IT capability, it must be consciously designed, with a clear vision and an understanding of the desired culture. That vision and those cultural aspirations will then govern the requirements for the other elements of the capability: policies and processes, organization, people, and support systems (see Exhibit 1).
A CAPABILITY THAT MATTERS
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Creating a vendor management organization (VMO) is no longer simply a matter of establishing a set of oversight processes and monitoring tools to ensure compliance; IT outsourcing on a large scale is simply too complex. Building an effective vendor management capability now entails, first and foremost, defining and building a culture of collaboration with the company’s suppliers and internal stakeholders.
When defining the culture, it is best to begin with some general guidelines for how the organization approaches its mission and how it will behave. Some of these guidelines may be borrowed from the positive aspects of the current environment, while others will likely be developed anew, based on the best practices
of other companies. Implementing a combination of internal and external practices helps reduce the organizational anxiety that usually results when a new culture is perceived as being created from scratch.
When developing these guidelines, IT leaders need to determine how the new culture will affect major stakeholders and the rules of engagement among them. Therefore, thought should be given to how the company, individual business and functional units, and service providers must behave and engage with one another to embed the desired culture. This is equally true on the individual level, where those chosen to help create and embody the new culture must have the requisite collaborative attitudes and skills.
ENVISIONING THE CULTURE
IT leaders need to determine how the new culture will affect major stakeholders and the rules of engagement among them.
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A world-class IT vendor management capability requires detailed supporting policies, processes, and procedures. Again, avoiding an entirely greenfield approach is smart; while new policies and processes will need to be created, it is important to modify as many existing ones as possible to maintain continuity.
In designing the policies and processes, IT leadership should keep in mind that
vendor management is a capability that reaches beyond IT. A wide variety of departments and functions depend on successful relationships with outsourcers and thus should participate in the design of the policies and processes that affect them. This will enhance the robustness of the designs, provide greater clarity with respect to primary process responsibilities, and increase organizational buy-in. Moreover, if they have already been chosen, the vendors themselves should be included in the design process. Today, many service providers already have their own internal processes for facilitating IT vendor management. Including them in the design effort is one way a company can make the most of everything vendors have to offer.
Second, vendor management processes need to encompass the entire life cycle of the relationship, from identification to termination. The management processes involved include demand management, contract issue management, contract change management, transition management, and vendor performance management, although the best-run organizations understand that many other processes, such as risk management and knowledge management, also warrant consideration and attention. A framework that identifies, prioritizes, and assigns responsibility for six steps in the entire life cycle is a critical component of any design process (see Exhibit 2).
POLICIES, PROCESSES, AND PROCEDURES
Source: Booz & Company analysis
Exhibit 2 IT Vendor Management Scope of Responsibilities
OF THE PAST THREE YEARS WAS HELPFUL BUT NOT SUFFICIENT TO PUT THE U.S. AUTO INDUSTRY BACK ON TRACK.
60%
50%
40%
30%
20%
10%
Industry restructuring put the industry on a path to achieving
full return on invested capital
Industry restructuring helped to address fundamental weaknesses
but did not go far enough
Industry restructuring was a missed opportunity to address
fundamental structural weaknesses
37%35%
53% 52%
11%13%
OEMSupplier
Per
cent
age
of R
esp
ond
ents
Marketing
Departments
Provisioning Department
1 2 3 4 5 6
� � � �
Organization Requesting Vendor Services
� � � � � �
Vendor Management � � � � �
Legal Department � �
Primary responsibility
Service Provider Identification
Service Provider Selection &Evaluation
Contract Negotiations &Signature
Service Provider Implementation
Service Provider Ongoing Operations
Service ProviderTermination
ILLUSTRATIVE
VENDOR MANAGEMENT – SCOPE OF RESPONSIBILITIES
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Third, IT vendor management is not a one-way street. World-class IT vendor management organizations recognize that the best long-term performance comes when the company is actively involved in improving the relationship. To that end, a crucial function of the performance management process involves measuring success in managing the vendor relationship, including educating the vendor on how to improve its relationship with the company. The implementation of clear, formal IT vendor management governance structures, related policies and processes, and tools for measuring performance will ensure
a more proactive management of delivery and a clearer view of contractual performance. The resulting transparency and management rigor will help identify risks and problems early, trigger the timely development of risk mitigation strategies, enable more effective enforcement of performance penalties and other contractual obligations, and improve the ability to structure win-win agreements that encourage the vendor to exceed expectations.
Finally, a world-class IT VMO needs to be both resilient and flexible. This means putting in place regular,
predictable processes as well as ad hoc processes that allow an organization to respond to the unpredictable (see Exhibit 3). Ad hoc processes may sound like an oxymoron, but they are based on a set of assumptions about a standard series of events that can usually be planned for and tested through use cases, even though the particulars may vary from one instance to the next. In short, ad hoc processes can still be designed, but they should be defined at a higher level than regular processes to allow for the flexibility they require.
Source: Booz & Company analysis
Exhibit 3 IT Vendor Management Must Incorporate Both Regular and Ad Hoc Processes
OF THE PAST THREE YEARS WAS HELPFUL BUT NOT SUFFICIENT TO PUT THE U.S. AUTO INDUSTRY BACK ON TRACK.
60%
50%
40%
30%
20%
10%
Industry restructuring put the industry on a path to achieving
full return on invested capital
Industry restructuring helped to address fundamental weaknesses
but did not go far enough
Industry restructuring was a missed opportunity to address
fundamental structural weaknesses
37%35%
53% 52%
11%13%
OEMSupplier
Per
cent
age
of R
esp
ond
ents
Marketing
Departments
Provisioning Department
- Predictable activities that are carried out on a repetitive basis (e.g., establishing SLAs)
- Activities that lend themselves to the use of process maps
- Deliverables that are consistent and lend themselves to the use of templates
- Timing is predictable, and activities can be planned (e.g., an SLA associated with a new contract)
1 2 3 4 5 6
� � � �
Organization Requesting Vendor Services
� � � � � �
Vendor Management � � � � �
Legal Department � �
Primary responsibility
Service Provider Identification
Service Provider Selection and Evaluation
Contract Negotiations &Signature
Service Provider Implementation
Service Provider On-going Operations
Service ProviderTermination
ILLUSTRATIVEVENDOR MANAGEMENT – SCOPE OF RESPONSIBILITIES
FEATURES OF PROCESSES UNDERTAKEN BY THE VENDOR MANAGEMENT FUNCTION
AD HOCREGULAR
Activities
Deliverables
Timing
EventExamples
- Service-level agreements
- Performance reporting
- Unpredictable activities that are carried out as they are required
- Activities that lend themselves to the use of guidelines and high-level process designs (since each time the activity is executed, the outcome is different)
- Deliverables that differ each time the process is executed and do not lend themselves to the use of templates
- Timing is unpredictable, and activities tend to be reactive in nature
- Performance audits
- Financial failure of supplier
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Short-term cost pressures have caused too many IT organizations to focus exclusively on what should be outsourced, and how quickly, while overlooking the need to put in place the requisite capabilities to manage the new delivery model going forward. IT vendor management demands a formal, structured organization of sufficient size and with the requisite functional capabilities and skills to effectively oversee vendor relationships while also supporting and promoting effective relationships with relevant internal organizations.
Formal, structured IT vendor management organizations with the requisite functional capabilities are commonly overlooked or underappreciated today by a great number of IT organizations. A typical
problem is that short-term cost pressure causes IT to focus on what should be outsourced and transitioning those services quickly, versus how the relationship and delivery model should be effectively managed going forward. Yet significant value can be derived by understanding how both the vendor and internal organizations can be managed together to promote a more effective relationship.
The most resilient and consistently successful IT VMOs are self-correcting, with the ability to manage vendor relationships for long-term value. That ability is embedded in the management processes, relationships, measurements, incentives, and beliefs of everyone involved. Such companies have discovered that the devil is in the details, and that “organizing to execute the vision” has truly become a competitive advantage.
In contrast, too many IT shops oversimplify the job of developing an appropriate vendor management organization design, often by working through the lens of a basic “people,
process, tools” framework. Our research has proven that the design of an effective IT vendor manage-ment organization involves four key dimensions:
Decisions and norms: • Decisions describe the underlying formal mechanics of how and by whom decisions are truly made; norms rep-resent the unwritten rules of “how we do things around here.”
Motivators and commitments: • Motivators are the objectives, incentives, and career alterna-tives available to employees in an organization. Commitments are the unwritten aspirations that drive and motivate people to strive for the organization and themselves.
Information and mind-sets: • Information describes how per-formance is measured, activities are coordinated, and knowledge is transferred, while mind-sets describe the deeply held beliefs that employees apply when processing information.
ORGANIZING FOR COLLABORATION
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An IT vendor management organiza-tion needs to have the right people in place and set them up for suc-cess. This involves formalizing and standardizing clear and differenti-ated IT vendor management roles and responsibilities across the entire organization—from IT to procure-ment to finance—to ensure clarity with respect to decision rights and avoid redundant efforts. Moreover, such a structure will allow staffers to specialize and thus to build deeper experiences and capabilities that can be used in future outsourcing and procurement initiatives.
At a more nuanced level, because they have the right people in the right roles, world-class IT VMOs can assure the entire organization that it is receiving the best service possible from its service providers.
Thus, roles heavy on relationship management require both a high IQ and a high EQ (emotional quotient). Such roles are best performed by people who know the company and how it operates, have credibility within the company, and can work well with others to drive the right solution, especially in stressful situations. And they need to be proficient at representing all sides in a debate: Sometimes they will have to argue the merits of a supplier’s case, sometimes the merits of IT’s case, and sometimes the merits of a business unit’s case. Individuals who meet all these requirements will tend to have the most seniority and gravitas.
Of course, there will always be plenty of positions in the IT vendor management organization for more junior employees. These roles represent a great opportunity for young, high-potential candidates to learn a key part of the business. Many companies see these roles as career progression steps and build them into rotational programs for future executives.
TALENT MANAGEMENT
Structure and networks: • Structure represents the formal organiza-tional model, including the neces-sary “lines and boxes.” Networks define the informal connections among individuals and groups that frequently determine how people communicate, make decisions, and obtain support.
Research also demonstrates that enter-prises typically fail in their efforts to create effective organizations because they begin with a full structural reorganization while neglecting the most powerful drivers of effective-ness: decision rights and information flow. Our work has shown that these dimensions are the most powerful in driving organizational effectiveness, although ultimately all four need to be addressed to ensure success.
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About the Authors
Mike Cooke is a partner with Booz & Company based in Chicago. He is the global leader of the firm’s world-class IT service offering and works across all major industries. He has deep experience dealing with boardroom-level strategic initiatives involving large-scale corporate transformations and restructurings.
Stephen Chen is a principal with Booz & Company based in Dallas. He works with leading health and financial services companies, focusing on information technology strategies, business transformation, and IT functional effectiveness.
Guy Bising is a senior associate with Booz & Company based in Washington. He works with health and engineered-products clients to develop and execute IT strategic sourcing and vendor management strategies.
The final component of a strong vendor management capability involves the identification and deployment of the tools and templates needed to support operational management, performance monitoring, and the general oversight of vendor activities. Effective use of these tools helps determine how vendors behave and perform, and promotes timely and clear communication.
As helpful as such tools and templates can be, they lose most of their impact if the work of the IT VMO is not supported with clear communication strategies or is not truly empowered to manage
the vendor relationships and to implement continuous improvement measures. This is especially true in the multi-vendor environments now found in many large organizations. Such arrangements are much more complex than single- or primary-source relationships. Only when the IT vendor management function has the power and responsibility to do its job properly will such tools and templates help it effectively navigate the turbulent waters of current IT outsourcing practice.
In conclusion, realizing the promised benefits and cost savings of IT outsourcing can be daunting, and capturing the long-term value of outsourcing often seems a monumental task. Nevertheless, IT outsourcing is and will remain a vital IT service delivery strategy. Having a well-established, robust, foundational IT vendor management capability is essential if your outsourcing efforts are to reach their full potential.
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