• Time and resources to be expended in a new vendor selection process
• Any mandatory close-out costs dictated in the current contract
• Negotiate with existing vendors
• Review contract
No gain
No recompete
• Discuss pricing discounts
and favorable terms
Economic
Y
analysis
• Expected value
of recompete
Solely
Evaluate
Select vendor/
High gain
Recompete
N
price?
vendors
recompete
• Includes
• New or revised
existing and
contract with
new providers
selected vendor
Exhibit 16.5
Vendor Recompete Decision Tree
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• Initial upfront costs that must be incurred with the new vendor
• Internal resources lost to managing and implementing the transition
• Any probable business disruption during the transition
• Additional internal costs that must be incurred to achieve effectiveness with the vendor ’s service or product (e.g., management time, training) Even with significant gains from switching vendors, the costs can often heavily outweigh the benefits. Vendors are very aware of these switching costs, and these costs are precisely the reason they are often able to increase prices for current customers while offering “great deals” to new customers.
This switching cost only further emphasizes the importance of properly establishing contractual obligations and measuring vendors, covered previously in this chapter. The vendor manager should understand vendor relationships that entail high switching costs and those relatively easy to switch and aggressively manage the inclusion of tight performance metrics and severabil-ity in the contracts of the vendors with the highest switching costs.
If the economic analysis shows that the benefits still greatly outweigh the costs, a recompete should proceed to the next step. If the reason for the recompete is based purely on pricing advantages, a simplified form of the analysis shown to the vendor usually results in a price concession. If the reason for the recompete is more than price or the current vendor will not budge on price, the recompete should proceed using the standard vendor selection process detailed later in this chapter.
The length of the contract up for recompete should be based on the potential discounts available from vendors in exchange for a guaranteed term.
For products or services that are rapidly changing and are rapidly coming down the cost curve (e.g., telecommunications services), the contracts should be no longer than a year. The savings of a new contract usually more than compensate for the lost term discounts on the original contract. For vendors that are difficult or unlikely to change, longer term contracts with heav y discounting are more appropriate.
Managing Troubled Vendors
Because of the wide variety of vendors used by a given professional services firm, inevitably, one or more of the vendors will experience financial or execution difficulties. The forward-looking vendor manager usually has ample warning of these troubles, particularly if he or she is participating in the informal forums, alternative information gathering, and vendor measurement activities discussed in this chapter. In these cases, it is crucial for the vendor manager to aggressively protect the firm’s interests by ensuring that adequate
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coverage for the vendor product or service is available and that the company’s financial exposure to the vendor is minimized or eliminated.
For well-established, competitive vendor marketplaces, ensuring adequate coverage in the case of vendor failure should be a relatively straightforward process of assessing competitive offerings and estimating the associated switching costs. For vendors providing highly specialized niche products or services, the vendor manager may have to conduct additional research to find alternative products, approaches, or workarounds. Often, the effort of conducting this research can be shared among several customers who coordinate through the informal information-sharing groups.
The financial exposure to a vendor can come from a variety of sources.
Prepaid or partially paid orders for equipment or products, prepaid or currently due maintenance fees, or other contractually obligated sums are common instances. We have seen many companies victimized by vendors that file bankruptcy while significant receivables have been paid by customers in advance of product or service delivery. Not only is delivery of the product delayed, but the monies spent to acquire the product are usually lost forever.
The vendor manager should work with the CFO, finance department, or firm senior management to minimize the risks of lost capital and work with the vendor to ensure that contractually obligated amounts due result in actual services received by the client. In extreme cases, the company must halt payment to the vendor and file a lawsuit to line up for restitution when the vendor refuses to refund for services not performed. Many times, the filing of the lawsuit will provide leverage—the vendor often cannot raise money or proceed with any restructuring until the suit is settled, which provides motivation for the vendor to step to the negotiating table.
In one client situation, a worried vendor manager consulted us about the quarterly maintenance fee due to a product vendor. While not concerned with the stability of the product, which was operating properly, the manager was worried that additional money invested in maintenance fees would be lost if the vendor continued to struggle. Careful research indicated that the vendor was indeed in serious trouble, and the client delayed the $100,000
maintenance payment based on various vendor contract breaches. One
month later, the vendor filed bankruptcy, leaving no hope of additional product development or support. The impact of $100,000 spent for services that would never be delivered would have been devastating for the financial position of this particular client.
In every case, the vendor manager should ensure that the firm senior managers are fully informed of the company’s operational risk and financial exposure because of troubled vendors. The senior management team can be instrumental in helping reduce the risk and can help the vendor manager manage the advance planning and alternative brainstorming needed to minimize the potential risks.
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Vendor Selection
This section outlines the process for selection of major outside service and product providers and the subsequent management of the vendors. The list of external vendors used by even a small firm is often lengthy. Vendors provide products and services across a wide variety of categories, as outlined in Exhibit 16.1. Within a category, multiple vendors may be used by a larger professional services firm.
The selection approach defined here is an abbreviated version of a full-f ledged, comprehensive methodology and should be adequate for most professional services firm vendor selection processes. For an overview of the exhaustive selection process for a large-scale vendor, particularly for IT, we suggest reading The Executive’s Guide to Information Technology (Wiley, 2003). Chapter 10 covers the selection process topic in detail. As with all other frameworks described in this book, common sense should prevail, and the applicable portions of the approach should be applied to the specific situation at hand.
The successful selection of vendors plays a critical part in determining the overall success of the professional services firm and, as important, the ease with which the firm achieves success. Successful vendor selections can be complex and lengthy processes that require the collection and analysis of significant amounts of information, particularly for telecommunications and systems vendors. Well-thought-out vendor choices and solid vendors who be-have as partners can ease the work of the vendor manager and the firm internal and professional staff considerably. Conversely, poor vendor selection can hamstring the organization with constant firefighting, failed initiatives, and angry staff and customers. Because outside vendors are generally a large source of expenditure for the professional services firm, the vendor manager cannot afford to ignore their proper selection and management.
Vendor interests and incentives, unfortunately, are not always precisely aligned with those of the vendor manager. While client satisfaction is a part of the equation for vendors, so are other factors such as product advancement, profitability, sales commission, quarterly revenue, and market penetration. A vendor salesperson’s natural role is that of an advocate for his or her product or service. This means that to be most productive for the firm, the vendor manager must supervise and actively manage the delivery of services and products on an ongoing basis to ensure that vendor delivery and execution are consistent with the expectations and goals of the organization.
Picking the vendors on which to rely can be a risky proposition. The selection process can go awry, wasting significant dollars, disrupting the business, and ending careers for vendor managers.
In spite of the criticality and risk associated with vendor selection, experience has shown that vendor managers are at a significant disadvantage in the vendor process, particularly vendor selection. A vendor manager may
Purchasing, Procurement, Vendor, and Asset Management 407
manage a selection process for a specific service or product a handful of times in his or her career, whereas his or her counterparts on the vendor side are generally senior-level sales professionals who close multiple deals each year. This puts the vendor manager at a distinct disadvantage to the vendor, from an experience standpoint alone.
Compounding the issue is the fact that once a vendor selection is complete, it is generally difficult to undo. If it turns out that better, more appropriate vendors are available, often the sunk cost and previously committed contractual obligations prevent their being engaged. Thus, the opportunity to replace a vendor may appear only once every few years, at best. This means that vendor selection can be a one-way street with very few turning off points and that vendor selection and management are a critical part of the successful vendor manager ’s toolkit.