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The top 9 trends in vendor management

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Multi-vendor systems are becoming the standard model for delivering outsourcing services in today’s workplace. This approach allows clients to leverage the best service for a particular business environment. However, multi-vendor delivery models also require a client organization to integrate multiple vendors with varying roles and coordinate their activities in an effective manner. Furthermore, many industries, such as finance and healthcare, face increasingly stringent regulations that place a burden on the client to ensure regulatory compliance over its vendors throughout its service delivery chain. This article discusses how trends in vendor management affect outsourcing contracts and the manner in which these relationships are governed.

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The top 9 trends in vendor management

  1. 1. Drive Your Business The Top 9 Trends in Vendor Management
  2. 2. 2 ©2015 WGroup. ThinkWGroup.com Multi-vendor systems are becoming the standard model for delivering outsourcing services in today’s workplace. This approach allows clients to leverage the best service for a particular business environment. However, multi-vendor delivery models also require a client organization to integrate multiple vendors with varying roles and coordinate their activities in an effective manner. Furthermore, many industries, such as finance and healthcare, face increasingly stringent regulations that place a burden on the client to ensure regulatory compliance over its vendors throughout its service delivery chain. Clients also must maintain oversight over their third-party relationships. Vendor governance and management are therefore becoming high priorities for outsourcing clients. These areas have often been overlooked in the past, but clients now recognize that the lack of vendor management is a key factor in reducing the value of outsourcing. These clients also should understand that third-party oversight is essential for obtaining value from relationships with service providers. This white paper discusses the following nine trends in vendor management and how enterprises can take advantage of them: • Standardization • Vendor consolidation • Robotic process automation • Labor arbitrage • Corporate culture • Third-party governance • Innovation • Relationships • Service levels Introduction
  3. 3. 3 ©2015 WGroup. ThinkWGroup.com Standardization The standardization of outsourcing processes allows organizations to improve vendor management and obtain an advantage in an increasingly competitive business environment. In particular, standardization provides organizations that perform financial services with greater confidence regarding regulatory reviews. Informal reviews by the Office of the Comptroller of the Currency (OCC) are becoming more common, so it’s especially important to implement standard processes and document them adequately. This preparation can often cause the OCC to forgo a formal audit and look for other enterprises that are at greater risk of regulatory noncompliance. Greater standardization also will increase the demand for more automated tools for performing vendor management. Vendor consolidation The increased priority for oversight over third-party vendors is causing clients to focus on audits as a means of ensuring compliance readiness among vendors. Small third-party firms, especially those with fewer than 50 employees, will be unwilling or unable to bear the growing costs of regulatory compliance. These vendors will therefore be acquired by larger service providers.
  4. 4. 4 ©2015 WGroup. ThinkWGroup.com Robotic Process Automation (RPA) is the use of software known as virtual robots to automatically manipulate existing applications in a manner similar to that of a person processing a transaction in an application. RPA tools provide the potential to significantly reduce operational costs, since they’re able to perform routine functions at a lower cost than human workers. RPA is especially important to banking organizations, since it directly addresses some of the requirements for regulatory compliance. The use of RPA tools to ensure compliance will increase and provide enterprises with a competitive advantage, due to their ability to improve the speed, accuracy, and auditability of outsourcing services. Robotic process automation Organizations that use RPA will also gain a broader advantage in their ability to bring vendor management and governance, risk and compliance (GRC) solutions to market. The requirement for regulatory compliance is especially likely to benefit financial services that use RPA. The financial crisis of 2008 resulted in regulatory agencies placing a greater responsibility for oversight on client organizations. This change generally means that a financial services organization is ultimately responsible for any breaches in the service delivery chain, regardless of their cause. The increase in regulatory pressures caused financial institutions to increase their oversight capabilities throughout the lifecycle of the outsourcing process. The most common areas of focus include improving process definition and contract discipline. Financial institutions also use RPA to develop more robust compliance strategies.
  5. 5. 5 ©2015 WGroup. ThinkWGroup.com The primary advantage of an RPA solution over a human worker is that it performs a process the same way every time. It also provides a detailed activity log for audit purposes, which is essential for demonstrating compliance readiness. Another advantage of RPA tools is that they’re easy to scale and can be reconfigured quickly to perform many functions, including data consolidation, document review, and invoice reconciliation, without the need to train a human worker. RPA also can define a process for making decisions about sourcing location by changing the premise of labor arbitrage. These benefits of RPA make onshore sourcing more cost-effective, providing clients that use offshore sourcing with a lower-risk option. RPA solutions provide a wide range of capabilities for monitoring and reporting software processes. This versatility will cause some confusion as vendor management solutions begin to merge with GRC solutions. The primary difference between these solutions is that vendor management focuses on increasing the supplier’s capability, while GRC focuses on mitigating the risk of using that supplier. Organizations that are able to acquire both of these capabilities will be in a better position to manage their supplier costs effectively. Many RPA tools still lack maturity, although a lack of maturity in the processes they’re designed to monitor is a more critical issue for most enterprises. The urgency of improving process documentation will result in organizations adopting the RPA tools that are available, rather than waiting for this market to mature. An RPA solution will perform a process the same way – every time.
  6. 6. 6 ©2015 WGroup. ThinkWGroup.com Enterprises will focus on driving higher levels of performance to obtain the original business case for outsourcing rather than looking for sources of low-cost labor. Research shows that proper governance in a multi-vendor model can increase profitability by six times more than similar improvements in governance over labor costs. Common steps for improving multi- vendor governance include implementing a multi-vendor governance model, transforming the complexity of that model into service value, and balancing accountability for multi-vendor model. The trend in multisourcing will increase the skills and structures needed in all areas of governance. Other trends also are increasing the need for governance, resulting in a complex environment that erodes the value of the multi-vendor market and adversely affects customer service. Simplification generally involves successfully leveraging the available solutions, including developing the governance structure, defining sourcing strategies, managing the transition to multiple vendors and facilitating contract reviews. Solid experience in engaging IT suppliers also can help clients meet the multi-vendor challenge. Executives are beginning to recognize the value of effective vendor management and are changing their priorities accordingly. This shift in priorities reflects the maturation of the outsourcing marketplace, which is changing the definition of a “company.” For example, today’s enterprises typically externalize over 70 percent of the cost base. This increase in outsourcing means that vendor management skills such as coordinating multiple vendors, managing service deliveries, and overseeing contract obligations will have paramount importance. Labor arbitrage
  7. 7. 7 ©2015 WGroup. ThinkWGroup.com The concept of effective governance will shift from mere compliance to a cultural imperative. This trend in vendor management means that compliance will become embedded in an organization’s daily operations, rather than the responsibility of a specific department. Each organization has a unique set of core products that influence executive decisions, business practices, and employee actions. This culture consists of the tone that the organization’s top executives set, as well as written policies. The internalization of effective governance provides additional benefits beyond operational alignment and regulatory compliance, including increased business value and improved relationships between clients and providers. A strong corporate culture is necessary for vendor-management practices that will protect an organization’s reputation and bottom line. It also guides employees towards responsible behavior by ensuring that the organization will support and approve of their actions. An organization without a strong culture can aggressively pursue earnings at any cost, which can cause it to lose direction or enter a new market without performing due diligence. Corporate culture For example, employee character and customer confidence are especially important for financial institutions. The loss of these qualities caused national economic problems with consequences that go well beyond these institutions themselves. The financial crisis of 2008 provides a recent example of the wide-reaching effects of poor governance among financial institutions. This crisis was due in large part to unsound lending practices among financial institutions, especially large banks. These practices adversely affected their own customers, the national economy, and the institutions themselves. The improprieties that led to the 2008 crisis included lapses in oversight over trading activities, Bank Secrecy Act controls, and outsourcing vendors. They also included a range of abuses in mortgage foreclosures, collectively known as robo-signing. These improprieties cost the largest banks in the United States billions of dollars in fines and restitution. They also have been the subject of many headlines and congressional hearings. More importantly, these practices have eroded the public’s confidence, which is vital for banks. The internalization of effective governance provides additional benefits beyond operational alignment and regulatory compliance. 
  8. 8. 8 ©2015 WGroup. ThinkWGroup.com The federal government was able to avert further catastrophe by supporting the economy with decisive action. Many of the large banks also had national charters that provided them with the financial strength to absorb high-risk institutions. Nevertheless, the 2008 crisis had a major adverse effect on the world economy and many financial customers. The long-term effects of this crisis were still being felt as late as 2012. The 2008 crisis resulted in the development of much stricter standards for major banks, which are intended to prevent it from recurring. These standards include minimum requirements for the design of a large financial institution’s risk governance framework and its implementation. It also provides minimum standards for the oversight of this framework, which must address the risks arising from organization’s activities. Common sources of risk for a financial institution include capital, earnings and liquidity. The new governance standards also define the responsibilities and roles of the departmental units that design and implement the risk governance framework for a financial institution. These lines of defense in risk governance include front-line business, internal audits and independent risk management. The new standards also require organizations to establish appropriate systems for controlling risk in business practices. For example, financial institutions must provide risk statements that describe levels and types of risk that they are willing to assume in the pursuit of their strategic objectives. These risks must be consistent with regulatory requirements regarding capital and liquidity. The latest guidelines for financial institutions also include standards for the boards of directors’ oversight over the design and implementation of the organization’s risk governance framework. These directors must be engaged in the risks of the organization to ensure they manage those risks appropriately. Furthermore, directors must have the authority to challenge managers when necessary to maintain the sanctity of the organization’s federal charter. This level of authority will help an organization to avoid becoming a mere booking agency for its holding company. The OCC can require a bank to submit a compliance plan when it determines that the bank has failed to meet a particular governance standard. This plan must detail the actions that the bank will take to identify key deficiencies, along with a projected timeline for those actions. The OCC can also issue an order enforcing compliance if the bank fails to implement a plan approved by the OCC.
  9. 9. 9 ©2015 WGroup. ThinkWGroup.com Key metrics for financial institutions, such as earning strength or credit quality, are relatively easy for regulators to measure. The strength of an organization’s culture is far more difficult to assess, despite its strong influence on the actions and decisions within that organization. The OCC has recently started to look to board members and senior management to set the tone for creating a healthy culture that engages in proper practices, such as reasonable risk taking. Supervisory agencies also fell short of expectations during the time leading up to the 2008 crisis, along with many financial institutions. For example, the OCC is looking for ways to improve its ability to regulate these institutions. Major areas of concern include recognizing problems more quickly and taking decisive corrective action. The OCC also is looking at other aspects of how it does business in an effort to improve its performance in the future. One of the major steps towards this goal was to invite a group of international regulators to evaluate the OCC’s supervisory process. This step was difficult for OCC staff members, since it involved a critical analysis by their peers. Nevertheless, senior executives at OCC felt this peer review was essential for improving its corporate culture.
  10. 10. 10 ©2015 WGroup. ThinkWGroup.com The results of this peer review affected all aspects of OCC’s supervision over financial institutions, including enterprise governance, organizational structure, and risk management. OCC’s vision statement and strategic goals also were significantly impacted. OCC management reports that the peer review was extremely helpful, despite the discomfort it caused staff members. OCC is implementing recommendations from the peer review. The most important goal for OCC’s changes in corporate culture is to set the same standards for itself that it sets for large financial institutions. The OCC is crafting legislation to ensure that large organizations develop compensation programs that balance financial rewards with risk. This legislation will prohibit excessive compensation or compensation that exposes the organization to risks that could lead to financial loss. It also will require compensation programs to comply with standards in corporate governance. Multiple agencies are developing the proposed OCC legislation, which could have prevented some of the practices that led to the 2008 crisis had it been in place at that time. For example, it could have prevented the originate-to-distribute model from becoming a means of ignoring risk instead of a means of managing risk. Regulations only go so far in ensuring effective governance, since regulatory agencies can’t write rules to cover every possible situation. Furthermore, internal controls are only as strong as an organization’s culture since risk officers must receive support from an organization’s senior executives. All organizations should strive to develop a healthy culture that reflects sound governance principles. This goal is particularly important for large financial institutions, which are capable of affecting so many people throughout the world. Inertia is typically the primary challenge in developing a strong culture, making it especially difficult for large organizations.
  11. 11. 11 ©2015 WGroup. ThinkWGroup.com Third-party governance The need to develop a culture of awareness and commitment toward regulatory compliance will lead to increased oversight over the governance of third parties. This trend will be especially prevalent among organizations that provide financial services, where third-party oversight is likely to become the responsibility of the organization’s board of directors. The ability of organizations to respond to regulatory requirements will continue to be outpaced by the proliferation of those regulations. For example, the OCC already tightly regulates financial institutions. However, other agencies, such as the Consumer Financial Protection Bureau (CFPB), Federal Financial Institutions Examination Council (FFIEC) and Federal Reserve Board (FRB) also are becoming more involved in assessing the regulatory compliance of financial institutions. The trend towards greater third-party governance will lead to a growing recognition that enterprises must go beyond merely providing lip service to regulations. Early measures in this process will typically include the development of new corporate policies and value statements, which should lead to the development of mandates for enforcing the desired behavior. Boards of directors must also take responsibility for driving cultural changes by promoting and supporting the actions of C-level executives. These measures are essential eliminating the old ways of thinking about vendor management.
  12. 12. 12 ©2015 WGroup. ThinkWGroup.com Innovation Innovation in outsourcing includes concepts such as continuous improvement and leadership. These topics may be covered thoroughly during negotiations, but often fail to meet expectations after the contract is signed. However, this traditional practice has begun to change in recent years. Service providers are now more willing to look for innovative ways in which to distinguish themselves from their competitors. The widespread use of mature offshore services means that labor costs are often approximately equal among many providers. This trend means that providers must find other ways to reduce prices over time. For example, providers are now investing in processes and tools that improve delivery and cost efficiencies. This strategy allows providers to obtain future cost savings from their outsourcing services. However, it also motivates providers to prefer long-term contracts, which have a greater probability of realizing a profit from those savings. Providers also are more likely to require the freedom to change delivery locations. Service providers are finding other ways to be innovative, such as increasing the use of innovation pools. This concept consists of defining a governance process for funding selected initiatives based on a set of established priorities. The client and service provider negotiate the amount of funding that each party will contribute toward the innovation pool. The client is thus able to indicate the innovative activities that it considers to be most valuable, and the provider is able to demonstrate its commitment to those activities. Service providers are looking for ways to demonstrate the value of their internal processes and tools, which typically include tool kits for development, testing, and productivity. For example, a provider can use these tools to improve service performance in cases where they align with the client’s objectives. The primary benefit of these processes and tools is the value they bring to the client, although they also can improve the technical capability and organization of the provider’s business environment. Service providers are looking for ways to demonstrate the value of their internal processes and tools. 
  13. 13. 13 ©2015 WGroup. ThinkWGroup.com It’s vital for clients to evaluate the available evidence and assess the potential value of these techniques against their potential risk. For example, new processes and tools should provide some improvement in service delivery, pricing, or risk mitigation. They also must fulfill change- management requirements, comply with federal regulations, and meet internal security policies. Another recent innovation among service providers is the offering of rationalization services as part of their managed IT services. These typically include infrastructure-rationalization or applications-rationalization services, which providers have traditionally offered as a separate consulting project. Infrastructure-rationalization services identify methods of streamlining the management of IT assets, while application-rationalization services are intended to streamline the application portfolio. The primary benefit of rationalization services is to reduce the cost of IT maintenance and management costs. They also allow the provider to elevate a discussion on services from price to value, while offering the client the opportunity to receive real benefit.
  14. 14. 14 ©2015 WGroup. ThinkWGroup.com A client that has already outsourced services has learned some important lessons in managing outsourcing agreements. These lessons provide the opportunity to take corrective action in the next relationship with a service provider. Experienced clients are more likely to understand the importance of managing vendors and the outsourcing process. They also understand that governance should go beyond simply managing the contract to include managing the relationship with the service provider. Clients should therefore apply strong governance principles to all products and services that it receives from vendors. Clients with experience in outsourcing are generally improving the processes and organization of their Vendor Management Office (VMO). This trend includes a shift from using one service provider to fulfill all sourcing requirements to multiple providers, including insourced and outsourced services. This strategy provides clients with greater outsourcing flexibility, but it also requires a more effective VMO. The additional complexity of a multi-vendor environment means that clients must manage their providers more aggressively than in the single-source model. A multi-vendor strategy therefore requires a client to invest in its VMO to obtain long-term benefits from outsourcing. In particular, a strong VMO is essential for the benefits of managing a multi-vendor environment to exceed those of managing a simple “one-stop shop” sourcing model. Multi-vendor sourcing provides other benefits, including maintaining a competitive pricing environment between the service providers. Furthermore, it allows the client to select the vendor that is best able to fulfill a particular sourcing requirement. Service providers are becoming more accustomed to the multi-vendor model and are more likely to offer general contracting services, especially to their long-term clients. Relationships
  15. 15. 15 ©2015 WGroup. ThinkWGroup.com These changes in client/provider relationships cause governance to move into other areas outside its traditional role of contract management. Clients are using governance to manage business outcomes, innovation initiatives, Conformance to Quality (CTQ), Customer Satisfaction (CSAT), and Service Level Agreements (SLAs). This shift from managing the contract to managing the relationship requires senior executives to adopt a broader focus when thinking about governance. They also must become more closely involved when either party becomes dissatisfied with the relationship. This process generally requires adjusting the relationship between client and service provider to ensure that both parties find increased value in doing business together. These relationships must therefore become more flexible in future outsourcing agreements. Effective governance requires a contract schedule to better document the expectations of both parties. The contract schedule may be used to define the specific relationship desired.
  16. 16. 16 ©2015 WGroup. ThinkWGroup.com Service levels The outsourcing market traditionally focuses on a large number of metrics to determine typical service levels. For example, the metrics for IT services commonly include application availability, first-call resolution, and incident resolution. These metrics may be helpful to IT executives, but they’re less important to business users. The large numbers of service-level metrics that are reported on a monthly basis often have little value for their readers. The process of translating these metrics into business terms has historically presented a challenge to clients, who often rely on their VMO to perform this task. Service providers have traditionally been adverse to measuring their performance beyond the scope of the contract. However, they have recently started to realize that they can distinguish themselves from their competition by achieving actionable measures that fall outside the contractual scope. This trend should not imply that providers will willingly agree to additional SLAs, especially those that could be used to terminate for cause or place the providers’ own dollars at risk. It does mean that providers are more likely to measure metrics that are more focused on business than IT, even when they don’t own the entire process. Common metrics of this type include number of defects in production, number of invoices paid, and number of orders processed. Service providers have several reasons for measuring metrics that aren’t required by the contract. For example, providers in a multi-sourced environment can gain insights into a competitor’s performance by accepting responsibility for the business performance of their services. Providers also can build relationships with the client’s CFO, CIO and other senior executives by showing the ID value of their services in terms those executives can understand. Furthermore, the strategy of measuring business metrics can give providers insight into the client’s business process, which may lead to new opportunities. Providers have started implementing dashboards that measure real-time performance in an effort to increase the transparency of service levels. This capability allows them to respond to service deficiencies before they result in SLA penalties. The combination of reporting business metrics and real-time performance can add significant value to a vendor’s services, thus providing another way for them to separate themselves from the competition. For example, a provider in a multi-vendor environment that can integrate reporting measures into a single tool is more likely to be chosen as the client’s general contractor.
  17. 17. 17 ©2015 WGroup. ThinkWGroup.com Summary These trends in vendor management affect outsourcing contracts and the manner in which these relationships are governed. A better understanding of these trends can help enterprises to structure more beneficial contracts and develop more mature relationships with their service providers. Vendor management is becoming increasingly important due to greater competitive pressures, regulatory scrutiny, and multi-vendor delivery models. Effective governance over vendor relationships is essential for compliance with regulatory standards. It’s also helpful for leveraging outsourcing to obtain a competitive advantage and create value for long-term shareholders. Leaders in outsourcing will be increasingly likely to view vendor management and governance as a means of investing in a strategy that yields significant returns. These enterprises will recognize the relationship between stock price and service levels, which will require a corporate culture with greater accountability. Followers in outsourcing will continue to view vendor management as an expense that provides minimal ROI. They also will react to problems that continuously arise as the result of an inability to measure vendor performance and obtain stakeholder involvement.
  18. 18. Drive Your Business Founded in 1995, WGroup is a boutique management consulting firm that provides Strategy, Management and Execution Services to optimize business performance, minimize cost and create value. Our consultants have years of experience both as industry executives and trusted advisors to help clients think through complicated and pressing challenges to drive their business forward. WGroup offers cloud strategy consulting and a full range of IT transformation advisory services. Visit us at www.thinkwgroup.com or give us a call at (610) 854-2700 to learn how we can help you with your cloud strategy. 301 Lindenwood Drive, Suite 301 Malvern, PA 19355 610-854-2700 ThinkWGroup.com

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