The document provides a comprehensive overview of vendor management, detailing its importance in ensuring effective procurement, risk management, and relationship management with various types of vendors. It outlines the benefits, challenges, and processes involved in managing vendors, emphasizing the need for a structured vendor management system to enhance efficiency and compliance. Additionally, it discusses outsourcing and its complexities, highlighting the critical aspects of selecting and managing vendors in an organizational context.

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VENDOR MANAGEMENT – AN
OVERVIEW
NAME: JYOTI KUMARI
ADMISSION NO.: HPGD/OC17/2752
SPECIALIZATION: IT PROJECT MANAGEMENT
PRIN. L. N. WELINGKAR INSTITUTE OF MANAGEMENT
DEVELOPMENT & RESEARCH
September 2019

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ACKNOWLEDGEMENT
I am using this opportunity to express my gratitude to everyone who supported me throughout the
course of this PGDBA project. I am thankful for their aspiring guidance, invaluably constructive
criticism and friendly advice during the project work. I am sincerely grateful to them for sharing
their truthful and illuminating views on several issues related to the project.
I express my warm thanks to Mr. David Fenley (Manager at PepsiCo) and Mr. Ravi Tilwani (Lead
at HCL Technologies) for their support and guidance.
I would also like to thank my colleagues from HCL Technologies, PepsiCo and DXC Technology,
all the people who provided me with the facilities being required and conductive conditions for
my MBA project.
Finally, I am particularly grateful to my family for having believed in me and their constant
support.
Thank you,
Jyoti Kumari
HPGD/OC17/2752

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TABLE OF CONTENT
Sr. No. Particulars Page No.
1. Introduction to Basic Concept 5
 Vendor Management 5
 Types of Vendors 5
 Introduction to Outsourcing 7
 Benefits of Vendor Management 10
 Challenges of Vendor Management 11
 Vendor Management Process 12
 Techniques to Improve Your Vendor Management Strategy 14
 Procurement V/S Sourcing V/S Vendor Management 16
2. Collaboration of Procurement, Sourcing and Vendor Management – VMO 18
 Goals of VMO 19
 Vendor Management Framework 20
 VMO Architecture 21
 Vendor Management Office Roles and Responsibilities 24
 Skills and Competencies Needed in VMO 25
 KPI’s For VMO 28
 Vendor Management Model 31
 Working with Multiple Vendors 37
 Vendor Categorization 39
 Vendor Consolidation 45
3. Vendor Selection 48
 Steps in Vendor Selection 48
 Step 1: Define the Evaluation criteria 48
 Step 2: Evaluate various models 49
 Step 3: TCO Analysis 50
 Step 4: Vendor Risk Assessment 51
 Step 5: Decision based on Analysis and Score 52
4. Introduction to Risk Management 53
 Risk Management in Outsourcing 54
 Contract Management 57
 Risk Perception Matrix 57
5. Spend Analysis and Performance Management 60
6. Conclusion 63
7. Bibliography 65

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INTRODUCTION TO BASIC CONCEPT
VENDOR MANAGEMENT
A Vendor (from French word vendre, meaning to sell) is any person or company that sells goods
or services to someone else in the economic production chain. In information technology as well
as in other industries, the term is commonly applied to suppliers of goods and services to other
companies.
Vendors are third parties who provide a product and or contract to perform agreed works on a
project. Procurement processes to be followed depends on the size of the project. For large
organizations, there may be supplier/ procurement management team and they adhere to strict
processes to contract for the services or goods required for a project. However in smaller
organizations, the process may be handled by one person or a small team. There are supplier /
vendor management frameworks in place to help project teams to leverage relationships and
identify preferred vendors. Project strategy for suppliers and vendors defines their selection
process, tendering, review and selection criteria, kind of contractual relationship, performance
standards expected (e.g. Service Level Agreements), Statement of Work. It is important that there
is work ethics from both sides and clear rules of engagement exist and both parties maintain respect
and professionalism.
Vendors may sell B2B (business-to-business; i.e., to other companies), B2C (business to
consumers), or B2G (business to government).
Vendor management is the process that empowers an organization to take appropriate measures
for controlling cost, reducing potential risks related to vendors, ensuring excellent service
deliverability and deriving value from vendors in the long-run. This includes researching about the
best suitable vendors, sourcing and obtaining pricing information, gauging the quality of work,
managing relationships in case of multiple vendors, evaluating performance by setting
organizational standards, and ensuring that the payments are always made on time.
So, that’s where the vendor management system or VMS comes in place.
A Vendor Management Systemis an online web-based tool that acts as a single node to manage
all vendor related activities in any organization or business while ensuring improved efficiency
and long-term growth in a cost-effective manner.
TYPES OF VENDORS
Every organization is not same, neither can every vendor be managed in the same fashion; so, upon
examination, IT organizations find that they typically use four categories of vendors:
1. Hardware vendors that sell or lease physical products and sell related support, such as
repair and maintenance.

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2. Software vendors that sell commercial off-the-shelf (COTS) products or offer licenses to
an existing product line; where enhancements to products, maintenance and technical
support are also offered.
3. Service vendors that can either provide long-term support, such as an outsourcing annuity-
based contract; or short-term services, such as staff augmentation services used to
supplement enterprise personnel.
4. Telecommunications vendors that supply telephony equipment, networks, circuits and
network services.
5. Cloud Vendor deliver computing as a service rather than a product, whereby shared
resources, software, and information are provided to computers and other devices as a utility
(like the electricity grid) over a network (typically the Internet).
Cloud computing, or in simpler shorthand just "the cloud", also focuses on maximizing the
effectiveness of the shared resources. Cloud resources are usually not only shared by
multiple users but are also dynamically reallocated per demand. This can work for allocating
resources to users.
For example, a cloud computer facility that serves European users during European
business hours with a specific application (e.g., email) may reallocate the same resources
to serve North American users during North America's business hours with a different
application (e.g., a web server).
This approach should maximize the use of computing power thus reducing environmental
damage as well since less power, air conditioning, Rackspace, etc. are required for a variety
of functions. With cloud computing, multiple users can access a single server to retrieve
and update their data without purchasing licenses for different applications. Cloud vendors
are experiencing growth rates of 50% per annum. There are mainly three variety of cloud
services;
 Infrastructure as a Service (IaaS)
 Platform as a Service (PaaS)
 Software as a Service (SaaS)

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INTRODUCTION TO OUTSOURCING
The next word that comes to mind the minute one says vendor, is the word outsourcing, since in
business, outsourcing is the contracting out of a business process to a third-party or as we often
call it, to a vendor. Whether vendors are being engaged on-shore, offshore or by a captive
organization, companies increasingly need a strong and capable Vendor Management. This need
is being driven largely by governance, risk and compliance obligations.
The Logic, Perils and Gains (LPG) of OUTSOURCING:
Before we delve into the details of Vendor Management, it is important for us to know the Logic,
Perils and Gains (LPG) of outsourcing. This will enable us to understand the Need for Vendor
Management along with the points to consider in the management of vendors for the
Organizations.

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 Logic
Although outsourcing has been around as long as work specialization has existed, in recent
history, companies began employing the outsourcing model to carry out narrow functions
which could be done more efficiently, and therefore more cost-effectively, by other companies
with specialized tools and facilities and specially trained personnel. The primary reasons for
companies to outsource are;
- Cost Reduction
- Focus on Core Competency
- Rather than try and make, buy what someone else specializes in
- Optimum Utilization of Internal Resources
 Perils
Anytime you give someone else responsibility for an aspect of your business, there is risk
involved. Did I hire the right person/company to do the job? Will they do what they are
supposed to do? Will they deliver on time? Will they meet the SLAs what my customer desires?
These are typically the questions that bother the company that chooses to Outsource. Some of
the risks/ perils involved in Outsourcing are;
- Lack of Business Know-how
- Loss of control
- Subdued Employee morale
- Difficult to Exit
 Gains
If the perils mentioned above are efficiently taken care of, organizations can benefit hugely
from outsourcing various functions and processes to outside companies that specialize in
them. Organizations stand to gain from Outsourcing in the following ways;
- Access to the latest and greatest in technology
- Cost savings
- High quality of staff
- Job security and burnout reduction for regular employees
- Flexibility
Hire or Outsource? How to Decide?
We have seen the risks and rewards associated with outsourcing the IT function of your business,
there is a lot to think about. Whether you choose to outsource or hire internally, one thing is certain,
you must know how to manage successful working relationships with your IT service providers.
As an example, let us consider IT Support/ Helpdesk. Outsourced IT Support or in-house IT
support? It can be hard to decide which right for your business is. Both options have their
advantages, but you need to be certain you're making the right decision before you commit to the

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investment developing an IT helpdesk in-house certainly has its benefits. With the right
background and continued training, your support team can build up in depth, specialized
knowledge of your company's particular IT set up and systems. If they are based on site, your IT
support team will also be available to solve problems quickly and efficiently.
However, IT support training costs money. Indeed, to stay current in the ever-changing world of
technology your staff will need to undergo constant training and sit regular exams. You also have
to pay a regular salary to your IT support staff. It can be tricky providing holiday and sickness
cover too. What happens if one member of your two-person IT support team is on holiday, and the
other is sick? It's usually a mistake to rely on a specific set of people to run your in-house support.
Even the most experienced IT engineer will lack experience in some areas. To cover all the bases,
you may be best with outsourced IT support.
As a general rule, outsourced IT support is more cost-effective than creating an in-house helpdesk.
Many businesses find that - once they do the math - outsourced IT support is clearly the better
option. Outsourced IT support also gives you access to a larger bank of expertise. If you choose a
good IT support company, they'll have staff with experience and qualifications in a whole range
of areas. Your outsourced IT support company should always be able to find someone to help, no
matter what your requirements.
There are other good reasons to choose outsourced IT support too. It frees up time for people in
your business to focus on running and growing it. Many companies find that, as they grow, a
knowledgeable member of staff ends up becoming the 'IT scapegoat'. Known to be good with
computers, the 'IT scapegoat' gets bombarded with requests for help whenever anything goes
wrong, distracting them from their actual job as we saw in the perils of outsourcing stated earlier.
If your sales manager spends more time helping staff with computer problems than selling, then
you know it's time to make some changes. The cost-effective answer is - usually - outsourced IT
support. You make monthly payments to an outsourced IT support company, and your staff to get
on with their jobs.
Like we saw in this example, the organization will have to look at the pros and cons of the various
options in each of its outsourcing decisions and come to a decision which is in the best interests of
their organization.

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BENEFITS OF VENDOR MANAGEMENT
By having proper vendor management in place, an organization can experience the following
benefits:
(1) Better Selection
By implementing appropriate vendor management in place, your organization can benefit
from a larger selection of vendors, resulting in more choices and ultimately better costs.
Your organization can benefit from a bidding war between vendors while ensuring that you
get your money’s worth.
(2) Better Contract Management
In a multi-vendor scenario, lack of vendor management system elevates the issue of
managing contracts, documentation and other vital information in your organization.
By implementing a proper VMS in place, your organization can benefit from a centralized
view of the current status of all contracts and other useful information which will enable
your organization to achieve better decision-making capabilities and save valuable time.
(3) Better Performance Management
An integrated view of the performance of all the vendors can be achieved through the
implementation of a vendor management system.
This can give your organization a clear understanding of what is working and what is not!
This ultimately leads to improved efficiency, which in turns improves the overall
performance of the organization.
(4) Better Vendor Relationship
It is never easy to manage multiple vendors at the same time. While some vendors may
prove really fruitful, others may not. But managing relationship among the vendors is the
key to successful project completion.
By getting all vendor related information in a single place, you benefit from getting all
required information at once and it can influence your decision-making process, thereby
simplifying it!
(5) Better Value
Ultimately the goal of a vendor management system is to get the most value for your buck.
So, implementation of a vendor management system, when done properly can result in
long-term savings as well as improved earnings over a period of time.

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CHALLENGES IN VENDOR MANAGEMENT
Although there are many benefits, some challenges need to be overcome to ensure the smooth
functioning of the organization.
There are many challenges that an organization may face if vendor management is not
implemented correctly. They are as follows:
(1) Vendor Compliance Risk
Setting standards before dealing with vendors can save you loads of time and money spent.
Not all vendors may perform as per your standards. It is important to choose the right
vendor from multiple vendors, who meet your organizational standards and criteria while
promising excellent performance.
(2) Vendor Reputation Risk
Dealing with multiple vendors is not an easy task. Also, the quality of work has to be
gauged upfront before getting into a contract, which makes the process more complicated.
While some vendors may get your task done really well, others can put up with some poor
performance and throw all your deadlines in a tizzy. Hence, background checks are a must
Before any selection is made. This may provide you with some insights into vital points
that you may have missed in the first place.
(3) Lack of Visibility
While it is really important to have a centralized data storage solution for managing vendor
data, it also benefits the organization from a centralized view and improved visibility,
which can lead to better resource allocation and improved efficiency.
(4) Vendor Data Storage
As your organization grows, it becomes essential to have a vendor data storage solution in
place. In the absence of a vendor management system, storing and retrieving data might
prove to be really tough, considering the fact that you may be dealing with multiple vendors
for multiple projects at the same time.
(5) Vendor Payment Risk
Some vendors may have different payment terms, while some may adhere to industry
standard terms. Figuring out the terms and ensuring that the payment is always made on
time is one of the major issues, especially while dealing with multiple vendors at the same
time.

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VENDOR MANAGEMENT PROCESS
At this point, we can infer that having effective vendor management is crucial. An organization
has to plan and execute a process to guide how they will engage with their vendors at every step.
While it is not possible to have one specific vendor management process that encompasses all
enterprises and vendors, we can bring together the basic steps that underlie an organization’s start-
to-finish engagement with its vendors:
(1) Identification and Establishment of Business Goals
Before the vendor management process starts, it is crucial to identify and establish business
goals that necessitate vendor involvement. This helps in understanding the requirements of
every business unit and prevents duplication of efforts and wastage of resources in terms
selecting and contracting with vendors. It also helps in the later stages of measuring and
evaluating vendor performance as these goals establish appropriate metrics.
(2) Establishment of a Vendor Management Team
After the business goals are recognized, the next step should be the foundation of a
dedicated vendor management team. This centralized team should be skilled in identifying
business goals and KPIs for vendor management, selecting relevant vendors, negotiating
the contracting process, periodically assessing the performance of the vendors and tracking
all transactions activities.
This team is crucial as they will act as an intermediary between the business units and the
vendors and ensure collaboration between the two.
It will also prevent the engagement of too many stakeholders – When vendor management
is decentralized to the business units, it results in a large number of contracts with the same
vendor or disparate transactions with multiple vendors. This impedes tracking and
evaluation of vendor performance and exposes the organization to vendor risk.
(3) Creation of a Database for all Vendor-related Information
After the business goals are clear and the vendor management team is up and running, the
next step should be to build an updated and categorized database of all relevant vendors
and vendor-related information.
The benefits of this are manifold –
(i) It will match the needs of the business units to the right vendor. For example,
the administration can identify the relevant vendors for office supplies, computer
equipment, etc.
(ii) After the categorization of vendors based on their type, cross-vendor
comparison will become easier for evaluation

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(iii) It will streamline information – scattered, disparate vendor information will be
stored in a single location and provide insights into the current stage of the vendors,
for example, vendors with contract in place, vendors that require renewals, etc. and
(iv) It will enable effective budgeting – you can easily recognize the long-term,
critical vendors and the short-term, tactical vendors and assess the budget
assignment accordingly.
(4) Identification of the Selection Criteria for Vendors
Once all vendor-related information is streamlined, updated and categorized, you have to
select the criteria based on which all relevant vendors will be chosen.
While cost has been the primary selection criterion for choosing vendors, businesses are
increasingly looking at other criteria to determine which vendor would best serve their
requirements – after all, lowest cost doesn’t guarantee the highest value. A CIO article1
has recognized non-cost factors that need to be considered to select vendors – financial
stability, previous experience in the field of work as the business, industrial recognitions,
the procedures followed by the vendor, economies of scale and their legal/regulatory
records. It is important to consider all of the aforementioned criteria to have a holistic
assessment of the vendors.
For purchases of high value, companies also engage in bidding procedures that involve
RFQs, RFIs, and RFPs before choosing the vendor.
(5) Evaluation and Selection of Vendors
At this stage, the vendors need to be evaluated based on the selection criteria and, if
applicable, the bidding process.
The submitted proposals need to be thoroughly assessed to understand the pricing structure,
scope of work and how the requirements will be met, the terms and conditions, expiry and
renewal dates, etc. This will ensure that your organization is deriving the maximum value
from the vendor. Look out for hidden savings opportunities!
Assess the internal strengths and weaknesses of the vendors and study how the external
opportunities and threats can affect your transaction as well as the vendor management
process.
Once you have ensured a complete start-to-finish evaluation process, it’s time to choose
your vendor.
(6) Developing Contracts and Finalizing Vendors
Well, now you have the chosen one. It’s time to complete the contracting process and get
your vendor(s) onboard.

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Typically, the contracting stage is assigned to the legal and finance team and the senior
management involved with the vendors. The rest of the business units receive the contract
and engage with the vendors after the finalization process. This tends to be sub-optimal in
the long run – the business units are the ones finally collaborating with the vendors on a
day-to-day basis and have valuable insights on how to maximize the vendors’ operational
performance. Hence, all the relevant stakeholders need to be involved, at least in the
decision-making process.
BEST PRACTICES: TECHNIQUES TO IMPROVE YOUR VENDOR MANAGEMENT
STRATEGY
You have a vendor management process best-suited to your organization, in place. However,
vendor management doesn’t just end once the vendors are chosen. There are techniques and
Best practices that complement your process and can make your organization’s vendor
management even more effective. Let’s take a look:
(1) Convey your expectations clearly
Whilst engaging with vendors, it’s necessary to clearly define the business goals of the
organizations and expectations from the vendors. Let the vendors know what your current
and future requirements are and how they align with your organization’s objectives. It will
enable you and the vendors to be on the same page and ultimately collaborate better, even
in the long-run. It helps to set benchmarks, reduces risks related to vendor performance
and compliance, and to evaluate the vendors.
(2) Ensure you set deadlines that are achievable and realistic
Given the set of goals and expectations you have, it is important to set deadlines that can
be met, realistically, by the vendors. Setting impossible deadlines not only impedes vendor
performance and value creation, but it also increases risk and prevents meaningful
collaboration.
(3) Collaborate with your vendors to maintain long-term relationships
The word ‘collaboration’ has come up quite a few times, hasn’t it? Well, it is important
because simply negotiating with the vendors about pricing and performance leads to the
completion of a transaction. But, when you collaborate and involve the vendors in
strategizing how to achieve the goals and expectations, it leads to valuable, long-term
relationship building. Collaboration allows both the enterprise and the vendors to
brainstorm innovative ideas about how value-creation from their partnership can be
maximized.
In fact, Zycus’ annual survey, Pulse of Procurement2, has recognized achieving better
synergies with suppliers as one of the top priorities and working with suppliers to improve
performance as a key focus area for procurement professionals.

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(4) Establish KPIs to measure Vendor Performance
How do we realize if the vendors are delivering as per the set expectations and business
goals? We need Key Performance Indicators (KPIs) in place to measure the various facets
of the vendors and to ultimately know if the vendor management process is effective.
The KPIs vary according to the organizations and based on what they consider as important
while evaluating vendor performance.
However, another article by CIO on ‘Vendor Management: How Do You Measure Value
for the Money?’3 has categorized various quantitative and qualitative ways to establish
KPIs and measure vendor ROI:
* Relationship Management; measured by the vendor’s commitment, flexibility,
and innovation,
* Cost Management; measured discounted pricing, order costs, etc.,
* Quality; measure by staff expertise, order accuracy, conformance to requirements,
warranties, etc.,
* Delivery; measured by on-time delivery, response time to order issues and
emergencies, etc., and
* Customer Satisfaction
(5) Assess Vendor Risks to enable its Minimization
This is probably one of the most important techniques that will help ensure vendor
management delivers what is expected.
Risk assessment of vendor management is not a single step – It starts when you recognize
a need for a vendor and then, it’s simply ongoing.
There are multiple types of risks surrounding vendor management – financial, payment,
operational, compliance and data security to name a few. You need to periodically identify
all vendor-related risks at every step of the vendor management process, assess its impact
based on your risk appetite and plan mitigation measures.
The threats that pose as risks are continuously changing – ensure that you are monitoring
the internal and external environment of the organization and assess the controls you have
in place, their effectiveness and update them as required. This level of due diligence will
help you minimize vendor-related risks and ensure vendor performance is able to satisfy
all requirements.

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Food for Thought – Difference Between Vendor Management and Vendor Relationship
Management
In many scenarios, the terms ‘vendor management’ and ‘vendor relationship management’ are
used interchangeably. Does one additional word really create any difference? Well, it does. While
vendor management covers the entirety of an enterprise’s engagement with its vendors,
Vendor relationship management is a part of that entirety that focuses on the ‘human aspect’ of
vendor management. At the end of the day, the vendors are represented by people and we have
already established how valuable vendor relationships are for an organization.
Building lasting and meaningful relationships with vendors, especially the critical ones, is going
up on the list of priorities for an organization dealing with vendor management. Teams are
recognizing the value of synergizing with their vendors – meaningful, sustained collaboration can
positively impact vendor performance and can also help minimize vendor risks. In order to
facilitate this, there are a growing number of VRM tools that enable companies to effectively
manage their vendor relations.
PROCUREMENT V/S SOURCING V/S VENDOR MANAGEMENT
In Organizations, the activities of Sourcing, Procurement and Vendor management are often used
interchangeably. However, the fact remains that all the 3 activities are distinct from each other
with the activities involved on all 3 of them distinctly different.
The activities involved in sourcing, procurement and IT vendor management are straightfor ward
to articulate. We have to:
• Plan for the "stuff" we want to acquire (sourcing).
• Select the vendors and contract to obtain the "stuff" (procurement).
• Manage the vendors that provide the "stuff" (vendor management).
However, the life cycle for acquiring and managing IT products and services adds complexities
that require IT domain knowledge - not always present in corporate procurement or business units.
This leads many organizations to establish seemingly redundant capabilities for IT vendor
management, sourcing and procurement.
Although the vendor management function is interrelated with the sourcing and procurement
functions, there are distinct differences. While sourcing and procurement functions focus on the
transactional areas of selecting service providers and coordinating orders and payments, vendor
management focuses on teaming with the service providers to improve overall performance and
drive efficiencies once contracts are executed. In other words, the sourcing and procurement
functions are responsible for "creating the outsourcing program," and the vendor management
function for "maximizing the benefits of the outsourcing program.”

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Despite differences in skill-set requirements for vendor management professional’s vis-àvis
sourcing and procurement resources, close interaction between these three functions is imperative.
In order to "maximize the benefits of the outsourcing program," vendor management professionals
often have to work hand-in-hand with their sourcing and procurement counterparts either to
support the negotiations around new services and scope changes or to manage and resolve
contractual issues. One way to integrate these functions is to have appropriate sourcing and
procurement personnel participate in governance committees so they are aware of ad-hoc requests
and have clear lines of communications.

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Collaboration of PROCUREMENT, SOURCING AND VENDOR
MANAGEMENT – VMO
The activities carried out by the procurement, sourcing and vendor management functions are
different, it is necessary for the team to graduate by becoming a more collaborated function. Today,
these three functions are generally part of the same team in the organization and are generally
known as the 'Vendor Management Office' (VMO).
Vendor Management Office remains a specialized function whose purpose is to bring maturity and
process discipline to the many aspects of governing and managing the performance of service
providers. Additionally, it brings a view of the service provider as a partner, thus enabling
information sharing and alignment of incentives, which in turn generates greater value for both
parties. Effective vendor Management Office can improve productivity, enhance performance,
maximize the business case, mitigate risks, and reduce overall costs related to third-party
providers.
To build a collaborative culture, sourcing, procurement and IT vendor management will have to
define their goals, and develop a set of shared goals. These shared goals are nothing but the Key
performance Indicators of the Vendor Management Office.
Alignment of these goals with specific activities, shared performance metrics and accountabilities
will foster a more cooperative environment. Forming virtual teams and informal communities of
interest (where groups don't report into the same organization or leaders) increases interactions
and encourages collaboration, as trust is developed over time. Virtual communities can operate
with shared goals to improve reliability, integrity, predictability and communication.

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To succeed in a multi-vendor outsourced environment, an organization must:
• Build a formal and mature VMO Framework.
• Architect a VMO function to achieve the organizational goals
• Set out a formal VMO mission and a VMO Charter, such that it aligns well to the organization
vision.
• Formally set out the VMO team roles and responsibilities as well as the reporting structure
within the VMO.
• Understand the competencies needed to manage the vendors.
• Chart down Key Performance Indicators (KPIs), that can be monitored to gauge the efficiency
and effectiveness of the VMO.
GOALS OF VMO
If VMO is primarily focused on costs and only rewarded or recognized for how it improves costs
for vendors, then it is destined to fail. Gaining acceptance and elevating its status of being a
strategic function requires the VMO to market itself across the enterprise. Communicating how
VMO not only saves money, but reduces risks and improves the quality of vendors' as well as
overall value and performance, must be the primary goal of VMO. VMO goals are in the following
areas;
A. Goals pertaining to financial aspect
• Achieve a reasonable balance in account management
• Realize group wide efficiencies and economies of scale in case of multiple BUs
• Maximize value across critical vendors.
• Understand and manage financial risk.
• Manage and reduce spending across IT, as appropriate.
• Improve vendor costs by optimizing spend.
B. Goals pertaining to Process aspect
• Avoid bureaucracy.
• Decentralize when appropriate, Centralize when needed.
• Ensure that there is a unified customer message to vendors.
• Avoid conflicting messages within and outside the organization.
• Ensure the vendor is delivering contractual obligations as defined in the agreement.
• Drive continuous improvement in the vendor's behavior and performance.
• Monitor compliance to corporate and regulatory requirements.
• Drive continuous improvement in vendor performance.
• Aggregate vendor data and communicate vendor performance.
• Establish a set of policies, standards, processes and templates for use when working with
vendors.
• Identify, qualify and manage opportunities for vendors to deliver innovation that impacts
customers' business performance.
C. Goals pertaining to relationship aspect (both vendor and customer)

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• Balance the most appropriate organizational controls over the customer side of the
relationship, counterbalancing the vendor's ability to manage the customer.
• Improve the executive management support of the most important relationships.
• Mitigate the risks associated with vendors, their products and their services.
Apart from these goals, VMO also has various process responsibilities that they need to ensure
happen without any delays and as per the guidelines set by the organization.
PROCESS RESPONSIBILITIES OF VMO
Over and above the goals mentioned in previous section, there are a few processes that are clearly
the responsibility of VMOs:
• Solicitation of input, through scorecards and other methods, from all major constituents in the
organization (including performance, contractual and relationship management performance
information)
• Marketplace intelligence - How the vendor is performing in the context of the larger IT world
(for example, the stock market or Gartner research documents)
• Direct communication with the vendor on overall performance through formal and informal
channels
• Part of the escalation path for conflict/performance resolution
• Facilitating information flow to senior executive sponsors
• Regular review sessions within the IT organization
• Analysis of services and products in relation to business targets and initiation of an innovation
process
• Managing the demand side to improve the quality of the demand during the contract life cycle
VENDOR MANAGEMENT FRAMEWORK
Most Organizations today do not completely have an in-house team to perform all of its tasks. To
achieve the economies of scale as well as utilize the advantage of a particular activity being a core
activity of some other organization as opposed to its own, most organizations today rely heavily
on outsourcing its non-core and sometimes even some core activities to vendors. How do these
organizations ensure that what they want to outsource to these vendors is being with utmost
efficiency as well as accuracy and at the same time ensure their own organization gets a value for
money in the whole transaction? The most effective way for an organization to address this issue
is to establish a formal vendor management framework that coordinates the elements of the vendor
relationship at various stages of the project lifecycle.
A vendor management framework would set clear roles and responsibilities for both the outsourced
vendors and the Vendor Management Office as well as the other relevant stakeholders in the
Organization. It provides both a consistent approach as well as a unified communication channel
for managing vendors across the board. This will ensure transparency, governance, ease of
communication and visibility throughout the IT supply chain.
A formal IT Vendor Management Framework should encompass the following:
• VMO Program

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• Relationship Initiation and Establishment Processes
• Contract Management Processes
• Continuous Improvement Program
VMO ARCHITECTURE
To execute a world class VMO, it is necessary to lay the foundation and architecture of the VMO
based on the VMO framework. The VMO architecture would be the building blocks on which the
entire VMO Organization would reside and hence it is necessary for it to be formed with
participation from all stakeholders.
As a part of the architecture, it is essential to also list down the deliverables as well as business
benefits that the VMO envisages from each of the building blocks.

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VMO Program
A VMO program determines the Sourcing Strategy of the Organization along with the various
guidelines and frameworks for the VMO. It also helps determine what, when and how much to
outsource and develop a roadmap for the same.
Deliverables
• VMO Mission Statement
• VMO Charter
• Sourcing Strategy for the Organization
• Portfolio Analysis Reports
• Business Case Analysis
• Sourcing Strategy Implementation Plan
• Sourcing Processes and Benchmarking
• Sourcing Governance Structure and Mechanism
Business Benefits
• Direction for the VMO and the Organization
• Objective and Structured decision on Outsourcing policy
• Portfolio and Spend Analytics
• Cost Benefit Analysis
• Transparency in Sourcing
Relationship Initiation and Establishment
This block helps identify the vendors that can be on boarded and possibly upgraded to ‘business
partner' status. It also defines a structured, effective process for vendor evaluation and facilitate
selection of vendors.
Deliverables
• Vendor Classification Criteria
• Request for Information (RFI)
• Request for Proposal (RFP)
• Vendor Evaluation Criteria
• Vendor Selection Criteria
• Vendor Acquisition Preparation/ Procedure
• Market Intelligence
• Due Diligence Guidelines
• Negotiation Guidelines
Business Benefits
• Structured Initiation Process lays the foundation for accurate demand mapping
• Risk Mitigation through careful vendor evaluation
• Structured Decision Making
• Standard communication with all vendors while soliciting proposals
• Awareness of Latest Technologies and Trends

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Contract Management
This block is aimed at preempting possible risks in outsourcing and how these risks can be
managed via Legal and Commercial terms and conditions.
Deliverables
• Risk Register for Outsourced Contracts
• Risk Management plans
• Standardized Commercial Terms for various type of procurements
• Standardized Legal Terms for various type of procurements
• Standardization of multiple vendor processes
• Confidentiality and Non-Disclosure Guidelines for Vendors
• IPR Guidelines
• Escalation Matrix at both Vendor and Organization end
• Dispute Management Protocols
• Service Level Agreements
Business Benefits
• Insurance against actual and projected risks
• Service Delivery Excellence through SLA Management
• Efficient Contract Definition and Execution
• Protection from IPR infringements
• Avoidance of Contract Terminations through Conflict and Dispute Management
Continuous Improvement Program
This block aims at continuously validating relationship success criteria by comparing the vendor
performance with the ever-changing end user expectations and delight levels and realigning the
service levels to these objectives
Deliverables
• Determine rating of vendor based on performance
• Vendor Improvement Plan
• Preferred Vendor Management Procedure
• Relationship Assessment - Strengths and Areas of Improvement
• Improvement Integration Procedure
• Stakeholder Satisfaction Management
Business Benefits
• Improve service levels to the End User
• Cost Reduction through Innovative Improvements in Services offered
• Align Relationship Structure to the changing business needs and benchmarks
• Proactively Manage Vendor Base and establish strategic relationships with
vendors providing maximum business value
• End User Satisfaction with VMO and effectively IT department

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VENDOR MANAGEMENT OFFICE ROLES AND RESPONSIBILITIES
Whether VMO is an office/department, standards body or a federated role performed by various
groups in the enterprise, the roles and responsibilities assumed by each involved in the VM
Program is key to the success of any VM program. Effective Vendor Management requires
Organizations to establish appropriate roles and responsibilities to interface with the vendors' staff
as well as the user teams or technical teams on the demand side. For vendor management to be
effective, organizations need to ensure that the vendor management structure they establish, will
adequately cover the vendor management disciplines, competencies, roles, responsibilities and
enterprise reporting processes.
Organizations should focus on establishing a framework and architecture for sourcing and sourcing
management. This framework should also identify a set of roles and responsibilities which are
required to effectively manage a sourcing life cycle (strategy, vendor evaluation and selection,
contracting, and vendor management). It should map these responsibilities back to the VMO
Strategy and Mission. Some of the various roles and responsibilities of the VMO are as seen in
figure below:
Based on the Roles and Responsibilities, the size of organization, the competencies of people and
the level of outsourcing, the Organization structure of the VMO will be defined. One person may
handle one or more profile depending on the competency and work load.

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SKILLS AND COMPETENCIES NEEDED IN VMO
Vendor Management Superstar. A technology guru with thorough knowledge of hardware,
software and systems, plus awareness of business unit needs. Must be a creative negotiator with
stellar communication skills and experience in finance, contract law and relationship management.
Ideal candidate is willing to confront vendors, call their bluffs, shake trees and keep vendors
honest. Ability to create win-win solutions a must.
Staffing in Vendor Management is no longer as easy as appointing a technology employee to be
the company's official representative. Outsourcing, the trend towards longer and more complex
deals, and an increase in the number of vendors of all sizes have prompted companies to rethink
the skills and experience required to manage these contracts on a daily basis. The key IT
procurement competencies that IT procurement professionals and managers should develop are
grouped into four areas:
- Technical IT knowledge
- Skills in Demand and Supply Management
- Commercial Skills with a sharp perspective on Legal and Financial aspects
- Project management
Technical IT Knowledge
IT procurement personnel need IT knowledge to understand how technology and IT principles
affect IT procurement. However, it is not essential that IT procurement managers have a technical
IT background, such as technical knowledge gained from a university degree in IT. In practice,
there are successful IT procurement managers with either a technical or business background. For
example, an IT procurement manager/professional should have a

26. 26
sound understanding of how a data center works, what components (servers, storage, software and
technical resources) are required to run it and how this affects sourcing. However, this procurement
professional may not necessarily have technical knowledge in data center design. The individual
may need to understand what virtualization technology is and how it impacts IT but may not have
the technical knowledge to implement a virtualization solution. Technical IT knowledge enables
procurement personnel to communicate effectively with IT users and gain their trust. They also
need these competencies to effectively interface internally with the financial department and
externally with service providers and vendors.
Skills in Demand and Supply Management
IT procurement personnel need to have the right competencies to understand, establish, implement
and manage procurement methodologies, processes and tools in demand management, supply
management and procurement operations. The following competencies in these three areas enable
procurement personnel to develop a procurement methodology:
1. Demand Management:
Enables IT procurement to become involved early in third-party decision making about IT
spending. Demand management focuses on optimizing the procurement resources, considering the
requirements of third-party IT spending projects. It may have less/no interaction with the end user
IT demands, which are part of the IT demand management domain.
2. Supply management:
Uses tools and processes to manage the existing IT supply chain effectively and efficiently. The
vendor due diligence process tries to ensure that vendors meet some basic requirements, such as
financial viability, product range, years in business, certification and qualifications, and
geographical presence.
3. Procurement operations:
Ensures that IT procurement is effective, efficient and compliant Processes.
General Commercial Skills with a sharp perspective on Legal and Financial aspects
Managers within VMO need to manage IT spending categories, including IT hardware, software,
services and telecom spending across functions. This enables them to obtain an in-depth view of
the vendor market, which improves risk management and time-to-market with a faster RFP
process. Managing spending effectively across categories ensures that IT purchasing is successful
throughout the organization. Many organizations without an efficient commercial procurement
management function often conduct their IT purchasing in a decentralized fashion, which leads to
maverick spending. For example, some companies operating in multinational environments have
negotiated multiple contracts with many PC vendors. This consolidated approach to the
management of categories in global PC procurement can optimize cost at a global corporate level.

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Many complex IT procurement projects go beyond simply negotiating price, which requires
general commercial skills. These projects often involve complex commercial and pricing models
with different variables, levels of risk and implications for total cost of ownership. Astute
commercial, negotiation and financial skills enable IT procurement to deliver business outcomes
and provide trusted advice to stakeholders. IT procurement personnel need adequate legal and
contractual knowledge when negotiating the contract with the vendor. IT procurement must to be
able to advise the stakeholder about all aspects of contracting, review contracting documents,
involve their legal function when appropriate, and highlight any commercial and legal risks to
those responsible for the contracts. Although organizations generally believe that the legal
department can manage the entire contracting process, this is a misconception. In fact, the legal
department is only capable of performing reviews and approving the legal aspect of procurement
contracts, which is less than half of the work involved.
Even though legal counsel has final authority on legal aspects of the contract, IT procurement
personnel need to ensure that contracts meet IT business needs. This amounts to participating in
the development of the typical contract documents, which include master terms and conditions,
statement of work, and service-level agreements. If procurement managers are knowledgeable
about contracts and business law, they can effectively manage any potential issues.
On similar lines, knowledge on the financial and taxation implications of making a purchase need
to be known to the VMO. It may happen, that a deal which looks highly in favor of a vendor owing
to its offer price may not actually be that heavily in favor if there are costs like import duty,
customs, CVD, etc. involved. Hence a knowledge on the financial aspects are also important. If
the vendor is a MSME party, not making the payment on time leads to unwanted interest liabilities
on the outstanding and if not known to the VMO, may be detrimental to the organization.
Project Management
IT procurement personnel need to hone their stakeholder and vendor management skills to manage
complex and often prolonged IT procurement projects, such as an enterprise resource planning
(ERP) sourcing solution. Such projects usually involve multiple stakeholders and vendors - for
example, five vendors and six stakeholders. The key project management skills needed for
procurement and vendor management include the following:
• Managing expectations
• Effective verbal and written communications
• Managing virtual and cross-cultural teams
• Defining a project
• Proficient negotiating
• Vendor selection and evaluation
• Strong interpersonal skills
• The ability to identify risks and develop appropriate responses (managing risks)
• Contract knowledge
• The ability to manage to a contract
• Understanding when and how to use legal assistance
• Managing changes

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Over and above the skills mentioned above, one key skill needed in VMO is handling Sales Calls.
If you are in VMO, you should expect tons of sales calls every day from vendors, who will promise
you how their product will be able to solve every problem in the organization and how by making
a strategic partnership, you will be able to derive immense business value
and growth.
Most VMO managers have an opinion that handling about three to five unsolicited calls per day is
part of the job -- and thank goodness for software’s like True caller and the delete button on voice
mail, they are able to sift through them well.
A Strategy to counter these sales calls and avoid wasting time in answering these calls is to develop
a web portal and advising all the new and prospective vendors to register there. You can make
them fill various details like their Type of business, Area of competence, Years of existence and
experience in various domains, reference customers, some questions about the size of their
operations can be selected from drop boxes (so you have easy to search profiles in your database).
VMO may include some basic information about their business as well as basic vendor
qualification requirements so that they don't have to spend time explaining those again and again.
Simply advise vendors soliciting your business that you'll call them when you have a project that
may require their products or services. Cause at the end of the day; Before you let a vendor tell
you he has a solution, you need to make sure you have a problem
KPIS FOR VMO
The organization must use KPIs to evaluate success of VMO or to evaluate the success of a activity
in which VMO is engaged. Sometimes success is defined in terms of making progress towards
VMO Mission and in turn the vision of the company, but often success is simply the repeated,
periodic achievement of some level of operational goal (e.g. zero defects,
On time delivery, SLA adherence etc.).
Accordingly, choosing the right KPIs relies upon a good understanding of what is important to the
VMO as well as the organization. Hence, VMO KPIs are objectives to be targeted that will add
the most value to the business. The KPIs could be Quantitative indicators that can be presented
with a number as well as Qualitative indicators that can't be presented as a number but can be
presented in terms of improvement in service levels or satisfaction.
VMO KPIs are objectives to be targeted that will add the most value to the business. Quality Cost
Delivery (QCD) metrics can be directly related to measuring VMO processes - not only that -
doing so can provide a valuable mechanism into finding areas for improvement. Quality Cost and
Delivery (QCD) metrics are nothing new and have been in existence in the manufacturing sector
for a long time. However, the logic behind the same can be used to even measure the performance
of VMO and are important elements while measuring their success. QCD metrics can be directly
related to measuring VMO processes - not only that – doing so can provide a valuable mechanism
into finding areas for improvement. QCD is an established and proven technique which can form
the starting point for introducing performance evaluation of VMO.

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Examples of KPIs for VMO under the QCD areas are as follows;
Quality
• Increase/ Decrease (depending on strategy) in the number of transactions that are
managed through the VMO
• Increase in the number of new vendors evaluated to be on boarded
• Increase in the number of Vendors covered under the Performance Management Plan
• Reduction in number of contracts not renewed in time
• Increase in the percentage of Procurement done via Automated systems like e-
procurement
• Improved relationship scores for strategic vendors
• Advanced and Automated workflow approval process to ensure consistent procedures
• In case of a central VMO in a federated group, Increase in the reach and range of the
VMO
• Increase in the automation of demand management and approval functions
• Availability of On-demand, real-time scorecard measures
• Reduction in number of amendments to Purchase Orders
• Increase in the Stakeholder Satisfaction with the VMO
• Adherence to Audit requirements of the Organization
• Reduction in the number of exceptions to the various processes established
• Increase in the number of Decision Support Systems to the Decision Makers

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Cost
• Savings in value or percentage as compared to the Budget
• Reducing aggregate spending due to Innovations and Automations
• Net savings achieved due to VMO's direct actions in negotiations
• Increase in Year on Year Savings for same scope of services
Delivery
• Adherence to SLA for Time taken from Approved Requisition to issue of RFQ
• Adherence to SLA for Time taken for Negotiations (could be different for different types
of requirements)
• Adherence to SLA for Time taken by vendors in delivering the Hardware/Software
License/ Network bandwidth/ Service Personnel (could be different for different types of
requirements)
• Adherence by Vendors to Service Level Agreed in the contracts
• Increase in the service levels provided by the vendors
• Percentage Reduction in Project disruptions due to timely delivery
• Percentage Reduction in Project disruptions due to efficient Conflict resolution
The KPIs mentioned above are by no means an exhaustive list of indicators of the performance of
the VMO. However, they themselves are indicators what the organizations can use to draw out
what they feel would be the best way to measure the performance of their VMO function.

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VENDOR MANAGEMENT MODEL
Outsourcing as a trend and formal Vendor Management have become critical to the success of
organizations today. The IT environment is quickly and decisively moving to a model in which
many - if not most - services are provided by outside vendors.
With a vendor management office, your goal should not be to create a firewall between IT and the
vendor, using a procurement group as a proxy, but to be smart and consistent within the enterprise
about managing multiple aspects of any vendor relationship. That's why a formalized approach
that combines IT, procurement and legal people makes sense. At many enterprises, the CIO has de
facto responsibility for managing IT vendors, but the day-to-day reality is that individual
departments, technology platform owners and project offices manage vendors for their local needs,
perhaps tapping into corporate procurement and legal staff for some of the tactical contracts and
pricing analysis.
Centralized command and control is not effective when business units have traditionally operated
in an environment with a high degree of autonomy. Yet autonomy can degrade efficiencies,
resulting in duplication of efforts if acquisitions are not centralized (like overspending by buying
the same products or executing multiple versions of the same contract); and lack of visibility into
contracts, spending and performance when responsibilities are distributed across business units
and geographies. In these situations, organizations are often unable to get an aggregated view of
vendor spend and vendor performance. A balance between the need for centralization in authority
and the desire for autonomy to support business goals must be met, but there can be no compromise
over accountability for vendor effectiveness. IT vendor governance also must be structured to
account for the culture and decision-making styles of the organization, while still holding decision
makers accountable for their actions.
There are 3 main Models
 Centralized Model
 Decentralized Model
 Federated Model
Centralized Model
In the Centralized model, the central VMO is the function that owns the complete responsibility
of the process and hence it is the only point of contact in the organization for the vendors as far as
the procurement of assets and services go. Right from the governance of processes and policies to
the negotiation of any requirement across the group, the central VMO is the function that will
handle all the activities. Hence it is necessary that the central VMO should be staffed adequately
so as to ensure they have both the competence as well as the required time to ensure that all the
requirements of the companies across the group are met effectively and efficiently.

32. 32
Decentralized Model
In the decentralized model, we can see that the same number of vendors are interacting with
various touch points in the distributed environment and hence increasing the number of
interactions with the organization. For e.g. Vendor V3 is interacting separately with decentralized
VMO D3, D5 and D6. It may happen that each of the three are not aware of the requirements of
the other 2 and hence may end up negotiating the same asset or service at different costs and
possibly higher costs as they wouldn't be able to enjoy the economies of scale.

33. 33
Strengths and Weakness of Centralized and Decentralized Model

34. 34
Federated Model - The Optimal Vendor Management Operating Model
A federated model can be helpful in addressing challenges faced in Centralized and Decentralized
model. It first relies on a centralized vendor-management team to develop a standardized set of
policies and processes, and then vendor relationship managers within the business units to
promulgate them. Within a federated model, vendor management personnel in the business units
additionally provide performance metrics and scorecards so that service-provider performance can
be strategically evaluated at an enterprise level. An effective federated model also includes a
centrally led governance structure to provide appropriate oversight across the relationship
managers, thus ensuring compliance with policies, including risk management activities.
This model has gained widespread application across the world due the various benefits. Since the
model combines the characteristics of the centralized and a decentralized model, it is only logical
that it will also encompass the strengths of both the models.

35. 35
In complex enterprises where there is multiplicity of diverse business units, not only does it present
complex management challenges, but the dissipation of energy and resources through sub-
optimization and duplication can be extravagant. That's where a federated model brings in the
above listed benefits.

36. 36
The two major factors that determine the competencies needed in the each of the roles within the
VMOs in the organization are
1) The position of the VMO function with respect to the Organization.
2) Amount of value added by the vendor to the business.

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WORKING WITH MULTIPLE VENDORS
Almost all large companies use many vendors and system integrators – a practice called
'multisourcing'-to deliver on strategic initiatives and operational activities. The multivendor model
for IT services is complex and requires orchestration between vendors that are often fierce
competitors. This orchestration requires the enterprise to establish a multi sourcing delivery model
that provides visibility and transparency into multiple vendor systems and processes. This becomes
increasingly complex when both internal and external sources deliver services to the enterprise.
What emerges is the role of a multisourcing services integrator. The client organization, a third
party, or one of the vendors delivering services can perform this role. The role, however, is not
very mature, requires investments in industry frameworks (such as ITIL), IT service management
and quality, and will increase the administrative costs of outsourcing and delivering services.
Figure: Differences due to multi-vendor environment
Benefits of working with Multiple Vendors:
Companies choose to engage multiple vendors for a variety of reasons. These reasons
depend largely on the opportunity that needs to be addressed. The following are the various
benefits of working with multiple vendors.
• Optimize cost due to availability of options
• Increase Speed to market
• Provides Resource flexibility as both the quality and quantity of resources can be
upgraded/ downgraded as per requirement
• Flexibility/ scalability in operations
• Availability of specialists and experts
• Working with Top MNC vendors helps improve brand image due to their high
quality of performance
• Helps in Risk Mitigation

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Challenges of working with Multiple Vendors:
While working with multiple vendors gives a multitude of benefits to the organization as
we saw in the earlier section, it comes with a few challenges that add management and
delivery complexities that need to be managed effectively. Challenges arise due to the
differences that may exist between not just the Organization culture and the vendor culture,
but also due to differences of multitude of aspects between various vendors.
Figure: Benefits of working with multiple vendors
The above differences lead to the following challenges;
• Increased efforts to integrate systems and manage vendors
• Complex Ownership and accountability
• Lack of transparency among vendors
• Increased risk, effort and complexity
• Unnecessarily constraining vendor capabilities through common governance and policies
across all vendors

39. 39
Figure: Result of differences between vendors
With the risk of not meeting the Organizations objectives on the anvil, it is necessary for the VMO
to adopt a few steps that shall help overcome the challenges of working with multiple vendors and
in turn also improve the efficiency of the Vendor Management. This can be achieved with a 2-step
approach, viz.
1. Vendor Categorization
2. Vendor Consolidation
VENDOR CATEGORIZATION
Vendor categorization is the segmenting of vendors into categories and is either done for all
vendors (IT and non-IT) or is started with a category of vendors, such as IT or even a subcategory
like IT professional services. The segmentation is intended to separate the strategic from the
nonstrategic vendors and apply different management approaches to them.
Many organizations have or are beginning to embark on developing more formal approaches to
managing key IT vendors. For many, this involves applying formality, discipline and change to
how the organization interacts with all its vendors, with an emphasis on improving outcomes
(costs, quality, innovation and collaboration). This often leads to the segmentation of vendors into
specific categories based on a set of predetermined criteria. For most organizations, this results in
a separation of vendors that are the most strategic to the business from those that are not.

40. 40
Vendor Pyramid:
A pyramid structure perfectly depicts the general distribution of the vendor base. Initially, a
Vendor is just a supplier in the market that provides products and services to all the organizations.
The relationship that exists with this type of supplier is a very transactional one and as the
relationship strengthens, so does the trust, and the supplier is on the path of becoming a strategic
partner.
Basis of Categorization:
Vendor categorization is typically done based on set of goals that involve improving vendor
performance and relationships, standardizing vendor interactions and vendor evaluations, and
improving buying patterns with vendors. Best-practice approaches to categorization rely on a set
of criteria that balances the level of current spending, the degree of business value the vendor
delivers, the costs and risks of having to switch vendors, and the level of intended future spending
or investment when categorizing them.

41. 41
Figure: Basis of categorization
Management's attention to all the vendors shouldn't be equal, as the organization must be careful
to distinguish the management controls needed across the various vendor relationships. The
categorization process begins with asking and answering the following fundamental questions
about all IT vendors:
• Current spending or investment (sunk cost)
Has the company invested in the vendor's products or services to the extent that walking
away from the vendor is not an optimal choice?
• Future expected spending (potential investment)
Is there a desire, requirement and propensity to spend more with the vendor?
• Vendor strategic alignment (business value)
Does the vendor understand the customer's business goals? Does the vendor deliver and
perform to those goals?
• Vendor dependency (switching cost)
How dependent on the vendor is the organization? Is the vendor readily replaceable, and
at what cost?
• Breadth of product/service (capability)
Can the vendor span markets and provide a multitude of products and services?
The answers to these questions will help enterprises decide how to segment vendors, how to define
the processes for managing these vendors, and the organization and resource investments required.
The segmentation will result in a categorization exercise to separate the most important vendors
from those that vary in levels of importance to the business.

42. 42
CATEGORIES OF VENDORS
Once an organization has established a vendor management program with an appropriate structure,
necessary roles and competencies, the vendor management program must establish appropriate
strategies and disciplines to evaluate, select and contract with vendors that will provide the best fit
for organization hardware, software, IT services and communication requirements. Organizations
should engage in a process to understand which vendors are best suited to deliver their needs and
evaluate the competitive landscape before selecting a vendor. Vendor managers should regularly
monitor the market, including new vendors, capabilities and delivery and pricing options, as well
as the competitive position of players. This insight can help organizations to refine their sourcing
strategies and determine the best combination of IT services, software and infrastructure vendor
options.
Figure: Types of vendors placed in the Vendor Pyramid
Strategic Partners
Strategic Partners are High-dependence, high-cost exposure vendors as well as vendors that the
enterprise wishes to maintain a level of investment or increase business with over time. These
contracts and relationships should be managed by IT vendor management and IT operations in
consultation with business customers and IT senior executives. Often, these include large
outsourcing vendors, software vendors and telecom vendors. They have strong financial positions
and are leaders in their marketplace. They are counted on to create greater value and drive mutual

43. 43
success. They are expected to consistently drive to higher levels of solution and operational
innovation and efficiency and can better adapt to business/ technology change more rapidly.
Emerging Vendors
Emerging Vendors are typically those vendors with a small initial presence, but one that is
expected to build over time. These relationships are initiated through technical or business
managers, but contracts are often negotiated and managed by VMO. These vendors may rise to
the level of strategic over time, and a strategic vendor management program should address this
transition. These can include any type and size of vendor that is new to the organization.
Legacy Vendors
Vendors that have been in place for a sustained period but are not considered strategic. These
contracts should be monitored on a regular basis through an asset management program (using life
cycles). Competitive displacements should be used whenever possible, with an eye toward
reducing cost and exposure over time through additional negotiations or reduced product use.
These contracts, depending on size and risk, can be managed through a combination of technical
managers and VMO. These can include software, hardware and operating-system vendors.
Tactical Suppliers
Vendors that are often small in cost and exposure, or that are in a commodity environment (for
example, any software with a low aggregate contract value would be managed by technical
managers). Develop standard terms and conditions that can be readily used for smaller, less risky
acquisitions. These contracts can best be managed through procurement or IT asset management
in consultation with technical managers. These tend to be IT product vendors with whom the
organization does not have a large share of business. These vendors generally deliver
commoditized IT products or low-business value services. These vendors either have average-to-
poor historical value performance or provide specific services or pieces of the enterprise
architecture that are scheduled for obsolescence or restricted from future development.
Figure: Move from transactional to Strategic function

44. 44
Steps in Vendor Categorization:
Vendor categorization is essentially a 4-step exercise as we can see in figure:
Figure: Steps in categorization of vendors

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VENDOR CONSOLIDATION
There has been a lot of discussion about whether an organization should run a limited or expansive
vendor strategy when working with vendors in each of the mentioned categories. Although a multi-
vendor policy would achieve the lowest possible cost at any given point in time, the added cost in
procurement and technical support challenges, combined with market forces themselves, will
outweigh the lower purchase costs in most organizations.
Figure: Need for Vendor Consolidation
The advantages of working with a consolidated set of vendors enables the following;
• Reduce the cost of supporting, maintaining and managing multiple vendors
• Facilitates centralization of Vendor Management and enables IT to present a single,
consistent face to its customers

46. 46
• Reduced number of support contracts to negotiate and manage. Allows IT to simplify the
administrative workload entailed in negotiating, monitoring and managing multiple
support contracts and reduce the associated legal review efforts
• Increased Procurement process leverage
• Increased transparency and visibility
• Enhanced control and tracking of Vendor Performance
The various steps in Vendor Consolidation include;
Figure: Steps in Vendor Consolidation
Future Operating Model:
Design future operating model detailing the operating architecture, governance, integration etc.
This shall help identify what and who is important for your future operations.
Vendor Consolidation Plan:
Analyze and plan activities for consolidating vendors including identification of roles and
responsibilities
Change Management Planning:
Draw Change Management plan to be deployed within the organization during vendor
Consolidation activity
Transition Planning:
Develop transition plan detailing the methodology and activities (process transfer, hand holding)
to be undertaken to transition work from one vendor to another after consolidation

47. 47
Risk Management Planning:
Analyze and document risks which may arise during/ after vendor consolidation and during
transition and plan for risk mitigation activities.
Knowledge Management:
Analyze requirements related to knowledge transfer between vendors during consolidation
Performance Management:
Plan and set up metrics and dashboards for tracking vendor performance in the consolidated
environment

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VENDOR SELECTION
Vendor selection plays one of the most important roles in the process of attaining the goal marked
out by outsourcing the activities of a certain project. Technology and vendor selection processes
can be a long, costly process, whereby project teams often base their decisions on subjective and
tactical criteria.
STEPS IN VENDOR SELECTION
A vendor evaluation and selection model to evaluate IT vendors will help organizations make
consistent, structured, repeatable and more-objective elections. VMO needs to start every vendor
selection with a clear understanding of why they want to undertake that project. Clearly articulated
motivations form the foundation for vendor election, performance metrics and contract terms.
VMO can increase their probability of success, by getting the stakeholders together to articulate
and weight the motivations.
The Steps involved in Vendor Selection are;
• Define the Evaluation criteria
• Evaluate various models of hardware and software procurement and support models
• Determine the Total Cost of Ownership (TCO)
• Vendor Risk Assessment
• Analyze the scores and take the decision
STEP 1: DEFINE THE EVALUATION CRITERIA
The foremost aspect in the selection of a vendor is to come up with a competent and well-rounded
team, viz a sourcing team which would comprise of the technical expert, the project manager, the
legal team and VMO, along with subject matter experts and the broader organization, who all need
to come together to determine the key evaluation criteria. The sourcing team, primarily responsible
for the evaluation and selection process, should determine and document the key evaluation
criteria. The list of agreed-upon criteria needs to be entered the evaluation sheet.

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The sourcing team must ensure that all of the evaluation criteria are properly defined and
documented to ensure that all personnel scoring vendors have the same "interpretation" of the
criteria. The sourcing team must work together to assign weightings for each of the key evaluation
criteria.
The Evaluation criteria would be different for each type of project, however various Evaluation
criteria’s that maybe common across various projects include the following;
• Vendor's Management Capability
• Vendor's Profile
• Vendor's Reference customers
• Vendor's Employee base
• Vendor's presence in customer location
• Vendor's Industry expertise
• Vendor's market share
• Vendor's project specific expertise
• Percentage of technical fulfilment of requirement
• Number of alternative solutions provided
• Vendor's Process capabilities
• Vendor's technical expertise
• Cost of the service/ product
• Quality of presentations
• Vendor's capability in resolving customer queries on doubts raised
• Vendor's Regulatory Knowledge
• Vendor's Financial Stability
• Levels of Automation possible
• Vendor's Quality Assurance Processes
• Risk Assessment in various areas
• Vendor's previous performance
• Environmental Compliance
• Long term relationship potential
STEP 2: EVALUATE VARIOUS MODELS
Enterprise IT is in an exciting phase. Old norms are being broken and consumption models are
getting redefined as companies seek more value for every rupee spent. CIOs and VMOs are looking
at flexible and cost-effective ways of procuring IT. From licensed purchases to accessing software
over the cloud, from resource-based to performance-linked models, IT pricing is clearly witnessing
a transition of some sort. Clients are expecting that 'little extra' from their vendors, and vendors in
their effort to control their shrinking revenues, are looking at new possibilities of offering the same
to the clients. Let us look at the various models;
- Models in Hardware Procurement
๏ Outright Purchase v/s Leasing

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- Models in Software Procurement
๏ Perpetual Licensing v/s Subscription models
- Models in IT Services Employed
๏ Outcome based v/s Time and Material contracts
๏ Service model based on location of resources
" Onsite Delivery Model
" Offsite Delivery Model
" Offshore Delivery Model
" Hybrid Delivery Model
- Impact of cloud computing
STEP 3: TCO ANALYSIS
It is vital for the IT organization to understand the total cost of delivering each service. This
includes the Capex hardware and software costs, as well as the Opex operations and personnel
costs. Total cost of ownership (TCO) is a financial estimate intended to help the sourcing team
determine the direct and indirect costs of buying a product or a service. The TCO analysis should
include total cost of acquisition and operating costs. This TCO analysis will help the sourcing team
gauge the viability of any investment in the project.
Generally, a TCO is done for a period of 3 to 5 years as the changes in the technology world is
very fast due to its dynamic nature and advancements and hence generally, a technology will
become obsolete in this span and most organizations look to revamping the IT infrastructure in
that period (except for huge investments like ERP products or legacy systems)
If we consider the case of a procurement of buying a server infrastructure in the project, the various
possible costs that would make up the TCO would be as follows:
Upfront Costs
• Acquisition costs (Cost of research, etc)
• Base cost of the Server and Storage
• Taxes and duties applicable based on source and delivery of location
• Implementation Costs
• Costs related to deployment of assets (Delivery, etc)
• Any associated software costs
• Any associated hardware and peripheral costs
• Any associated network costs
• Initial Warranty Cost
• Cost of finance at time of acquisition

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Running costs through the life cycle
• AMC costs
• Operating Costs (associated services as well as infrastructure)
• Support Maintenance costs
• Cost of reconfiguration if needed
• Costs of enhancements and upgrades of certain components
• Cost of Change in case of eventualities
• Cost of decommissioning
• Cost of Insurance
• Net present value of a future investment incase payment terms are different across
vendors
STEP 4: VENDOR RISK ASSESSMENT
Risk is the potential of losing something of value, weighed against the potential to gain something
of value. Hence a probability or threat of damage, injury, liability, loss, or any other negative
occurrence that is caused by external or internal vulnerabilities, and that may be avoided through
preemptive action is called a Risk. Risk is an uncertain event or condition that, if it occurs, has an
effect on at least one objective of the organization.
Risk assessment is the determination of quantitative or qualitative value of risk related to a concrete
situation and a recognized threat (also called hazard). Quantitative risk assessment requires
calculations of two components of risk (R), the magnitude of the potential loss (L), and the
probability (p) that the loss will occur. Risk management is the identification, assessment, and
prioritization of risks followed by coordinated and economical application of resources to
minimize, monitor, and control the probability and/or impact of unfortunate events or to maximize
the realization of opportunities.

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STEP 5: DECISION BASED ON ANALYSIS AND SCORE
Once the various aspects and steps of the Vendor evaluation and selection have taken place, the
sourcing team needs to come together and score the vendors on the various attributes marked out
at the start of the process. All personnel who contributed in step 1 must participate in one or more
of the various activities concerned to them like reviewing responses to RFPs, oral presentations,
conducting references, takeaways from the negotiations, and so on. The sourcing team should
discuss all the findings, along with the analysis of the key issues. The team should not only look
at the overall score and which vendor scored the best, but also look extensively at the subtotals of
the various aspects in the evaluation criteria. However, the vendor that scored the best overall may
not necessarily be chosen: the team may come to a consensus on the use of
another vendor.
The sourcing team would now make its final selection, and the documentation made in the entire
process, from Step 1 to 5 would now act as the formal documentation and audit trail of the decision-
making process. Once the vendor is chosen, the team should immediately update the risk
management plan and guidelines for contract negotiations by documenting each area in which the
chosen vendor scored low and develop an associated risk mitigation or contract clause to manage
this area. We learn about this Risk Management of the specific contract in the next chapter.

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INTRODUCTION TO RISK MANAGEMENT
Risk management is the identification, assessment, and prioritization of risks followed by
coordinated and economical application of resources to minimize, monitor, and control the
probability and/or impact of unfortunate events or to maximize the realization of opportunities.
The strategies to manage threats (uncertainties with negative consequences) typically include
transferring the threat to another party, avoiding the threat, reducing the negative effect or
probability of the threat, or even accepting some or all of the potential or actual consequences of
a particular threat, and the opposites for opportunities (uncertain future states with benefits).
Risk management involves the following elements, performed, more or less, in the following order.
• Identify and characterize threats
• assess the vulnerability of critical assets to specific threats
• determine the risk (i.e. the expected likelihood and consequences of specific types of
attacks on specific assets)
• identify ways to reduce those risks
• prioritize risk reduction measures based on a strategy
Once risks have been identified and assessed, you may choose to do one of the following
Avoidance (eliminate, withdraw from or not become involved)-
This includes not performing an activity that could carry risk. An example would be not buying a
property or business in order to not take on the legal liability that comes with it. Avoidance may
seem the answer to all risks, but avoiding risks also means losing out on the potential gain that
accepting (retaining) the risk may have allowed. Taking up a project to avoid the risk of loss also
avoids the possibility of earning profits.

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Reduction (optimize - mitigate) –
Risk reduction or "optimization" involves reducing the severity of the loss or the likelihood of the
loss from occurring. Acknowledging that risks can be positive or negative, optimizing risks means
finding a balance between negative risk and the benefit of the operation or activity; and between
risk reduction and effort applied. Modern software development methodologies reduce risk by
developing and delivering software incrementally. Early methodologies suffered from the fact that
they only delivered software in the final phase of development; any problems encountered in
earlier phases meant costly rework and often jeopardized the whole project. By developing in
iterations, software projects can limit effort wasted to a single iteration.
Sharing (transfer - outsource or insure) –
It is defined as "sharing with another party the burden of loss or the benefit of gain, from a risk,
and the measures to reduce a risk.” The term of 'risk transfer' is often used in place of risk sharing
in the mistaken belief that you can transfer a risk to a third party through insurance or outsourcing.
In practice if the insurance company or contractor go bankrupt or end up in court, the original risk
is likely to still revert to the first party.
Retention (accept and budget)-
Involves accepting the loss, or benefit of gain, from a risk when it occurs. Risk retention is a viable
strategy for small risks where the cost of insuring against the risk would be greater over time than
the total losses sustained. All risks that are not avoided or transferred are retained by default. This
includes risks that are so large or catastrophic that they either cannot be insured against or the
premiums would be infeasible. Also, any amounts of potential loss (risk) over the amount insured
is retained risk. This may also be acceptable if the chance of a very large loss is small or if the cost
to insure for greater coverage amounts is so great it would hinder the goals of the organization too
much. It has been shown that one in six IT projects becomes a 'Black Swan', with cost overruns of
200% on average, and schedule overruns of 70%. Now that we know what Risk Management is,
let us understand the necessity of Risk management in the wake of outsourcing.
RISK MANAGEMENT IN OUTSOURCING
In an environment of increasing regulatory pressures and issues, higher SLA expectations,
understanding what the risks are - and how to effectively mitigate or avoid them - is an essential
part of ongoing vendor management. Clients must uncover potential compliance exposures from
third parties and know how to mitigate these risks and obtain control assurances from IT vendors.
Assessing and mitigating the risks of using vendors, short-term and long-term, and examining and
providing mitigating tactics for vendor financial, operational, and compliance risks is of primary
importance in outsourcing today. Because the market or vendor position may change quickly,
vendor risk management is designed to keep organizations aware of pending vendor challenges,
and how enterprises can better insulate themselves from the risks of vendor disruptions or changes
in product strategies.

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Hence as a part of the Enterprise Risk management framework, it is necessary for the VMO to
upgrade themselves from risk assessors to risk managers.
Figure: Move from transactional to Strategic function
Risk Management also consists of 2 broad categories;
• Managing Overall Vendor Risks
• Managing Risks in the project
Managing Overall Vendor Risks
Since the global financial crisis, companies around the world are generally facing stricter
requirements for reporting and managing service-provider risks and third-party compliance
obligations. For regulated entities (e.g. financial services institutions, pharmaceutical
manufacturers, etc.), robust vendor risk management capabilities are becoming even more critical,
as regulatory complexity escalates along with the financial and reputational consequences of non-
compliance.
This situation, coupled with the increasing sophistication of outsourcing deals, has caused many
companies to invest in developing vendor risk management capabilities built upon robust risk
management frameworks. These frameworks are critical for assisting organizations in
understanding the risks posed by their service providers at an enterprise level and in providing

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near-real-time transparency into how certain risks could have financial repercussions and/or
damage the company's reputation.
Managing Risks in the project
As third-party vendors expand their roles across the value chain, the potential for a vendor failure
increases dramatically. Organizations can no longer ignore the risks to which they are subjected
via entering into an engagement and transaction with a particular vendor. Costly high-profile
incidents have been the triggers for implementing vendor risk management across all the
outsourcing deals that are done by the organization. These are the risks which have been perceived,
identified and assessed in the vendor selection stage along with all the risks that exist in doing any
outsourcing transaction. With the scope of work and activities being very complex in the IT
domain, it has become imperative for both the parties to have various terms and conditions in the
scope of the agreement.
When it comes to a specific engagement, there are many risks involved related to the vendor being
unable to deliver, or not delivering to the right level of quality. That is precisely the reason the two
parties enter into a contract, so that they can confirm the understanding of terms between the two
of them as well as ensure that various risks associated to a transaction are covered for. This leads
us into the definition of contracts and how contracts help the VMO in the management of risks of
entering into an engagement.
CONTRACTS AND NEED FOR CONTRACTS IN MANAGEMENT OF
RISKS
A contract, by definition, is an agreement having a "lawful object" entered into “voluntarily" (free
will) by two or more parties, each of whom intends to create one or more legal obligations between
them. The elements of a contract are "offer" and "acceptance" by "competent persons” having legal
capacity who exchange “consideration".
Figure: Constituents of a Contract

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CONTRACT MANAGEMENT
Contract management is the process that enables both the parties entering into a contract to meet
their obligations in order to deliver the objectives required from the contract. It also involves
building a good working relationship between customer and vendor. It continues throughout the
life of a contract and involves managing proactively to anticipate future needs as well as reacting
to situations that arise.
The central aim of contract management is to obtain the services as agreed in the contract and
achieve value for money. This means optimizing the efficiency, effectiveness and economy of the
service or relationship described by the contract, balancing costs against risks and actively
managing the customer-vendor relationship. Contract management may also involve aiming for
continuous improvement in performance over the life of the contract. Contract management is
about resolving or easing any tensions to build a relationship with the vendor based on mutual
understanding, trust, open communications and benefits to both customer and vendor - a 'win/win'
relationship.
Contracts are designed to reinforce trust and reduce risk. Unfortunately, when they’re too detailed
or rigid, or when they send mixed signals, they can exacerbate the very problems they're supposed
to prevent. The critical success factors in drafting of contracts include;
- Good preparation.
- Completeness of contract
- Contract Language
- Single business focus.
- Service delivery management and contract administration.
- Relationship management.
- Continuous improvement.
- People, skills and continuity.
- Knowledge.
- Flexibility.
- Change management.
- Proactivity.
RISK PERCEPTION MATRIX
A Risk Perception Matrix is a tool that the VMO can use to identify various risks while dealing
with various vendors and at the same time assessing the vulnerability of the risks, identify the
contract terms that can be drafted to mitigate those risks. Thus, it involves two major things, Risk
Perception and Risk Mitigation. A Risk Perception Matrix notes down the various risks and
variations of the risks and documents them against various Risk mitigation plans and solutions.
VMO needs to note down various possible and Perceived Risks. The list may expand or contract
depending on the nature of the transaction. The list is as follows;

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- Risk of Misunderstanding
- Risk pertaining to Payments
- Risk of Quality
- Risk of Quantity
- Risk of Non-performance
- Risk of Delayed Delivery
- Risk of Transit Loss
- Risk of legality
- Risk of Title
- Risk of Confidentiality
- Risk of IPR
- Risk of Exchange rates
- Risk pertaining to Vendor going bankrupt
- Risk of compliance
- Risk of lack of OEM support
A robust risk management framework typically comprises four main elements, which are
necessary in order to consistently track, measure, manage and report service-provider risk across
the enterprise. It includes
- Filter
- Assess
- Segment
- Monitor

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VENDOR ENGAGEMENT
Organizations must ensure that they have effective and formal disciplines to manage the vendors
and their contracts, performance metrics, and relationships. Often minimal attention is given to
how the deal will be managed, and what level of interaction and oversight will be required to
ensure that vendors are delivering on their contractual commitments.
Managing Vendor Engagements consists of a range of activities that are carried out together to
keep the arrangement between customer and vendor running smoothly. They can be broadly
grouped into four areas;
• Governance of Service -
Tracking Vendor Delivery ensures that the service is being delivered as agreed, to
the required level of performance and quality.
• Governance of Relationship -
Vendor Relationship Management keeps the relationship between the two parties
open and constructive, aiming to resolve or ease tensions and identify problems
early.
• Governance of Contracts -
Contract administration handles the formal governance of the contract and changes
to the contract documentation.
• Governance of Interactions -
Ground rules in Vendor Engagement are the guidelines for the organizations to
follow for efficient vendor interactions.
Figure: Vendor Engagements

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Figure: Vendor Governance – Disciplines & Tools
INTRODUCTION TO SPEND ANALYSIS AND PERFORMANCE
MANAGEMENT
Spend Analysis and Performance Management have emerged as the leading strategies enterprises
will use to drive further improvements in vendor management. Spend Analysis and Performance
Management reports are the 2 major components of a VMO dashboard and reporting requirements.
The key drivers for the need for Spend Analysis and Performance Management are;
• Ever increasing growth and need for Big Data Analytics
• Spend and vendor performance dashboards have become a key requirement of top
management
• Collaboration with Strategic Vendors to create value for both organizations has become
a necessity
• One of the key ingredients in vendor categorization is Spend Data.
• Accurate spend data and Efficient Vendor Performance Management are equally critical
to other business objectives, including compliance management, negotiations, vendor
selection, inventory management, budgeting and planning, and product development and
management.

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SPEND ANALYSIS
Spend analysis is the process of collecting, cleansing, classifying and analyzing expenditure data
with the purpose of reducing procurement costs, improving efficiency and monitoring compliance.
It can also be leveraged in other areas of business such as inventory management, budgeting and
planning, and product development.
The various areas that Spend Analysis is used are;
- Analysis of the Spend with respect to areas of spend
- Analysis of the Spend with respect to the trend from time to time
- Analysis of the Spend with respect to vendors.
Getting accurate and timely Spend Analysis is very important. However, there are various
challenges to spend analysis. They include;
- Data exists across systems and Data matching and consolidation is a herculean task
- Even within systems, the data may not be completely in the format needed
- Lack of standardization in Master Data Management for vendors and part codes
VENDOR PERFORMANCE MANAGEMENT
Performance management includes activities which ensure that goals are consistently being met in
an effective and efficient manner. Performance management can focus on the performance of an
organization, a department, employee, or even the processes to build a product of service, as well
as many other areas. Performance Management is the process by which organizations align their
resources, systems and employees to strategic objectives and priorities. With respect to the Vendor
Management Office, Performance Management is performed on two levels;
• Externally directed at vendors where their performance against project requirements is
monitored and managed, and;
• Internally where the performance of the VMO is monitored and managed.
The concept of the Cross - BSC (XBSC) is to use the BSC approach to not only implement
strategies formulated within their own company boundaries, but also to develop BSCs for each
relationship with a strategic vendor. The X-BSC becomes the basis for evaluating the performance
of the relationship and in turn the vendor.
Vendor Performance Management is the means and ways of capturing, measuring, analyzing and
reporting the vendor's performance.
Vendor report cards provide a method to measure objective and subjective data points from across
the enterprise, measured over successive periods of time. This approach provides clients with a
baseline/trend line by which to compare the strategic vendor’s performance. A trend line that

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improves over time indicates a successful relationship, while one that reflects stagnation, or a
decline indicates a need to improve processes (or that the vendor is experiencing major problems).
The objectives of Vendor Performance Management are as follows;
- Helps VMO understand the vendors better and the vendors' capabilities by stakeholder
experience but formal documented approach.
- Measure past performance accurately
- Aid future Decision making
- Provide factual documented basis for incentives or penalties on existing contracts
- Provides means for Continuous Improvements
- It can also give early warnings for possible disruptions or stakeholder dissatisfactions
- Set common ground for realistic future expectations
The Steps to be followed for a formal Vendor Performance Management schema should be;
- Define Vendor Performance Management Strategy
- Define the Evaluation criteria and rating system
- Define the Rating system of the Report Card
- Define modalities like concerned stakeholders, means, frequency of data collection
- Collect the data on the defined parameters
- Analyze and discuss Report Card with stakeholders
- Discuss with vendor and chalk out improvement plan
- Continuously monitor action points in improvement plan
- Appropriate inputs provided to Sourcing managers for future actions
As far as VMOs own performance goes, VMO must advance the maturity of their organization
and transform vendor relationships beyond transactional events.

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CONCLUSION
This report talks about a very crucial aspect of organizational functioning – vendor management.
In today’s global economy, where geographical and economic barriers are constantly diminishing,
organizations have to work with different types of vendors from all around the world. Even if you
are working with a single vendor, it is crucial to have effective vendor management in place
because their performance ultimately affects your business’s performance. It is important to
understand the benefits and challenges of vendor management so that you can design an effective
process that will guide your engagement with your vendors.
One should not forget to complement your process with vendor management best practices to
ensure that your vendors deliver maximum value to your organization.
In the end, effective vendor management saves time and applies an expertise (negotiation,
understanding scope, and maintaining vendor accountability) to tap the most value out of each IT
relationship, while serving as a single point of communication to eliminate “finger pointing” and
put the focus back on end-results.
VMO must advance the maturity of their organization and transform vendor relationships beyond
transactional events. Those maintaining the status quo will struggle to prove the need for
disciplined vendor management and may find their organizations marginalized or eliminated. With
tightening budgets and organizational pressures to show returns on investment coming to bear on
vendor management, VMO struggles to articulate measurable business value, thereby placing their
political influence, program resources and possibly the role itself at risk.
Hence VMO needs to ensure the following to be successful in its core purpose of making the
outsourcing program work in favor of the organizational goals;
• VMO program to be formulated based on thoroughly researched best practices. An
understanding of the VMO and its potential impact on the organization is the key building
block in the drafting of the VMO program.
• Procurement done by individuals to meet a specific need to change to planned
procurement done based on sourcing strategy and strategy implementation.
• Technology selection to move from need based acquisitions to strategic business value
adding resources.
• Vendor arm-twisting negotiations to change into efficient Win-Win outcomes for all
outsourcing projects.
• VMO Processes need to mature from Adhoc transactional contract fulfillment to
transparent auditable process with up to date documentation and knowledge management.
• Awarding of contracts based on holistic parameters instead of consideration of only
traditional up-front cost parameter.
• Instead of simple closure of contracts through standard terms and conditions, VMO to
consider the Risk Perception Matrix and frame simple contracts ensuring all risks in the
project are mitigated.
• Building a relationship based on trust and transparent communication enables both the
parties to achieve their goals.

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• Excel based Adhoc reporting to be upgraded to system based automated spend analysis
via VMO dashboards.
• Performance Management to act as not just an area to evaluate Vendor Performance but
also an aspect that can be used to motivate the vendors to achieve continuous improvement
• VMO KPIs to mature from being merely cost driven parameters to business value related
parameters.
• Another key aspect is to have Support from the finance, HR, compliance and legal areas
in empowering the VMO to perform their duties optimally. This support provides guidance
and standardization and provide feedback on lessons learned to drive continuous
improvement.
• Governance should not be viewed as micromanagement but a means to ensure the laid
down objectives are met and met at the required levels of quality and conformance.

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BIBLIOGRAPHY
 Wikipedia
 www.gartner.com
 https://www.slideshare.net/anandsubramaniam/vendor-management-1576246
 a-complete-guide-to-vendor-management: zycus.com
 Managing Project vendors: Welingkar Course Book