Keeping track of bids, vendor performance, previous contract terms, alternative providers and technology differences was taking too much time for Bernard "Bud" Mathaisel as he settled in as CIO of electronics manufacturer Solectron in 1999.

Many of Solectron’s vendors were also customers, which just complicated the job politically. Seeking a more disciplined approach, Mathaisel partnered with Solectron’s assistant procurement officer, Jeff Dixon, to create a virtual vendor management office (VMO) staffed by IT and procurement employees. “The result is that the CIO could be a decision maker without having to run the process,” Mathaisel says. Now CIO of manufacturing outsourcer Achievo, Mathaisel brought that discipline with him.

Likewise, Dixon has brought it to Cisco Systems, where he is now director of enterprise software and outside services for IT vendor management services. “We take care of the trees and let the CIO focus on the forest,” Dixon says.

Dixon estimates a tenfold return in the staffing investments of a vendor management entity - from better deals through consolidated purchasing, and from avoiding the costs of straightening out piecemeal or short-term deals later. “That doesn’t even count the intangible benefits, such as having a flexible contract or reducing supplier risk,” Dixon adds. Following a similar approach, Accenture CIO Frank Modruson calculates that his company has experienced significant savings.

Creating a formal vendor management office is smart, says Marc Cecere, a VP at Forrester Research, yet many enterprises have not done so. A July 2006 Forrester survey showed that 47 percent had some sort of formal vendor management groups - but 90 percent of the rest had no intention of doing so. Such enterprises risk being at the mercy of savvier vendors, he warns.

Most enterprises underestimate the need to actively manage their vendors, concurs Judith Hurwitz, president of consultancy Hurwitz & Associates. Their IT staffs often lose the perspective needed to ensure they’re getting the best value from the relationship, she says, as the emotional connections nurtured by the vendor take hold. “That’s why the vendors’ salespeople are paid so much,” she notes.

Why Bother With a VMO?

With a vendor management office, your goal should not be to create a firewall between IT and the vendor, using a procurement group as a proxy, but to be smart and consistent within the enterprise about managing multiple aspects of any vendor relationship. That’s why a formalised approach that combines IT, procurement and legal people makes sense, says Joe Pucciarelli, program director for technology financing and management strategies at IDC (a sister company to CIO’s publisher).

At many enterprises, the CIO has de facto responsibility for managing IT vendors, but the day-to-day reality is that individual departments, technology platform owners and project offices manage vendors for their local needs, perhaps tapping into corporate procurement and legal staff for some of the tactical contracts and pricing analysis. That can work in smaller companies with a small number of vendors, where the CIO or a few IT execs can keep the information in their heads, Cecere says.

CIO Dan Demeter doesn’t want a vendor management organization outside the CIO’s domain at talent management firm Korn/Ferry International. “They tend to treat IT sourcing as they do buying toilet paper,” focusing on price and not understanding the underlying technology issues that affect IT’s ability to serve business needs, he says. “If you give [vendor management] away, you really take away a lot of the control, not just over prices and contract terms but over the relationship and support.”

But Demeter says that CIOs of large organisations need vendor management because of their scale. “It’s essential because of all the technical details,” he says, citing his previous experience at Citibank.

The changing nature of technology procurement - from hardware and packaged software to provisioning of infrastructure, software and business processes as services - also supports the use of a more formal vendor management approach that crosses departmental boundaries, says Rob Watkins, CIO of food management company Compass Group, The Americas Division. “As you have more outsourcing providers that cross departments, there’s an opportunity to manage these relationships strategically,” he says.

Integrated Vendor Management

You don’t want to make IT vendor management only an IT function or only a separate corporate function, says Dan McNicholl, chief strategy officer for General Motors’ IT organisation. “You need to balance the competing goals, specialty skills and the broad relationship,” he says.

Among several ways to institute a formal vendor management organization, the most common choice is a virtual approach: Here, you assign procurement and legal staff to IT vendor management, and use IT “account managers” to coordinate all aspects of specific vendor relationships and IT “scouts” to assess technology and market trends that may change needs later.

With this arrangement, you maintain the typical client relationships with the vendor, such as having engineers work with vendor support staff. “The vendor management needs to be ingrained at all levels,” says GM’s McNicholl, and then coordinated. Although some CIOs worry that procurement staff only want to squeeze the last nickel from a vendor, Achievo’s Mathaisel believes they bring real value to the vendor management process. “You gain a rigor and a discipline that financial people naturally have,” he says.

It makes more sense to create a virtual office than to establish a VMO as its own department, Mathaisel says. For one thing, financial and legal staff can rotate through the virtual group as part of their career development while maintaining a career path in their departments, he notes. These staffers often end up learning new skills that help them move into compliance activities when they return to finance, Mathaisel says. IT staff often have the same concerns. But when it’s safe to take on vendor management roles, the IT staffers often find new, unexpected opportunities, he says.

Not every vendor or deal gets the attention of a vendor management office—nor should it, says Gary Plotkin, CIO of The Hartford’s financial services property and casualty division. The goal is not to build a bureaucracy but to devote management resources to those relationships that have the most impact or potential impact on enterprise strategy, he says.

At The Hartford, Plotkin has a threshold of several hundred thousand dollars to determine what vendor relationships are managed through the formal vendor management process. There’s good reason to set thresholds of spend, says Accenture’s Modruson: “The rigor costs money, so you want to be proportional to the spend.”

The Hartford assigns an IT manager to each vendor that surpasses the threshold. “That’s the go-to person,” Plotkin says. Some vendors whose business volume is very large get a senior vendor relationship manager, such as Plotkin or one of his deputies, assigned to them as well. A CIO or CTO can work directly with a vendor’s CEO or CTO in a way that, say, a network operations manager can’t, so having multiple relationship levels is important, Plotkin says.

Achievo’s Mathaisel, GM’s McNicholl, Cisco’s Dixon, Compass’s Watkins and Accenture’s Modruson follow the same basic model as The Hartford’s Plotkin.

More Benefit to Come

Although enterprises that have a formal vendor management group clearly gain both monetary and strategic advantages, IDC’s Pucciarelli believes there’s still more value to be had - from better management tools. “The biggest procurement analysis infrastructure in IT is Excel,” he says. Some useful technologies in place for supply chain management are now being adopted for IT vendor management, Pucciarelli says. He expects more offerings in the next five years.

But technology can only support your people and process, he adds. “You need a team that steps back and understands the business value,” concurs consultant Hurwitz.

Why haven’t more enterprises formalised their vendor management practices? Some fear that top-down control will lead to excesses, such as confusing initial price savings with long-term value, says Forrester’s Cecere. And some companies are too small or have too few vendors to need more than a CIO’s focus on the issue, he says.

Others don’t see vendors as entities to manage strategically, says Achievo’s Mathaisel: “If you want a master/slave relationship with your vendor, this is a waste of time.” The remaining enterprises should reconsider their opposition to the idea of formal vendor management, he says; “it is very much worth the effort.”

Galen Gruman can be reached at [email protected]