Vendor relationship management

A look at the world of vendor relationship management...
In many cases the decision of buy versus build has been made and the firm has decided to buy technology.  We've covered that in the past in "Buy versus build, a false dichotomy".  Once the decision to buy technology is made there is often a gap in the strategy employed by many firms.  The gap is that there is no-one who actually takes ownership of the relationship with the vendor and manages that relationship over the lifecycle of the contract.

 

A procurement department can be very helpful but often do not have the highly detailed knowledge of the market in that space to be able to offer more than the standard terms and conditions and conduit to in-house or retained lawyers to assist with contract liability and other terms and conditions.  In summary, procurement is necessary but not sufficient.

 

Let's look at some fine grained details of this:

• Who owns the relationship with the vendor?
• Who negotiates the economic details of the contract?
• Who negotiates the service level agreement part of the contract?
• Who monitors the delivery against the service level agreement?
• Who raises breaches in the SLA with the vendor?
• How are SLA penalty payments handled - as negative invoices, as credit notes, as discounts against future purchases?
• What happens in the event of the vendor changing ownership?
• What happens if the vendor reduces the size of the local office?
• What happens if the vendor tries to "end-of-life" the product you are using and replace with a broadly equivalent product at a higher price?
• What happens in the event of the vendor entering bankruptcy or equivalent?

All of the above are important metrics to manage.  By having a single person facing off to the vendor with a collaborative team of the business, IT, legal, procurement, risk and so on it's possible to have a successful vendor relationship and therefore a successful engagement.

 

One simple change I have always advocated - "Material Change of Ownership" clause.  If the ownership of the vendor changes materially then the firm has the right, within the first two years after the change, to request a two year price freeze.  This gives the firm time to evaluate the new ownership and to plan for a rip-and-replace if the new ownership is not looking to offer the service levels required.  Within mature enterprise IT platforms that target the buy-side there is often a change of ownership as the founders of a firm sell to one of the big name vendors.  The challenge is that when this happens the new owners may decide to run the business as a "cash-cow" and treat the business like an annuity revenue stream, get rid of the developers and senior staff and de-skill the teams that support clients.  If the system is mission critical such as a back office then the pain of poor support has to be weighed against the pain of rip-and-replace.  Hence a two year freeze to allow for contingency plans to be implemented.

Another simple one is to always retain plan B.  So by all means implement the "one system to rule them all" in your front office.  But retain formal, informal and contractual links to other vendors so you have a credible threat to present to a vendor - the fact that you can rip and replace without a great deal of trouble.

Vendor relationship management is often overlooked but when done properly it's very valuable in offering optionality and cost control to the firm.