Historically, vendor management teams built strong skill sets in acquiring services at low/competitive unit-cost prices and measuring vendor performance. But the world changed, and there is a growing misalignment between the purchasing and vendor management and the business units they serve. Businesses say the vendor management teams buy things cheaply but don’t buy the things that meet the business needs or deliver the outcomes the business wants. Businesses are asking for more value, and it’s not unusual for Everest Group’s vendor management and CPO clients to ask us for help in how they can better partner with their company’s business. This blog looks at how the current practices are ineffective in aligning with the business and how vendor management needs to change so it can deliver the value the business expects.
What Changed To Cause Misalignment?
The businesses appreciate, of course that purchasing and vendor management ensure a company’s money goes further than before because of their skill sets in driving low unit costs. They want that to continue, but they also want vendor management to address varied needs of the business and delivery the value the business needs. This change in business expectations and need for better alignment is aggravated by digital transformation.
Third-party services now get disrupted by the injection of technology in a digital business model that drives a different set of objectives. The objectives now focus on experience, not cost. And they operate at a different level of efficiency, often between 30%-300% more efficient than the old models. So, they point to a different objective and are dramatically cheaper. The traditional purchasing and vendor management is left behind, as they struggle to apply the “three bids and a buy” Request for Proposal methods and SLA-driven traditional vendor management. The misalignment is growing, and growing rapidly.
How To Resolve The Misalignment
Stakeholder Issues. There is another aspect to the structural misalignment between vendor management and the business: complications in understanding stakeholder needs.
A business has multiple stakeholders, which can be segmented into two categories: executives and power users. They work in the same organization, and the common believe is that the executives will tell the rest of the organization what to do.
Consequently, current vendor management practices spend too much time and put too much emphasis on executive relationships and executive meetings. Typically, they don’t pay enough attention to the middle managers and power users – the people using the vendor’s service day to day. Furthermore, governance vehicles typically don’t address this group of stakeholders. They are not in governance meetings and, if they are, they are not engaged in a way that brings problematic issues or needs to the surface.
Vendor management teams must pay attention to both stakeholder groups in the business. Each has a different view that vendor management needs to uncover so it can service the business deeply. Governance meetings intended to bring teams the two groups together tend to be poorly attended. Instead, vendor management needs to conduct individual interviews outside of governance meetings to unearth the true misalignment issues.
This issue of structural misalignment happens on both the business side as well as the vendor side.
There is a difference in the vendor’s business between its stakeholder groups: the executives and the vendor account teams (or “power deliverers”). Spending time and effort to learn the views of executives alone is not adequate. Both vendor stakeholder groups have different interests and see the world differently. Purchasing and vendor management needs to engage them independently as well as collectively.
Governance meetings typically are not effective enough in surfacing the vendor issues. Vendor management must find ways to investigate the vendor’s interests much more systematically and much more deeply than is possible in a regular set of meetings. Typically, governance mechanisms don’t work. They are poorly attended and not viewed as high value to the business. Because they don’t really meet the needs, they are poorly attended, which then further contributes to their lack of value.
However, the answer doesn’t appear to be enforcing discipline about people attending the meetings. Vendor management must find ways to engage the two vendor stakeholder groups in a more productive and systematic way that unearths where they are truly going in a much deeper set of engagements.
Questionnaires are typically ineffective. Interviews and individual meetings are far more effective, particularly if they have strong agendas that create a structure that allows people to uncover their needs or frustrations. Companies historically put way too much focus on customer satisfaction surveys. Vendors deploy this tool to try to gauge customer satisfaction. But it’s easy to manipulate these tools, and they tend to provide false positives. They may be worth doing, but companies should not rely on them too much. Instead, they should create a more systematic, thoughtful investigation to uncover the misalignment issues.
Objectives Have Changed. Another dimension in resolving the misalignment between vendor management and the business is recognizing that almost in every service being procured, digital transformation changes the game. It does so by changing the objectives. Digital transformation makes the objectives about results or an experience and dramatically automating or injecting technology to improve the experience.
Coincidentally, the technology also dramatically changes the cost to serve. Vendor management must change its mind-set to total-cost thinking rather than unit-cost thinking.
Vendors Are Disadvantaged
In resolving misalignment, vendor management also must recognize that the company’s vendors are disadvantaged. Digital transformation will cannibalize revenue flows to the vendors, and they will naturally resist this. Again, we can go back to the construct of the executives and the power users as evidence of misalignment. The vendor’s executives will articulate the need to cannibalize their work and indicate their interest in doing that to meet the client needs and expectations. But the account teams (the power deliverers) will resist that and delay and underdeliver on that journey because they want to maintain their revenue base and personal bonuses.
Again, vendor management must recognize that organizations don’t speak in one voice. For vendor management to make progress in aligning with the business, it must deal with the multiple voices, each having legitimate interests. It’s complicated, but it’s necessary to unpack that complication. Recognize there are different stakeholder interests in the business community as well as the vendor community and find ways to uncover their interests.
Vendor Management Transformation
This calls for a more sophisticated purchasing and vendor management, rather than doing away with it. Vendor management has specialized skills that they can apply across multiple service lines or multiple categories. Must they must make a step change up in their performance. In this new world, they must get closer to the business and, to do that, they must understand the complexities among the business stakeholders and the vendor stakeholders.
This capability won’t come without investment. Vendor management teams must become more sophisticated and must be equipped with better data and better tools. Just like the services they purchase and manage, vendor management teams now must upskill and go through a transformation process.
