The rise of the vendor management office

Comment: How businesses are keeping outsourcers in check.

Australian organisations’ growing reliance on technology outsourcers has given rise to a new unit within firms that are doing this the best: the Vendor Management Office (VMO).

In recent years, a number of local and international companies have suffered high-profile outsourcing failures in service delivery, project execution and realisation of the expected value.

Vendor management has gained prominence within companies like the Commonwealth Bank, Westpac, AMP, Citi, HSBC and AT&T, in recognition that vendors need to be managed throughout an outsourcing relationship, not just when striking or ending a deal.

Analyst firm Forrester reported last year that almost half of companies had established centralised vendor management groups, with an additional 11 percent planning to introduce one that year.

In my experience in the Australian finance sector, firms using multi-disciplinary VMOs have been able to deliver tangible results in customer satisfaction and commercial value, with some driving down costs by ten to 15 percent.

The VMO manages and facilitates contracts across three critical pillars on an ongoing basis, each of which needs a differing set of skills, methods, and processes:

• Strategic Relationship – driven by company executives. Aims to understand all parties’ businesses and challenges, and through this, agree on common objectives with shared KPIs.
• Service Delivery – governs and monitors project delivery and production support, with any issues escalated appropriately.
• Commercial Management – verifies that obligations are being met by both parties and manages contractual consequences, whether they are rewards based on KPIs being met, or penalties for non-delivery.

Unfortunately, there are many pitfalls in setting up a VMO as the skills and capabilities needed are multi-disciplinary, involving specialised legal, commercial, financial and technology competencies.

The task is further complicated by the fact that the VMO needs to traverse multiple internal departments and many supplier relationships, at both operational and strategic levels. 

Savvy firms have drawn lawyers, accountants, procurement officers, IT architects and service delivery skills into one unit - either in a virtual or direct manner.

They have up skilled their people not just in the technical competencies of their job family but also in soft skills to navigate relationships, engagements and negotiations.  

Balancing commerce and technology

The trick to a VMO is to ensure it is balanced across commercial and technology dimensions.

Too strong a legal/procurement focus may produce contracts that look good economically, but result in poor customer service and suboptimal IT delivery – forcing the IT team to form ‘shadow IT’ to compensate.

On the other hand, a heavy technology bias in the VMO can expose the commercial management to greater levels of financial risk and a task-based approach where accountabilities in delivery become very unclear.

This can lead to a weak legal position for the client from internal IT teams being seen as a potential cause for non-delivery by the outsourcer.

Service providers like Information Services Group (formerly TPI) offer outsourced VMOs, but naturally this only works if the service is independent of other service providers, and can act on behalf of the client organisation in a trusted manner with aligned incentives.

Without a VMO, companies should lean against outsourcing core technology services, and focus on attracting, developing and retaining an in-house technology capability as a core competency for strategic advantage instead.

Clearly, insourcing versus outsourcing is a topic in its own right. Apple, Google, and Amazon are among those retaining strategy, architecture, design and engineering in-house to support innovation and growth that has fundamentally changed the world for us all.

Sarv Girn is Sydney-based consultant and technology executive with 25 years’ experience in British, Australian and Asian financial services firms including Westpac and the Commonwealth Bank.