The most basic definition of vendor management is the management of a company / entity which supplies parts or services to another company / entity. You can invariably argue that is the same as project management and you would be right. However, another term that is associated with vendor management is the concept of outsourcing where a company / entity which supplies parts or services to another company. A common factor in today’s market is to distinguish between “outsourcing” and “off-shoring.” Outsourcing involves hiring a vendor to perform a service on behalf of a company. “Off-shoring” typically is a subset of “outsourcing,” and involves retaining a vendor who is based outside the country of the project owner
Sound vendor management is multiplied in importance as organisational strategy is now very much dependent of its success. Here are some of the major lessons that have being learnt for a successful vendor management approach:
- Market forces matter, but relationships are still important. Dealing with multiple vendors with the goal of reducing outsourcing services to the level of commodities might appear to be a valid cost-cutting strategy, but doing so ignores the ever-present requirements of competent vendor management. Taking the time to develop each relationship in an arrangement is important and can pay off in smoother communication, better execution and avoidance of unnecessary expenses.
- Think ahead about possible conflicts. The biggest single mistake in is that companies don’t take into account how different vendors will have to work together. For example, if one vendor is running operations and another vendor is responsible for applications, the operations provider, with responsibility for hardware, may stand to gain a bonus if hardware usage is reduced. However, the application provider may be deploying a new application that requires faster processing and twice the disk space.
- Develop a standard process for vendor management. Working with a variety of processes can soak up costs for little in return. Refining a single standard process can help in creating an airtight project, as holes are discovered and eliminated over time. Think about not just the procuring of the vendor but also the process of on boarding the vendor and likewise the off boarding.
- Use accurate measurement tools. Methods such as the Balanced Scorecard or Earned Value should be used to evaluate the vendors performance. Think about how to manage progress and how this will be communicated around the business.
How different is this from project management? Not a major amount but with vendor management there tends to be a greater focus on the relationship management rather than the wealth of planning techniques that is associated with project management.
The following is a simple structure to position the layers of vendor management within any organisation
One of the things that differentiates vendor management from project management is the focus on vendor performance metrics. From a vendor management perspective, data needs to be collected to identify the current performance, the target level of performance to understand the medium- and long-term levels. These performance levels must be achievable, and should be broken down into targets for discrete short-term intervals, e.g. the next three quarters. To implement the performance measurement framework, a plan with timescales and designated responsibilities is needed. Once the plan has been implemented and data collected, new baselines can be set, comparisons made and new standards/targets set.
The metrics, targets and improvement activities must be cascaded down through the organisation, involving people and teamwork in the development of new metrics, data collection and improvement activities which requires the following characteristics from the vendor manager:
- Leadership and commitment
- Good planning and a sound implementation strategy
- Appropriate employee involvement
- Simple measurement and evaluation
- Control and improvement
Improvement can be initiated by examining the gaps between current and target performance of the driver metrics at each level. A minimum, achievable set of actions is determined, with plans, assigned responsibilities and owners.
There are subtle differences between vendor and project management and it primarily comes down to the type of relationship that needs to be managed and how this is approached.