CIOs and vendors: How close is too close?

Large IT deals are often described in strategic partnership terms where customer and supplier collaborate to achieve a successful project outcome.

They can involve vendor or supplier staff embedded in customer organisations to understand the business and be on hand to assist with changes.

The reasons for seeking and building that partnership seem benign enough but the question of how close is too close is hotly contested.

Plutonic Zoo managing director Victor Konijn says that vendor-client relationships often sour because "they aren't close enough".

He says that clients are often fearful of letting a supplier get too close.

"They're just humans - they shouldn't be too scary," he says. "Most suppliers have a genuine interest to help."

But supplier proximity fears aren't unfounded.

Let a supplier get too close and you could end up paying a lot more for the job or find yourself leasing back intellectual property that once sat internally, Phoenix Consulting co-founder Hayden Kelly says.

"I'm working for a large corporate now. They've been with a vendor over a period of time, and I'm not saying it's a conscious thing [but the vendor's] virtually stripped [the corporate's] IT group of their IP," he says.

"In a lot of cases you end up buying your IP back at a premium."

Solving problems of distance in vendor-client relationships can be costly.

But there are early warning signs that your supplier has gotten too close and ways that you can stop and regain breathing space without affecting the relationship.

Too cosy

Kelly says that allowing a vendor or supplier to stake a permanent presence in the organisation - such as embedding staff or setting up a project office - can be a bad idea.

He says it not only allows them to "pick the eyes out of every opportunity" that comes up internally - perhaps preventing it from being put out to market or competitive tender - it can be the start of a gradual loss of intellectual property.

"It's all couched under partnering," he says.

"They ingratiate themselves into the corporate and nobody even considers the alternatives.

"They become almost part of the management team."

Another symptom that your supplier is too close is if they are able to start work on a project before it officially gets signed off.

"I see that a lot," Kelly says.

"What [the supplier will] do is: they'll front-end the cost in the work that's done before it's signed off.

"Nobody tracks the 30 percent that was in progress before the appropriate sign-offs were approved."

A third - but less common - sign is if the supplier is engaged to start scoping programs of work.

"I saw a major corporate last year pay one of the major suppliers $12 million to scope a $180 million job, which they were always going to bid [for]," Kelly says.

"That gets back to the loss of IP. If you haven't got anybody in-house capable of scoping the job, you go to the vendor and of course it suits their offer.

"It's a self-fulfilling prophecy."

Read on to page two for strategies on how to put some distance back in the relationship, without damaging the relationship itself.

Test the market

The consensus on what constitutes acceptable breathing space in a supplier-client relationship is maintaining an ability to test the market.

Australian Project & Consulting Services service director Craig Dennis says that it's important to set ground rules, particularly when appointing a preferred vendor or supplier.

"You've got to make sure the vendor knows that, any point in time, you can test the market," Dennis says.

"I've seen quite a few examples of suppliers 'buying' their business. They'll drop prices to ridiculous levels to get in the door and then over the next year or two, the customer almost doesn't realise they're paying a premium on the sort of prices they could get in the street.

"You can avoid that by saying upfront, 'We like you guys, we want to work with you for the long haul but you've got to understand because of our procurement policy or probity advice we will be testing the market - maybe not every time but certainly with reasonable regularity, and you need to be commercially savvy about that'.

"[Tell them:], 'We're not necessarily going to take the cheapest price, we're going to take the best value."

While he acknowledges that a preferred vendor is always going to have "some advantage over somebody walking in off the street, if they're not absolutely exclusive - even if there might be some appearance of exclusivity - the risks start to go away."

Kelly agrees: "Essential breathing space for mine is where you do have an opportunity to go to market [and] it's a new piece of work or not related to [work already contracted], you make sure you go to market rather than just go back to that vendor."

Kelly says the key to putting distance in a too-cosy relationship is to "really understand what it is imperative" for the supplier to do - and what can be brought back in-house.

"In most cases if you do that objectively, probably 30 or 40 percent of the stuff they're doing that's taken for granted could either be put to market or done in-house if you bought your IP back."

He warns that this might be difficult if the supplier relationship has been allowed to get too cosy.

"In the major, the initial reaction of the IT professionals in the company is, 'We can't do this, they'll walk'," Kelly says.

"All these things are intertwined. If [the supplier's] got a presence on the floor, they build that mindset - 'We can't afford to [make cuts or move work back in-house], let's not damage these guys' margins too much because they'll walk, and then where are we?'

"It all just grows over time. [But] when you're sitting on a $200 million account and it's a chance to be stripped back to $150 million, [the supplier isn't] going anywhere."

Clear communication

Konijn says that setting boundaries in a relationship is really about communication.

He says there is "nothing wrong with telling a vendor you don't need a call every week" or with any other attempt to set the "intensity [of relationship] you appreciate and value."

A supplier's excitement, he says, could otherwise be "perceived or misinterpreted as being aggressive".

"If that's not appreciated, then just say so," Konijn says.

"Our generic communications advice to clients is don't say what you don't want, just be specific about what you do want."

Dennis notes that if the relationship does get too cosy, an "open and frank discussion with your vendor" could begin a process to recast ties and commit the boundaries to paper.