Vendor managers should have a good plan for the activities associated with vendor selection, including:
• How to plan and execute a reasonably rigorous vendor selection process
• An approach for generating target vendor lists for a given product or service
• How to issue an effective request for proposal (RFP)
• An understanding of the work required to complete due diligence on vendors and their products and services
• How to produce meaningful feedback from vendor reference checks
• Vendor negotiation techniques that ensure best pricing and service Overview of Methodology
Exhibit 16.6 shows an overview of the vendor selection methodology covered in this section. The methodology is intended to provide a reasonably detailed approach to the vendor selection process that will be applicable to most vendors required for a small-to-medium size professional services firm.
The process begins with the definition of scope for the product (or service) being acquired and proceeds through the identification of a team to support the selection process, the identification of potential vendors, the issuance of an RFP, the selection of vendor finalists, due diligence on the finalists, and final vendor pricing negotiations. Each of these steps is further detailed in the following section with a diagram highlighting the subtasks, required information, and outcome for each subtask.
Of critical importance throughout the selection process is to ensure that at all times the effort is being managed, organized, and driven by the vendor manager in charge. Top vendor sales professionals did not reach that status through passivity. Vendors are well practiced at the art of seducing the hap-less vendor manager and will take on as much of the work and own or drive
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• Define business rationale for product or service
• Determine clear scope of business activity to be supported
Define vendor scope
• Establish vendor evaluation team
• Inventory and priortize business requirements
• Generate preliminary cost/benefit model
• Identify data sources for vendor list
• Build inventory of potential vendors
• Determine primary and secondary screening criteria
Primary vendor screening
• Build screening evaluation framework
• Gather screening data for vendors
• Determine vendor approach options based on vendor data
• Produce 2–8 finalist vendors for RFP issue
• Build evaluation criteria
• Create vendor introduction and RFP documents
• Issue RFP to interested vendors
Request-for-proposals
• Conduct bidders conference
• Refine RFP and vendor list based on vendor input
• Assess RFP responses
• Select 2–4 finalists for vendor due diligence
• Update evaluation framework
• Conduct service or product due-diligence
• Conduct vendor demonstration or in-office visit, if
Vendor due diligence
appropriate
• Conduct company due diligence and reference checking
information, if necessary
Final vendor negotiation
• Negotiate pricing with vendors
• Negotiate terms and conditions, and contractural language
Exhibit 16.6
Vendor Selection Methodology Overview
as much of the effort as the manager lets them to remain in control of the process. A good way to ensure that the vendor manager remains in charge is the implementation of a code of ethics for purchasing. The topic is covered at the end of this chapter.
Second, the selection team is responsible for organizing a large amount of information being gathered from a variety of disparate sources. Keeping clear documentation on the raw data, analysis, and outcome of each step covered in this chapter helps explain to outside observers how the decision was reached, serves as organizational memory, and, most importantly, ensures that no steps are skipped and that the analysis is completed in a reasonably thorough fashion.
The third key to success is the analysis done by the team in preparation for the vendor sales call. This step should be completed before the first vendor is contacted. Vendors long ago perfected the courtship required to manage
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clients through the sales process, and if vendor managers have not done their homework in the form of the upfront analysis and scope work, they will be at the mercy of a sales process they neither control nor fully understand. The necessary objective analysis becomes lost in the feel-good haze of endless vendor dinner outings, rounds of golf, and vendor-led conference calls and visits. The result is, at best, a distorted, suboptimal outcome. We have observed dozens of vendor selections and have rarely seen success emerge from a vendor-driven process.
Define Vendor Scope
The vendor manager should first seek to clearly understand the full range of business activities to be supported by the service or product in question. The process for the vendor selection f lows entirely from this scope, making this a critical step in the overall analysis. The efforts during this step provide dividends later as the vendor due diligence is executed. The evaluation team will be able to ask clear, concise questions of the vendors and communicate the priorities for the firm appropriately.
The scope definition can also be achieved by defining what is not in scope.
For example, the scope might be defined as “all purchasing activities, not including receiving, payables, and forecasting” or “all purchasing of products, not including office supplies.” The scope definition should also draw clear distinctions between business processes or systems that are replaced or supported and affected but not changed as part of the selected vendor service or product.
In every case, a detailed document that defines the specific scope under consideration is the first step in the vendor selection process. The document should define the scope in as detailed a manner as necessary, with appropriate illustrative charts and diagrams.
The final scoping step is to get sign-off from firm senior management.
Any final ambiguities or inconsistencies in the scoping will be clarified under their scrutiny. Getting final scope sign-off may take several iterations of presentations and questions and answers.
Establish Evaluation Team
After the scope has been defined, the next task is to establish an evaluation team to provide expertise and effort to complete the selection process. The scope definition helps identify the individuals required for a successful assessment.
The team should include members from functions or departments who
will use the vendor product or service. This ensures that the expertise and the business unit- or business function-specific knowledge is incorporated into the evaluation process from the start. Further, early participation from end users of the product or service facilitates the most rapid acceptance of
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the vendor selection outcome. Finally, these participants tend to catch potential issues that may be missed by the vendor manager or that the vendor manager is unaware of.
The overall team size varies by company size, scope of business functions under consideration, and the importance of the decision being made. A small vendor selection team might consist of the vendor manager and a representative from the business unit or function affected, along with ad-hoc participation from other firm staff and professionals. A large-scale selection team assessing, for example, a new system implementation for a large organization might contain 5 to 10 full-time team members and as many as a dozen part-time members.
The most effective way of building team membership is through nominations from firm senior management. The list of potential team members should be interviewed by the vendor manager to determine if they have the requisite skills, knowledge, interest, and ability. Achieving the right skill mix, participation level, and environment for the team will have a strong impact on the overall effectiveness and results of the selection process. Even small-scope vendor selection efforts are large undertakings and require considerable sustained effort on the part of the team.
Inventory and Prioritize Business Requirements
One of the toughest realities of vendor selection is that the only way to truly understand whether the vendor product or service is a good match (and where its weak points are) is to first understand the in-scope business requirements at a painstaking level of detail. Unfortunately, the work of documenting scope and business requirements is difficult and tedious. However, it is an absolute prerequisite of a successful vendor selection, and it forms the bedrock foundation of a successful process. Without understanding the scope of services to be provided or required product functions, the team cannot possibly judge the level of vendor fit, what the shortcomings are, how they are dealt with, or the costs and benefits of the selection. A superficial, weak understanding of business requirements and scope is a primary reason for the failure of vendor selection initiatives.
Because starting the “courtship” process with vendors is infinitely more enjoyable than nonstop internal team meetings where requirements are white-boarded at excruciating levels of detail, this step is also the most commonly skipped. The smart vendor manager waits until the proper amount of homework has been done before making the first vendor contact.
Preliminary Vendor Screening
The goal of the vendor-screening step is to rapidly build a comprehensive list of potential vendors. These vendors form the pool from which the final
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