Diagnosing Vendor Management Troubles: Should We Really Have a Vendor Doing This?

A vendor management program that is grounded in the contractual agreement negotiated between an outsourcing provider and buyer is undoubtedly an enabler of a successful outsourcing solution. The program should span strategic and operational levels to align executive views on service delivery priorities, drive service quality and special projects, convey changes to requirements and regulations, and track against service levels.

Despite outsourcing buyers’ best efforts, vendor management problems are common. The challenge is determining whether the root cause of a problem is the structure of the vendor management program itself or the scope of the overall outsourcing decision. Here are a few tips to help diagnose common vendor management issues.

Some of the most common pain points that indicate the need for changes to the vendor management program include:

• Personnel are stretched too thin or don’t seem effective. Companies can make a mistake in reducing headcount too drastically after outsourcing. A strong core of vendor management resources is needed to govern the relationship. These internal resources are needed to align with the vendor’s operational staff and management, oversee key decisions, manage to service levels, and manage contract scope (including periodically evaluating contract addenda to refine service delivery and costs as the client’s needs and the outsourcing industry evolve). Without sufficient resources, and more importantly, the right resources, a vendor management function will feel strained in its vendor interactions. When establishing vendor management functions, leaders need to keep in mind that vendor managers and operational delivery managers have different skillsets. Vendor managers oversee activities, manage to a contract, perform issue management and escalation, etc., while operational delivery managers are often more technical and focus on execution without as much attention paid to the parameters within which that execution takes place.
• Inability to enforce penalties that make a difference in vendor behavior. With respect to a particular vendor, a vendor management function needs to operate within a contractual framework containing service levels with credits, defined escalation paths in governance committees, and contractual remedies for performance issues. The contract is key leverage for dealing with a vendor when the relationship is not fully functional. If the contract is weak in its definition of governance and escalation requirements (including required involvement of key vendor executives) or lacks key flexibility, then vendor management’s ability to drive behavior change are limited to the willingness of the vendor to make changes (which is often driven by the profitability of such changes). Service levels may also be poorly defined, leading to the “watermelon effect” of reports showing a “green” status while actual service delivery suffers. Service levels need to reflect end-to-end delivery within provider-controlled portions of the operation, at performance standards that represent the true needs of the business.
• Tactical fixes are made but executive leadership remains unhappy with vendor performance. Vendor management must be coordinated across operational and executive levels.Operationally, an outsourced relationship may be functional and meet the expectations of a contract and operational management team, but executives may have a negative perception of the outsourced services. Executive management needs to be involved in vendor management to refine the scope and objectives as the relationship evolves, to drive outcomes that meet their expectations.

When experiencing these example pain points, the vendor management function and contractual framework itself should be evaluated to see if adjustments in service level definitions (if permitted through periodic review and modification), vendor management staffing levels, governance meeting attendee composition, etc., may yield improved vendor performance and perception.

However, other pain points related to vendor management could more likely mean that the decision to outsource, or the approach to the outsourcing, is or was flawed. Two common scenarios include:

• Vendor management channels are being used to over-prescribe how solutions are provided, or from where solutions are provided, and the vendor is having trouble accommodating changes. Clients need to let the provider run its business. Key requirements must be communicated, but when a client goes too far down the path of prescribing the “how” instead of the “what” of a solution, the result is that communication paths with the vendor become clogged with excessive instructions on how the provider should operate.  This creates substantial overhead for both client and outsourcer that can be unfruitful. Also, it can actually increase risk in the event that requested changes drive manual workarounds with less control than the provider’s standard way of doing business. If vendor management is being used to over-prescribe operational details that are truly necessary to the business, then the operation may be better suited for in-house delivery.
• Regulations and external entities are driving onerous vendor management requirements. Depending on the client’s industry, external regulatory bodies and agencies or affiliated businesses may drive requirements into contracts and oversight responsibilities. Some of these externally driven requirements are necessary to protect the industry and consumers, but others, although well-intentioned, can lead to confusion and unnecessary overhead (leading to over-prescribing the “how” as described above).  Furthermore, while a proper vendor management scope can identify vendor deficiencies, a vendor management function driven by external parties can increase the risk of “false positives” in which deficiencies are perceived even though they are not truly evident.  This degree of external influence on a vendor management function should be factored into the risk/reward decision of whether to outsource – i.e., it might make more sense to conduct the operations internally.

Ultimately, vendor management is critical to a success in outsourcing. It is also a mechanism for validating, or refuting, an outsourcing decision. When pain points reflect deficiencies in personnel, vendor response, or disconnects between levels of management, then the vendor management program should be evaluated for improvement.  But if pain points relate to over-prescribing service delivery details, or difficulty in performing vendor management under the drivers of external parties, then the decision to outsource, or at least the scope of outsourcing, should be evaluated for change.