By Jon Tonti
Every company has different structures for managing vendors that hinge on where to centralize and decentralize power. Decentralization can give employees the space to act more independently and gain the capabilities that come with the challenge; however, an organization may run the risk of disjointed communication, less objective vendor scrutiny, or putting unprepared managers in high pressure situations.
Normally the business line manager works directly with the provider at an operations level and a vendor governance organization (VGO) made up of senior leaders (that may be assigned to monitor different aspects of large outsourcing engagements according to their expertise) deal with more universal concerns like engagement practice, cross-functional communiqué, prioritizing projects, tracking projects in the initial stages, strategic interdependence planning for business units with respect to vendors, companywide vendor performance, and best practice as mentioned in the IAOP OPBOK.
What is less defined and a bit more subject to debate are cross-functional category teams also known as vendor management groups (VGMs) within companies tasked with filling the management gap when a business line manager has little experience with outsourcing engagements, or cannot take time away from purely managing operations to strategically manage the progression of an important relationship that is not just transactional in nature.
“The category team should never be a barrier. It is a cross-functional team that represents the interests of various internal stakeholders so that the provider can align with those interests.”
Here is where the a company can go towards decentralization having the business line managers be responsible for all vendor management related activities, less those stated above that are carried out by the VGO, or a company can employ the vendor management organization layer that lies between the business line mangers and the VGO. In the absence of vendor management capability at all levels of the organization, these teams may develop organically in response to the need for both management and technical know-how in handling vendors.
“At a highly complex company a VGO or procurement team can only shortlist vendors because they don’t know enough about what is happening at the level of the business lines, they don’t know what the technical project manager knows. At the same time a technical guy may not have the commercial acuteness to handle contract negotiation or a technical team to handle the pressures of outsourcing (especially in a multi-sourcing environment) that is why you either see technical project managers being trained or teams [of individuals with different skills sets] melding together,” said Srikanth Sesh, experienced international consultant and CEO of SmartConnect.
This third layer of vendor management that can form organically is also mandated by upper management to focus on relationships with important providers or sensitive segments of sourcing. The cross functionality and strategic focus of the teams is supposed to help companies dive deeper into relationships with key providers or think more critically about certain segments of sourcing. This third layer does have its detractors.
Detractors say that decision making is unnecessarily centralized and business line managers become less tied to ownership of execution. Decentralizationists also argue that VMGs organic or not should only be seen as patches to temporarily provide support when business line managers do not have the experience to comprehensively manage the providers themselves; all responsibilities should be shifted back onto business line managers as soon as possible.
So is the extra layer worth it or not? It depends a lot on the maturity of different business lines and their managers’ experience in handling outsourcing engagements. It seems there is agreement that VMGs should in general be temporary and that they can be utilized when the particular business line that will be the internal client of the provider doesn’t have much outsourcing experience.
What Andy Flores, Partner at Scott Madden, stresses is the strategic use of these teams for deepening the relationships with the most important providers in the most critical areas.
“The category team should never be a barrier. It is a cross-functional team that represents the interests of various internal stakeholders so that the provider can align with those interests,” Flores stated, he went on to talk about the comprehensive perspective the team is designed to bring, which is focused on pushing the expansion of relationships with the most important providers to cover even more functions, so that in time less providers would be needed to cover the same range of services reducing management costs.
When it comes to managing a relationship between a provider and a particular business line it serves, doing it in the most decentralized fashion may seem intuitive, but the distance between a business line manager and the VGO can be great even though the business line will be doing its regular reporting, hence a check-and-balance of a VGM for a highly strategic partnership could be useful.
“There will always be an overrating by the line manager,” said Sesh when talking about the relationship between the line manager and the provider. And when it comes time to renegotiate the contract “the line manager is going to tell the vendor what to quote and how to negotiate,” he added.
Although there would have to be approval from the VGO and probably a procurement department before a business line is allowed to reenter into contract with a provider, a cross-functional VMG tasked with the strategic management of deepening the relationship might be useful to get the clear-whole picture.