In this chapter, we emphasize the importance of properly managing vendors and provide techniques for monitoring and assessing vendor performance. We cover the typical vendor types found in a professional services organization, how to set thresholds for prioritizing vendors that need scrutiny, and how to establish and assign the vendor management role within the firm.
We also discuss how to take control of vendor relationships, particularly inherited ones, how and when to recompete vendor contracts, and provide guidance to the vendor manager on working with vendors in turmoil or financial trouble. The topics of vendor management, purchasing and procurement 383
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practices, and asset management are linked in most firms, and are covered here as well.
Why This Topic Is Important
Almost without exception, services firms must rely on a variety of vendors to accomplish their objectives. Outside vendors provide many of the functions outlined in this book, including legal, banking, information technology, telecommunications, marketing, public relations, and real estate services, as well as more mundane items such as office supplies, catering, and facilities.
Because professional services providers such as lawyers, consultants, real estate agents, or doctors get little training in managing outside partners, including experience measuring service levels, selecting service providers, and negotiating pricing and terms, many professional services firms fall short in vendor management. This can be highly damaging to the firm, not only because of the reliance on vendors for such a wide variety of functions, but also because of the high expenditures on outside vendors. In aggregate, outside providers generally comprise the largest expenditure of a professional services firm besides labor costs. Failure to manage these expenditures and relationships suitably can be devastating to the firm.
A cooperative and amicable relationship is necessary to extract the most value out of vendor relationships, while applying regular management practices to ensure that the vendor is performing up to expectation and committed service levels. This can be challenging because of the periodic incongruent incentives of the firm and the vendor sales and delivery teams, and the wide variety of vendors that must be managed. Often, firms cover shortfalls in vendor performance by adding staff or other expenditures rather than confronting nonperforming vendors and instituting standard vendor management processes and procedures. Firm managers and staff must work to be taken seriously by vendors and to hold nonperformers accountable.
Vendors, like most businesses, pay the most attention to the customers who provide their largest revenue stream or the customers who are most vocal. Thus, smaller companies must learn to aggressively communicate their needs, requirements, and timelines to vendors and, for extremely critical vendors, to work together with other small customers to inf luence vendor policies and priorities. In addition, larger companies with significant vendor spending should ensure that the vendor is ref lecting their needs appropriately in product or service development priorities, rather than submitting to a vocal minority. While inf luencing vendor priorities is important for professional services firms, vendor managers should prioritize their vendor inf luence efforts based on their individual situations. Paying attention to finding the best labor lawyers available and ensuring their proper
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performance is much more critical to a staffing services firm than, for example, ensuring that the office supplies are always delivered on time. Most professional services firms with sizable spending on vendors should assign an individual (or group of individuals) to take responsibility for managing the vendor relationships, a role that we refer to throughout this chapter as the vendor manager.
Topics discussed in this chapter include:
• How to work effectively with vendors to ensure that the full value of investments in products and services of outside providers can be achieved
• How to build a mutually beneficial partnership with a vendor
• The importance of establishing the vendor management function
• How to take control of vendor relationships
• How to set thresholds for determining which vendors to focus on
• The distinction between types of vendor contracts
• Important steps in establishing new vendor relationships
• Methods for establishing and managing vendor performance and ser-
vice levels
• Gaining value and leverage by working with the vendor ’s other customers
• When and how to recompete vendor contracts
• Approaches for managing vendors experiencing business difficulties
• How and when to select vendors, including requests for proposal (RFPs) and contract negotiation
We have devoted specific chapters elsewhere in this book to the selection and management of particularly critical vendors for professional services firms, including providers of legal, information technology, real estate, and finance/accounting services.
Vendors as Partners
The most effective vendor relationships are the ones in which the vendor and customer build a close partnership. However, this relationship can be difficult to achieve. Vendors have a different set of incentives and priorities than the vendor manager, and finding ways to work to mutual benefit takes effort and willingness on both sides to accomplish. Most often, the proper tenor for the relationship is set during the selection or bidding process, which is covered at the end of this chapter. Exhibit 16.1 shows the typical vendor types engaged to provide products or services to professional services firms.
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Legal Services
Banking and financial services
Tax and audit services
Information technology hardware/software and services
Real estate
Marketing and public relations
Telecommunications
Office supplies
Printing
Staffing/recruiting
Cleaning services
Catering/food service
Exhibit 16.1
Categories of Vendors for
Professional Services Firms
There are a number of ways for professional services firms and vendors to work in partnership to mutual benefit. Working with clients closely, the vendor can provide a wide range of benefits to the customer, including:
• New services or product features customized for the customer
• Free product updates in advance of official product release
• Free off-the-record consultation or advice on minor matters
• Telegraphing major company announcements in advance of official notification, where appropriate
• Concessions on pricing for future product or service purchases
• Discounts on maintenance, training, or other ancillary services
• After-hours or emergency support or availability
• Information on undocumented product features or provision of special services reserved for best customers
• Access to vendor internal resources for consultation
• Introductions to other clients with similar requirements or needs for brainstorming or consultation on specific problems
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In return, the customer might provide:
• Breaks on minor delivery shortfalls by the vendor
• Continued business without any unnecessary or onerous recompetes
• Detailed feedback for improving the service or product
• Press releases and references for vendor ’s sales prospects
• Specific letters of recommendation for vendor ’s sales calls
• Potential sales leads for vendor with companies in same industry or contacts from other professional relationships
Typically, these items are provided to the opposite party on a best-efforts basis. The items proffered in a partnership are of relatively low cost to the partner providing them but can be of tremendous value to the other party.
This type of relationship will significantly increase the value of the contract without requiring arm’s length contract addendums whose cost and difficulty of enforcement often destroys much of the potential value and usefulness.
The longer the relationship exists, the higher the potential benefits for both parties. For the vendor, sales costs are virtually eliminated, and over time, the cost to serve generally declines due to experience effects, resulting in long-term gross margin improvement. For the customer, the vendor’s cost reductions are typically shared with the customer via pricing discounts, additional no-charge services, and higher service levels or speed. The customer ’s cost to manage the vendor also declines, and “learning curve” costs from new vendor entrants are eliminated. Finally, the customer benefits from a vendor whose staff understands the business in intimate detail and can provide customer-specific solutions.
An important benefit of participating in a close relationship with a vendor is the opportunity to inf luence the vendor ’s product or service development process. This is particularly true for vendors that provide a critical product to a professional services firm, such as a software application for tracking projects and time provided to a business consulting firm or a candidate background screening process for a staffing services firm. Successful vendors invest immense resources in developing their current and future products and services. Many product vendors have an income stream emanating from
maintenance contracts to devote to product enhancements and new features.
By partnering closely with vendors and providing input to the prioritization process for new feature or capability development, the client firm can leverage vendor research and development (R&D) investment amounts far in excess of the amounts it could dedicate to internal development. The client then steers the product direction to its ultimate benefit.
One software application vendor we worked with invited 25 key customers to their corporate headquarters twice a year for product development and
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demonstration sessions. The vendor product manager would create an inventory of all enhancement requests, interface suggestions, and functionality recommendations from the biannual two-day affair, and work with the internal development staff to incorporate as many of the ideas as were possible and appropriate. Although the software vendor had thousands of clients and an annual users’ conference, these 25 clients drove a disproportionate amount of software enhancements and greatly benefited from partnering with the vendor.