The role of vendors continues to evolve. Today, many are viewed as an essential resource and valued partner by the companies they serve. Yet as vendors become more entrenched in their clients’ day-to-day operations, optimizing vendor relationships and managing their performance have become top priorities. As a result, business and IT leaders are looking to the vendor management office (VMO) to provide an effective solution for meeting these objectives.
Using a supplier relationship framework, companies can segment vendors by understanding the method of engagement and recognizing that performance measurements can vary, depending on the business value derived from each vendor and its relative importance to the company’s future business functions.
A vendor segmentation framework should encompass two dimensions: the business value derived from each vendor, and their attachment to the organization’s business activities. Figure 1 highlights four potential areas for categorizing vendors: commodity, emerging, strategic and legacy.
Numerous questions can then be asked relative to the vendor’s business value and attachment to the client organization. Responses will help determine the best category for a vendor. For example:
- How aligned is the vendor with the organization’s strategic goals and objectives?
- What is the investment plan for the future with this vendor?
- Can the vendor span markets and provide a mix of products and services?
- How many business units are using this vendor’s services/products?
- Is the vendor readily replaceable?
- How much have we invested in the vendor's services, such that walking away is not an option?
Key stakeholders/business users respond to the above questions for each vendor. Responses are fed into a scoring model to determine the best fit within the following categories:
Commodity vendors provide alternatives in a market that is saturated with competitors – making it easy to replace them. Managing these vendors focuses on ensuring optimum performance and efficient delivery. IT owners or the procurement team typically oversee these relationships – monitoring service levels at regular intervals to ensure SLA adherence.
Legacy vendors are involved in critical operational activities, but their alignment with the organization’s strategic goals and objectives has diminished over time. Still, it is important to ensure that these vendors remain focused on serving the organization’s needs. Usually, a monthly review of service levels is carried out by IT owners who manage the relationship.
Emerging vendors provide an opportunity to drive innovation in the business. The market for their services is largely untapped – allowing an organization to achieve competitive advantage through early adoption. Relationships here are typically managed on a day-to-day basis by the IT owners, with the VMO providing oversight. Emerging vendors remain on the radar due to their potential to move to the strategic category. Hence, it is essential to engage IT leadership and nurture the relationship to derive maximum benefits.
Strategic vendors are industry leaders – well aligned with organizational requirements and business objectives. Given that they are critical to a company’s long-term success, it is crucial to cultivate and manage these relationships these effectively – a job best overseen by the VMO. It is beneficial to engage executive leadership with strategic vendors to further assure business alignment and drive innovation opportunities.
Vendor segmentation is not static; it is an ongoing effort that helps ensure an up-to-date view of the vendor landscape. It is therefore essential to track and identify vendors’ activities within and across categories to monitor their performance, assess their potential and avoid investments that could be detrimental over time.