Procurement teams have long focused on strategic sourcing as a key driver for reducing costs. Procurement outsourcing has lived up to its end of the engagement, as it has helped many companies achieve cost reductions and more beneficial terms compared to their previous contractual arrangements. However, procurement outsourcing often does not bring as many bottom-line benefits as it could, even at companies with well-documented successes. The biggest barrier to fully realizing the benefits of procurement outsourcing is improperly managing the relationship. Companies can get more value out of procurement outsourcing by placing more value on vendor management. This post provides a primer on vendor management and tips for implementing it at your organization.
Vendor management is a set of functions that provides insight into the overall performance of the procurement outsourcing service provider against contracted agreements and customer expectations. It encompasses a combination of both proactive and reactive activities that can be supported internally or via a third party. Examples of these activities include:
- Developing a communications mechanism between the vendor and the company
- Analyzing invoices
- Monitoring consumption of the service provider’s goods and services
- Tracking the quality of goods and services
- Monitoring contract performance
- Reviewing issues that come up and how they are resolved
- Understanding the internal costs of managing the service provider
- Monitoring the service provider’s financial health and the risks the service provider presents to the company
One of the key differentiators between companies that have negotiated sourcing savings vs. those that have successfully delivered them ongoing is having an effective vendor management program that addresses the points listed above. These functions should be done regularly – rather than by periodic audits or in response to specific problems – and the results should be shared among all stakeholders. Vendor management should provide regular, timely, and relevant feedback that enables the vendor to make adjustments that improve their performance and quality. The feedback is for product quality as well as for their business process and service quality.
Successful vendor management starts at the time of sourcing. Setting up a vendor management program and strategy and evaluating key courses of action requires direct participation from within the company. Many program components of running the program are transactional and task centric, and thus are good candidates to be handled through a shared service or with support from a third party. However, delivery quality measurements and requirements definition should remain with the business units. Beware of vendors that push back on a lot of reporting requests and metrics.
A procurement outsourcing service provider that values your long-term success will welcome a thoughtful vendor relationship program because it should help them improve their performance not only for you, but for their other clients. Vendor management should manage expectations for the service provider-client relationship and can be performed in a way that aligns the vendor and company in more of a partnership model.
Part II of this post presents more specific ideas on how to use a vendor management program to get more value from procurement outsourcing.