Are your vendors the Spice Girls or Arcadia?

For years now, I've listened to Yahoo Music but I've recently switched to Pandora because it does a better job of selecting the music I want to hear.

For those of you who don't know, Yahoo and Pandora are online radio stations that select music based on the listener’s preferences. Despite the similarities, they approach music selection (or sourcing) from different philosophical perspectives. A Yahoo user rates artists, songs and genres and, based on their selection, Yahoo plays music liked by other similar listeners. It is musical democracy in action. A Pandora user, on the other hand, selects artists and songs they like and Pandora plays music with similar attributes such as instrumentation and rhythm. It is musical genetics in action.

Recently, my curiosity got the better of me and I decided to determine if there was an identifiable difference in the music recommended by the two systems. I set up a new account in each service and, after selected the Dandy Warhols as the single piece of information the services knew about me, played 100 songs on each station. I then assessed the popularity of the songs in each playlist by comparing the lists to a sample of Billboard Charts.

Subjectively, I concluded that the range of music delivered by Yahoo was much broader than that delivered by Pandora and that there was a positive correlation between my subjective assessment of the inappropriateness of the Yahoo songs (for a Dandy Warhols fan) and the number of weeks the song appeared on the Billboard charts. For example, Spice Girls' Wannabe (26 weeks on Billboard) was recommended to me by Yahoo and not played at all on Pandora (thankfully). A Yahoo song was 7 times more likely to appear on a Billboard chart than a Pandora song.

So what does this have to do with sourcing?

Lately, I've been mulling over the sourcing “long tail” as described by Dave Stephens. Dave's contention is that, as the costs of interacting with a vendor falls, buyers will be able to engage exactly the right vendor for each task and that this will increase the number of vendors a company deals with. However, for this to happen, procurement departments must not only decrease the cost of interacting with the vendors, they must also improve the efficiency of identifying potential vendors.

Currently, most sourcing is done using a yahoo-type system: the firms with the biggest reputations get invited to tender for work even if their skill set is less relevant to the task than other smaller providers. This creates a tipping point in vendor sourcing where the market tends to consolidate around a few large players.

In order for Dave's long tail to work effectively, the smaller players need to be given a chance to play. If this is to occur, the method of sourcing suppliers needs to change from Yahoo sourcing to Pandora sourcing - that is, from reputation-driven sourcing to functionality-driven sourcing. If we continue to source based on reputation, buyers will continue to be driven to the most popular suppliers rather than to the most appropriate.

By the way, Election Day by Arcadia is exactly the type of song I want to hear when I'm in the mood for Dandy-Warhols-type music, and Pandora played it for me.

Technorati Tags: outsourcing, vendor management

Efficient RFT process v. contract management: Part 2

I've received quite a few requests for the spreadsheet shown in the post below. Many of the emails told stories of working in procurement departments with compulsory go-to-market policies. The following is from Steve Murphy talking about his experiences with a previous employer:

I have worked in procurement organizations that were audited to insure that large contracts were bid every other year and all contracts every three years. The annual audits did not analyze effectiveness just performance against policy. Some of the groups could have been categorized as under-resourced. Most were focused on the daily requisition queue and never looked up to see if there was a better way to get things done.

The audit policy described above is not uncommon, and actually makes a lot of sense from a cost reduction perspective. The spreadsheet model shows that, from a cost perspective, going to market (a relatively easy task) is nearly as effective as managing vendors well (a more difficult task). So if a company recognises that good vendor management is a weakness and doesn't want to invest in improving their vendor management skills then going to market regularly is a reasonable fallback option. But, as most of the emails noted, companies can do better than this one-size-fits-all approach to vendor management.

What the spreadsheet model does not show are the other benefits realisable from good long-term vendor partnerships. I'm talking here about vendors who know a client's business well and can recommend changes to the client's internal processes that reduce cost or who make changes to their own systems to meet an important client's specific needs. This is a win-win situation for both the vendor and the client and generally only occurs in long-standing relationships with a high degree of mutual trust.

Technorati Tags: outsourcing, vendor management

Quick and dirty financial model: Efficient RFT processes v. contract management: Part 1

I've noticed that companies with under-resourced procurement departments are often so overwhelmed with day-to-day vendor management issues that they roll-over contracts rather than go to market. I've decided to do a quick and dirty model showing the cost of not going to market.

The assumptions in the model below are that the procurement department manages $100 in annual spend. If they manage contracts poorly, their year-on-year costs will increase by 1% (Poor CM column). If they manage contracts well, initially their year on year costs will decrease by 4%, but over time, as they mature as a purchasing group, their year on year cost decreases will drop to 1% (Good CM column).

The "Poor CM" column shows the company will spend $1,281 over 12 years if they never go to market and do a poor job of managing their suppliers.

The "Good CM" column shows the company will spend $988 (23% savings over Poor CM) over 12 years if they never go to market but do a good job of managing their suppliers and achieving year on year cost reductions. A fiction, I know, but a convenient one for the purposes of the model.

The "Periodic RFT" column shows the company will spend $1,035 (19% savings over Poor CM) over 12 years if they go to market every three years and achieve the same reduction as the "Good CM" column, but do a poor job of managing their contracts and experience the same annual year on year increases as the "Poor CM" column.

This indicates that an under-resourced procurement department who cannot focus on contract management can achieve significant results simply through efficient and regular tendering.

Interestingly, if the procurement department goes to market every six years instead of every three years, the savings drop from 19% down to 14%.

Send me an email if you'd like a copy of the spreadsheet.

Technorati Tags: outsourcing, vendor management

Inflexible contracts and wobbly cafe tables

Earlier this week I watched a show called the New Inventors. Each week three crackpots (and I mean that in the nicest way) come on the show to demonstrate their inventions. Given the program is shown on the Australian public broadcasting network, it is not surprising that inventions with an agricultural or environmental application usually get up. But not this week.

This week the winning invention was a cafe table levelling mechanism that makes it so your cafe table always has four legs on the ground. The system works by connecting hydraulically each of the leg supports so that when one leg is raised by an uneven paving tile the other legs are automatically pushed down.

This is an ideal metaphor for flexible vendor management. When circumstances change throughout the life of a contract placing pressure on certain deliverables, the contract price or the other deliverables must be adjusted to account for the change. I'm reminded of Implementation tip #3 in an article by Pascal Van Cauwenberghe from Nayima on techniques for fixed-pricing agile software development projects. Pascal recommends only accepting change requests where another feature requiring equal or greater effort is removed from the requirements.

The table metaphor has also got me thinking about ways to capture hydraulic-like vendor management flexibility in a contractual situation. If it gels, I'll write more on that later.

Technorati Tags: outsourcing, vendor management

Outsourcing contracts: Not all fairness is equal

An interesting study in the Journal of Empirical Research on Human Research Ethics confirms a growing body of work showing that people care more about procedural fairness than distributive fairness.

How does this apply to vendor management? It may mean that a buyer or vendor who is getting less than they expected won't react provided they perceive as fair and equitable the process for distributing the rewards. Thus, an outsourcing relationship can remain strong even when circumstances begin to favour one party provided the mechanism for redressing imbalance is perceived as fair.

I've prepared two diagrams below that attempt to capture this relationship. The first diagram shows an outsourcing contract with a high degree of procedural fairness (clear, reasonable processes defining when and how to make changes to the relationship). The curved line shows the fluctuation in the distributive fairness (equity of effort to reward) as time passes. When the line moves closer to the top of the box representing procedural fairness (buyer line) it indicates that the buyer is putting in more effort for less reward than they expected at the outset. Note that in the diagram below the curved line does not cross either horizontal line which indicates that despite the fluctuating equity neither party reacts to the fluctuations.

The second diagram shows a relationship with a low degree of procedural fairness. Note that the inequity in the relationship fluctuates to the same extent as in the first diagram but results in two reactions from the buyer and one reactions from the vendor (a reaction occurs where the inequity crosses the top or the bottom of the procedural fairness box). In this relationship, the reduction in procedural fairness has resulted in reactions that would not have occurred in the above relationship. Note that reactions to inequity can occur in many forms ranging from litigation to underservicing.

The lesson for contract drafters is to spend time on the processes you are implementing for dealing with change throughout the life of the contract.

Technorati Tags: outsourcing, vendor management

Linking payment to the creation-of-value rather than the following-of-process

For some work that I'm doing, I re-visited this past week an interesting article by Nick Malik on drafting RFTs for agile projects (how good is the internet!). Nick's recommended drafting methodolgy is aimed at ensuring payment is linked to the creation-of-value rather than the following-of-process.

Inside Architecture : Agile Vendor Management - removing waterfall from outsourced projects

First off, let me say that not all vendors perform all tasks. I am breaking down the tasks according to analysis, design, construction, and delivery, because it is the model that my former clients are familiar with, and because some vendor companies cannot do all of the steps. So, when reading each section, realize that each section stands alone. It can apply to a vendor hired to fulfill that role alone, or to a vendor that fulfills that role as part of a larger process.

However, if you do have one vendor creating requirements and another doing design, and potentially a third doing construction, you have to provide the facility (desks, computers, phones, server software licenses) for them to develop all of the artifacts in one place, because they will ALL be working AT THE SAME TIME.

This is absolutely key to success: the primary effort of analysis is not done until design has released an iteration and code is being delivered, and it has no positive impact if the developers don't meet, know, and trust the analyst(s).

Technorati Tags: RFT, RFP, Outsourcing, Agile development

Using corrective plans to lift a relationship back onto the rails

Richard Raysman and Peter Brown in the New York Law journal set out some “vendor management 101″ lessons for crisis management in outsourcing agreements. The real lesson is that the relationship should not have been allowed to get to that state in the first place. Problems with service delivery or contract management tend to become larger and more intractable with each passing second.

Their “corrective plan” recommendation is a good one. Ideally, the “corrective plan” process should be set out in the original agreement.

One effective tool that the parties may use to resolve their dispute is a “corrective plan.” A corrective plan is a written agreement that is tailored toward the specific problem or problems identified in the demand. The plan spells out a course of action that the parties need to take, generally over a 30- to 90-day period, to resolve production or financial issues, or both. Often the plan will contain explicit language that there is no admission of wrongdoing on either side.

Technorati Tags: outsourcing, vendor management, contract law

Tying some vendor management threads together

Earlier today, I reviewed my posts and decided that I should have tag-lined my blog "Sh*t happens. Deal with it". I intended to write about all aspects of vendor management but I've found I've focused solely on the importance of building sufficient flexibility into contractual relationships to allow them to handle unforeseen events that occur throughout the life of the contract.

In summary, the Vendor Manager must establish clear aspirational goals for the supplier relationship. Once they have established the goals and tied remuneration to the goals, the environment is set for a flexible relationship that can change with the times. If the parties are focused on the aspirational goals, they are more likely to be flexible [1] [2] [3] and to demonstrate innovation.

Of course the trick is tying remuneration to the goals and establishing suitable change control procedures … more on that later.

Technorati Tags: outsourcing, vendor management

Flexible vendor management

Yet another article on the importance of building flexibility into relationships:
Business Finance

Even when companies research, plan and enter a partnership with the best of intentions, it is still important for them to have a predefined process for dealing with problems and conflicts as they arise. "Flexibility post-agreement is just as important as flexibility pre-agreement," says MacInnis. "No one can legislate for every eventuality as each party changes and evolves, so there must be some way to deal with unforeseen changes in scope." If the alliance agreement and partners are flexible enough, the principles governing the relationship can be effective over the long term even as the alliance changes and evolves.

Technorati Tags: vendor management, outsourcing, contract management

Dave Stephens on supplier strategy

Dave Stephens has some great commentary on the role of the supplier in strategic execution.

His basic contention is that, as the cost of dealing with additional suppliers falls, buyers can contract with exactly the right supplier to serve their strategic goals. This may lead to an increase in the number of suppliers a company deals with but that is not a bad outcome because of the low incremental cost of dealing with each additional supplier.

I wonder how that will impact Vendor Management Offices / Sourcing departments?

Technorati Tags: outsourcing, vendor management