Although vendor management and procurement have traditionally co-existed within many IT departments, the similarities usually stop there. Vendor management (VMO) concentrates on establishing relationships with vendors to help fortify a business’s overall performance through effective sourcing practices. Procurement focuses on transactional areas like selecting IT service providers and coordinating orders and payments.
To understand how these two functions work – and to avoid conflicts that could be detrimental to the business – companies must first understand their respective roles and goals.
Vendor management centers on:
Strengthening vendor relationships.
Mitigating vendor-related risk.
Continually tracking, monitoring and reporting vendor performance to drive continuous improvements.
Optimizing vendor-related expenses by identifying redundant expenditures and/or inefficiencies.
Finding, quantifying and managing vendors that can help drive innovation and positively impact business performance.
Managing the complexities of multi-vendor integration.
Procurement concentrates on:
Evaluating new vendor relationships and ensuring that the lowest-cost provider is strongly considered.
Negotiating and managing contracts.
Mitigating contractual risk.
Authorizing payment and services.
The figure above shows how vendor management (VMO) and procurement functions connect and overlap throughout the vendor-services lifecycle. Numerous touch points can be observed in the following areas: demand and supply analysis; service initiation and vendor selection; and contracting.
For IT leaders looking to take a deeper dive, we recommend the following:
Analyze supply and demand: Procurement defines global spend categories and engages with suppliers to establish and maintain existing relationships. When a request for service is made by IT owners, the VMO first evaluates in-portfolio vendors. In cases where the latter cannot fulfill the requirements, the VMO works with IT owners, research organizations and procurement to create a shortlist of external vendors with capabilities that meet desired service requirements.
Perform due diligence: VMO and procurement functions work hand-in-hand to conduct due diligence on new vendor requests. If an in-portfolio vendor is selected, the VMO determines the need to conduct the RFX (RFP/RFI) process versus requesting a proposal from an outside vendor. If the latter is needed, procurement and vendor management work in concert to gather information and perform due diligence in order to gauge the vendor’s capabilities and suitability for the job.
RFX process: Procurement facilitates the RFX process by conducting supplier sessions for internal stakeholders, developing complete evaluation criteria for selection, and coordinating the submissions. The VMO provides inputs to the evaluation criteria and acts as a liaison with the IT owners in the RFX processes. Procurement, vendor management and IT owners jointly evaluate the vendor shortlist and determine the final vendor.
Contracting: Procurement facilitates the end-to-end contracting process, leading the contract negotiations with the supplier. The VMO provides inputs to the contractual terms and conditions, working with IT owners. The VMO’s goal is to ensure that IT’s requirements and expectations – in terms of scope, milestones and deliverables, service level commitments, etc. – receive due consideration and are agreed to by the vendor.
Getting There from Here
IT organizations should start with the engagement framework detailed in the figure shown earlier, then customize it to ensure optimum efficiency and effectiveness. Once the framework is finalized, it can be introduced within the organization and receive approval from executive leadership and other stakeholders – including procurement, the VMO and IT process owners. A well-defined process, along with roles and responsibilities and a strong governance mechanism, should be in place to support the common goal of successful sourcing.
For more insight, visit Cognizant's Business & IT Strategy Practice.