Creating a truely level playing field for panels of suppliers

For supplier panels, I agree with the quote below … after all, it is the premise behind River Dynamics, a company I founded in 2000 and have since sold. However, the playing field needs to be a true two-dimensional field rather than a single-dimension price-point comparison. The purchaser needs to consider all of the elements of contract management and service delivery to determine which supplier is providing the greatest value (See the previous post for a graphical view of contract management and service delivery).

Line56.com: Service Spending Opportunity

Vendor Neutrality — The Key to Sustainable ProfitAchieving initial and ongoing cost reductions requires optimizing every requisition — specifying the services needed, distributing the requisition to the appropriate pre-qualified suppliers, and allowing them to bid competitively for the opportunity. Many enterprises today have semi-exclusive arrangements for some services that hamper their ability to attain the best services for the best price on every requisition.

In addition, the high-quality vendors welcome participating in a vendor-neutral marketplace since they gain substantial benefits when they compete on a level playing field — reduced sales expenses, lower bidding costs, faster payment with far fewer disputes, and increased revenue through receiving all requisitions.

Technorati Tags: vendor management, contract management, procurement, sourcing, panel

Trust, service delivery and contract management

I have been thinking recently about the relationship between trust, service delivery and contract management. These three dimensions are loosely linked over the short term but tightly linked over the long term. For example, in the early stages of a relationship, a purchasers level of trust in their supplier is built largely on the supplier’s reputation and conduct during the contracting negotiations. The supplier’s contract management and service delivery may be abyssmal, but the levels of trust may initially be high. However, as time goes on, the supplier’s ability to deliver the services and their skill at managing the contract have a growing impact on the level of trust in the relationship.

The following diagram is my attempt to capture the dimensions graphically.

The vertical axis shows the strength of the contract management, the horizontal axis shows the strength of the service delivery and the size of the circle is determined by the trust in the relationship.

The interesting thing about the above diagram is that each quadrant has a particular circle size associated with it. The circle in the bottom left quadrant has a tendency to be small while the circle in the top right quadrant has a tendency to be large. Each quadrant is like an environmental niche that best supports circles of a particular size; although it is possible for outsized or undersized circles to live in that quadrant for a period of time.

At the start of the relationship, the circle is typically large but it can exist in any quadrant. As the relationship progresses, one of two things happen: either the large circle moves into the top right quadrant (its natural environment) or the circle becomes smaller.

Making interorganisational relationships work

M@n@gement, 8:4, Pitsis, Josserand, Clegg and Kornberger

M@n@gement has a terrific series of article in their special edition: Making Interorganizational Relationships Work. Of particular note is an article by Knoppen and Cristeaanse entitled A Transformational Lens on Supply Chain Partnerships in which they assert that “The transformational lens contributes by facilitating a more complete picture of partnerships than would be achieved by considering each of its constituent bodies of literature in isolation, and sheds new light on the temporal aspect of partnerships.” The paper discusses the overlap between transactional cost analysis, organisational design and network literature in analysing supply chain partnerships.

An indictment of procurement departments

Supply Management.com - Getting in on the act

Trying to apply traditional procurement processes to a BPO deal is “like nailing jelly to a wall”, says Scott.He adds: “BPO deals depend on price, service and flexibility. [The] Procurement [department] is good at delivering price and service, but it’s not good at flexibility. [Emphasis mine]“

The reason for this lies in the period of negotiation before a deal is signed. “Flexibility can’t be written into a contract,” he explains. “It depends on developing a relationship and taking a partnership approach with a supplier.” This relationship develops during contract negotiation.

“If a formal procurement process is imposed, the relationship tends to develop at arm’s length.” By the end of the contract, he says, the outsourcer and the supplier barely know each other.

And this is important to the outsourcing firm. As Scott puts it: “You have to say, ‘My partner’s problem is my problem’.”

Technorati Tags: procurement, vendor management, contract management, outsourcing

Procurement outsourcing stats

Outsourcing lands in procurement - 3/16/2006 - Purchasing - CA6315354

According to research from the Everest Group in Dallas, which publishes an annual study on procurement outsourcing, the procurement outsourcing sector grew 30% in 2005 to reach $297 million. It is expected to exceed $380 million in 2006. Given that the current “spend base” is estimated to be about $25 billion (translating into a current market penetration of under 1%), there is a huge potential for growth in procurement outsourcing. According to Everest, “Procurement outsourcing has the potential to become the biggest ‘game changer’ in business process outsourcing.”

…

Interestingly, the manpower savings associated with procurement outsourcing really only scratches the surface of benefits. The real savings come from the specialized procurement expertise and the volume-generated leverage that procurement outsourcing providers can bring to the table, which lead to lower procurement costs. In fact, according to Everest Research Institute, one reason for the growing popularity of procurement outsourcing is that the strategy can achieve five times the savings multiples of other business process outsourcing domains, delivering a potential bottom-line savings of up to 2% of sales.

…

A shortlist of procurement outsourcing providers:

• Accenture
• Ariba
• IBM
• ICG Commerce
• Capgemini
• Prosero

Technorati Tags: vendor management, contract management, procurement, outsourcing

Are we focusing too much on procurement?

I remember a conversation I had as a teenager in which a friend and I were discussing life partners. She thought that, out of the billions of people on earth, we had only one true life partner and I thought that any one of several would do provided both partners put in the effort (perhaps our agendas were different).

Now, I find myself behaving like I’ve changed my position on this. I spend weeks/months arranging the ideal RFT, selecting the perfectly-matched supplier, placing my client in the strongest negotiating position, negotiating the agreement and, at the end, feel like I’ve set up a fairy tale relationship. Sometimes, the relationship works out, sometimes it does not.

Is this worthwhile effort? What if we spent less effort pre-contract and more effort post-contract? What if we quickly selected a supplier with the skills to do the job and then invested the effort we saved in the procurement process in ensuring the relationship works? Would the overall cost and quality of service be better?

Technorati Tags: vendor management, contract management, procurement, outsourcing

Cult Contract Management

A thought exercise: What if a contract manager used the same techniques as a cult leader to deliver the contracted outcomes?
A successful cult leader does the following:

1. Creation story: Writes a creation story that explains how the cult started, defines it’s ultimate aim and identifies obstacles in its path.
2. Creed: Lists the values that each of the believers will need to embody to overcome the obstacles.
3. Priesthood: Sets out the structure of the priesthood and believers who will work to achieve this goal.
4. Ritual: Define the rituals that each of the priests and believers will perform.
5. Icons and sacred texts: Draft the texts and the icons that will guide and rally the believers.

Translated for the contract manager, they should ask:

1. Creation story: What is the contract attempting to accomplish? How will success be defined? What obstacles need to be overcome?
2. Creed: What values or principles will the vendor and the business unit need to exhibit to overcome the obstacles e.g. cooperative approach, fairness, honesty, and transparency.
3. Priesthood: Who is responsible for managing the contract on both the vendor and client side. Has a resource been assigned to all of the end-to-end activities.
4. Ritual: How often will the parties need to get together to review performance under the contract? What will be discussed at these meetings? How will issues be escalated?
5. Icons and sacred texts: How is the contract structured? What performance metrics will be measured and how? What will the reports look like?

No successful cult has ever left its believers wondering what they need to be doing right now. The goal is continually reinforced. The correct actions needed to achieve that goal are always at the forefront of the beleiver’s mind. This is accomplished through very simple rules: Meet with the other believers regularly, always keep your focus on the goal, and when you’re lost, mediate on the icons and sacred texts (performance reports and contract).

Vendor Management Office at Blue Cross and Aflac

An article at CIO.com discusses starting a Vendor Management Office with reference to the VMOs at Blue Cross and Aflac, an insurance company.

Blue Cross built “a group that oversees RFPs, works with legal counsel on all contracts and maintains relationships with all vendors. Whereas the initial vendor management group dealt with invoices and back-end activity, the VMO now gets involved at the start of negotiations and helps IT managers make informed decisions on which vendor can offer the best deal and the best service for a particular project. BCBS’s VMO—led by a manager with financial and IT experience—also makes sure the vendors know about each other in order to foster healthy competition among them, which ultimately leads to better products, services and pricing for BCBS.

Aflac found “a VMO manager with an understanding of technology and experience in finance and legal issues… [S]omeone with this combination of skills would be best equipped to handle accounting and contract issues. After searching for several months, [they] hired Stephen Guth, a former programming analyst who had also earned a law degree and worked as senior manager of sales operations support for Dell.

“Over three years, Lester and Guth have put together a process in which IT managers create project briefs and submit some of them to the VMO, which in turn finds the best deals—in terms of price, quality, and vendor commitment and expertise—from vendors and negotiates IT contracts for Aflac. The project brief is generally a two-page description of an IT project, drawn up by the project sponsor, that includes a full explanation of the technology and business needs.

“Guth and his group, working with the project sponsor, then start looking for an appropriate vendor, basing the search on their own research, experience and vendor metrics. Once negotiations start with a vendor, after a complete RFP process, Guth uses his own standardized contracts rather than relying on those drawn up by the vendor. “When you set up a standardized practice [for vendor selection] with people who do it over and over again, you are going to get the best deals for your company,” says Lester.

“This centralized approach has formalized Aflac’s relationships with vendors that in the past were handled on an ad hoc basis. Before the VMO, vendors met with a wide variety of IT managers and even technology users. Aflac’s technology projects are now completely aligned with business initiatives, says Lester, because they are initiated by the business, not by technology vendors.