Vendor Management Office

A vendor management office (VMO) is an internal unit within an enterprise that is charged with evaluating third-party providers of goods and services, supervising day-to-day interactions and managing longer-term relationships.

In some cases, an IT vendor management office is established to create and monitor vendor relationships with regard to IT, including establishing the organization’s proper mix of IT outsourcing and insourcing opportunities and setting vendor risk management policies.

Vendor management typically involves numerous oversight duties for a CIO or IT executive, including negotiating and then monitoring the length and substance of contracts; keeping tabs on new technologies; maintaining contact with current vendors and reaching out to vendors with which the organization has not yet worked.

For those organizations not prepared to leap into a full-scale VMO, it’s also possible to establish an IT governance or standards body of employees from across the company to oversee purchasing policies and assess new vendor technologies and other offerings.

When assembling either a VMO or a standards body, it’s vital to have broad representation from procurement, legal services, IT and business units. It can help to involve individuals who have backgrounds in project management as they are often more comfortable in supervisory roles. It’s also important to include people who have a far-reaching view of the organization and who, above all else, understand the importance of good relationships with vendors.

Vendor management allows you to build a relationship with your suppliers and service providers that will strengthen both businesses. Vendor management is constantly working with your vendors to come to agreements that will mutually benefit both companies.

While there is debate on the detailed aspects of IT VMO implementation, including demarcation of responsibilities between procurement and vendor management, and the precedence of the functions, the overall benefits to the enterprise outweigh any internal risks or downsides associated with the VMO model.

Road to Success – Strategic Sourcing

No sooner did the smart organizations thought they had squeezed the last ounce of savings from their supply bases, enlightened purchasing and supply organizations were already saving even more by focusing more on process than function. New-style purchasing departments lead their organizations to join with suppliers to spur innovation, apply joint expertise to product development, and create genuine supply advantage.

In the once mundane world of hard-nosed negotiations aimed at reducing costs, managing supplier relationships, and buying everything from paper clips to private planes, “those buyers down in purchasing” have traditionally been a minor blip on the CEO radar screen. Not anymore.

Strategic Sourcing goes well beyond cutting costs. It can have a profound impact on a company’s financials and can strongly influence the purchasing and procurement processes. Strategic Sourcing is defined as the process of evaluating, selecting and aligning with suppliers or consortium of suppliers to achieve operational improvements in support of an organization’s strategic objectives.

An organization selects its suppliers based on their ability to support and assist in improving a process, providing a product/service at a lower total cost, or offering a better product/service that helps to differentiate.

It has been discovered by executives that suppliers can be untapped resources in a number of areas because they often have more to offer than a specific product or service. As expert providers to specific industries, suppliers have insights, competencies and expertise in areas that the companies which employ them may not have. Companies have begun to rely heavily on this input. Other contributions from suppliers may include marketing concepts, technology pursuits, or creative financing. Company executives should meet frequently with executives from strategic suppliers to discuss possible new products or markets and other mutually beneficial strategies. Suppliers may also offer valuable input to corporate objectives and issues.

Although this process requires an up-front investment in time, money and effort, the downstream benefits will be significant in terms of the alignment of the stakeholders, the quality of the transition and transformation programs, the robustness of the business case and the potential for success throughout the life-cycle of the contract.

Remember: Fail to Prepare, Prepare to Fail!

Outsourcing contract prices to drop

In the light of the current economic scenario worldwide, the outsourcing contracts are hard to come by. The IT vendors need to come up with innovative ways to grab the contracts in such a cut throat competitive environment.

Price is of the main reason, if not the only one, for outsourcing contracts. Since the global economic slowdown, these companies have learned to compare and started to bargain for a more “reasonable” contract price.

As companies scout for an outsourcing partner, traditional and new offshore providers fiercely compete with the pricing while trying to keep their revenue growth on target. Clients indulge in intense discussion over pricing of the contracts whether it is a new contract or renewal of the existing one.

According to independent studies carried out by Gartner and Alsbridge, the contract prices are seeing a drop.

According to the study, a substantial 84% of the respondents chose to outsource to drive down costs. But Alsbridge data showed prices had dropped by over 25% since most of those contracts were signed. The biggest average drop in prices was in services around storage, where there was an average drop of 56%; in telecoms (43%); servers (23%); and mainframes (20%).

Cost cutting is very high on the agenda of CIOs to continue to rein in budgets marker rates fall, mentions Sheridan, Head of ITO Alsbridge.

 

Gartner warns IT vendors and consumers to be careful not to push each other to the edge. Otherwise, they will end up being bitter on the outsourcer end because they can’t make enough profit on the deal and bitter on the customer side because they might get the least amount of service from the vendor.

 

CIOs must balance their negotiations with the vendors, if cost reduction is the only motive for renegotiation, it rarely results in success. The challenge for IT leaders now is to balance their cost-cutting motives with their company’s long-term business and technology needs. IT leaders must research the market data to understand what’s fair at the level of value they want in return for the price they pay, and have a reasonable discussion with their vendor based on clear objectives.

 

According to Mark Kobayashi-Hillary , a well-known globalization and outsourcing writer, even in these tough times, there is still plenty of opportunity out there for those who are offering high quality of service at a good price. This could be the end for very high margins and hyper growth. Even if this situation is undesirable, it is good for the industry as the genuine value providers will come out victorious.

 

Speaking of offering value to customers, for companies nowadays, looking for an offshore provider is more like shopping for a bargain. They are looking for vendors capable of delivering quality results and break monotony by innovation at a much lower price.

Outsourcing in Uncertain times

Economies of the west are facing a high level of uncertainty. Rising unemployment in the United States, the biggest market for Indian IT vendors, has led the US government to impose sanctions on outsourcing. Also, the businesses are looking for measures to stay afloat in such uncertain economic conditions, cost cutting being the most sought after. And one of the biggest impact of cost-cutting is the reduction in IT spend and thus outsourcing.

But does cutting costs on outsourcing contracts really help the business?

The answer is No.

Lets us take a look at how outsourcing can really help when business is low and companies need to stay lean.

Outsourcing lowers costs

Outsourcing makes fixed costs into variable costs. The concern of the resource count and facilities moves to the vendor. Thus the consumer can now move its costs to investments.

This shift improves the consumer’s corporate balance sheet. In tough times, the switch enables the consumer’s overall financial statement to look much better. In good times, however, the step to variable costs puts the company’s financial picture in better condition, making the company more appealing to its investors.

Outsourcing offers process expertise in non-core areas

Outsourcing enables the pool of experts to supervise the non-core functions. Process expertise is crucial when the business is facing tough conditions or expanding rapidly. In tough conditions the business must invest in their core operations rather than worry about the services offered by information technology. Also, when the business is expanding it has to concentrate more on improving the core competencies. Thus, in such scenarios it is best to outsource the IT functions to the experts.

Outsourcing enables risk sharing

The business risk is shared with the IT vendor through an outsourcing contract. The consumer need not have to invest heavily in hiring and training of human capital only to fire them when things turn bad.

When times are uncertain, companies

• need to adjust their risk profile,
• need to cut their costs,
• restructure their balance sheets and
• should still have flexibility

Outsourcing makes all those things possible.

Negotiating an Outsourcing Contract

Negotiating an outsourcing contract involves much more than just achieving the pricing you desire.  As you go through the process, you will go through the normal “give and take” discussions as you work with your potential provider(s). However, it is important that you do not focus solely on pricing. While reducing cost is typically the primary value proposition for outsourcing, you also want an outsourcing contract that allows you to realize your immediate and long-term objective, and value for money.  To meet those objectives, pay careful attention to the five aspects noted below.  These areas of the contract, if not carefully organized, can bring down value of your business and decrease the prospect of having a successful and sustainable outsourcing contract.

1) Statement of Work – A Statement of Work (SOW), describes in great detail the services to be performed by the provider and also clarifies certain client responsibilities.  A few wrong check-marks in the responsibility column or a one or two of missing tasks can expressively change the extent of service the provider is to deliver and will result in misaligned expectations from the start of the contract

2) Service Levels – Service levels work in unification with the SOW to scope the services that the provider will deliver.  They describe HOW MUCH and TO WHAT EXTENT the services described in the SOW are delivered.  It is important that the service levels reveal what you need even as you are discussing price.  Importantly, you should understand that the costs go up exponentially as you get closer to a 100% performance target. Additionally, there are important service level terms that should be included to allow the freedom to modify and tweak service levels and to re-allocate service level credits as your business needs change.

3) Termination Language – It can be hard to focus on termination language and termination charges at the beginning of an outsourcing relationship. Termination language is equivalent to a prenuptial contract – it is there “just in case” things do not work out as originally intended.   As the final negotiations occur, you may be tempted to give a bit on the termination language in order to get to the price point you want.  Depending on your starting point, some “give” might be acceptable but you first need to understand the ramifications if you need or want to get out of the contract (or pieces of the contract) in the future.  Once the contract is signed, it can be especially difficult and costly to get out of it if the termination language is favorable to the provider.

4) Future Pricing – There are a number of factors to consider regarding future pricing.  On the whole, you should expect your IT costs to go down over time due to improvements in hardware and software functionality and pricing, labor arbitrage, automation, and so forth.  Because each situation is different, there are no easy “rules of thumb” to apply, but pay close attention to these specific areas:

Year-over-Year Pricing – You should expect the unit pricing for most towers (possibly excluding applications due to its labor-centric nature) to go down each year, with the provider accepting the risk of continuously improving and streamlining its operations to achieve lower price points each year.

5) Delivery Locations – In return for hitting your price point, a provider may want to include the freedom to deliver from whatever location they see fit.  There are many risks associated with movement of work from one team to another, much less from one country to another.  Because of the potential impact to your business, you want to make certain that you have some sort of approval authority prior to the movement of support functions.  The provider may counter that they are accepting the risk because they are signing up for service levels.  However, the potential business impact to you is much greater than their risk of incurring service level credits for missing a couple of metrics.

 

In summary, these five potential areas need to be managed closely through the negotiation process.  Due to the variations and complexity inherent in each deal you should strongly consider the use of an outside outsourcing advisor to help.  Because they understand your perspective as well as the providers’ point of view, they are ideally positioned to help manage through these items (as well as the many other items that will arise) and develop an outsourcing contract that works well for both you and the provider.

Why Outsourcing Fails

One of the critical issues that keep onchasingbuyers and providers of outsourcing is how to ease the risk of failure. Outsourcing is much more complex today—an increasing number of companies are uncovering three key reasons to outsource:

The skills or projects that are outsourced cannot be executed in-house for a many reasons, including cost, the deficiency of appropriate talent/expertise and time factors. The outsourced job requires quality procedures that cannot be achieved in-house, it also requires more management overhead.

Outsourcing will fail big time if the purpose for which it is done are not well thought off. But despite having the right reasons, outsourcing fails due to a number of vital factors. Let us analyze some of the reasons why an outsourcing engagement fails

No strategic purpose. There must be a clear objective for outsourcing. While cost reduction is a valid goal, it should not be the only one. Saving definitely affects the bottom line of the company,but it should not be the key reason. When cost saving becomes the key objective, the outsourcer is often driven to select the cheapest provider regardless of capability or resource sand often end up in compromising the quality and more importantly the objective behind which the job is outsourcedhence  only when strategic objectives are satisfied that outsourcing finds success.

Blurred requirements/expectations.  When a company outsources, for e.g. code development, it must be clear about the process, technology, talent, SLAs, timelines, testing, outcomes, ownership, IP etc. For example, once a programming requirement is frozen, the outsourcer should be very clearbecause if he he not clear then the development team will work on unclear requirements and might result in a product which is totally different from the requirement specified.

Poor transition. Requirements and processes are often moved thousands of miles away from where they were originated. Bridging the distance means the transition process should be rugged and accurate. Agreeing on the terminology, identifying the processes and capturing the metrics make the difference. The role of quality in transitioning cannot be underestimated. However, tools to manage transition (for all types of outsourcing needs, not just IT) are becoming better as outsourcing grows. Ensure that your provider uses updated tools and quality standards that are suited for your industry.

Rapidly changing needs of the buyer. When the buyer’s needs change, the provider is sometimes unable to change as quickly. A provider who is not nimble and flexible and does not understand your business environment can lead to failure.

Poor communication. It is extremely difficult to control teams that are spread out. But it is even more difficult to keep tabs on a team that is not under your direct supervision and is located perhaps miles away and follows completely different works culture, standards, etc. from your own. Communicating crisply and clearly and sharing all business-related data is essential to keep the relationship in good state and thereby improve the outcomes of outsourcing. Buyers often feel that “communication” is a task for the provider. The provider often follows a mandated reporting schedule—which could be a weekly presentation of performance metrics or reviews of development and views this as “adequate communication.” When this happens, misalignment and failures are expected

People factors. The provider often has difficulty in sourcing and retaining talent. This means that either the provider will not have the team required to deliver the task or the constant churn will create teams that have no sense of loyalty or purpose. Such teams will not serve the purpose.

By no means is the above list of reasons complete, but paying attention to these is a vital starting point. Preventing failure depends on sensitive / proactive team managers who are both competent and determined to find business success in outsourcing. The principal reason for outsourcing failure is the lack of will in top management.

Outsourcing Myths!!

 

Myth 1: IT Outsourcing impedes productivity

There is a crucial opinion that when a consumer choose for IT Outsourcing, the overall efficiency of the matter might go down just because of various restrictions in terms of culture, length, communication and time that exist.

Reality 1: Productivity is enhanced when IT Outsourcing is opted for

Exceptional language and communication capabilities and superior information possessed by the employees of IT Outsourcing organizations make sure that the efficiency sees a rise in spite of time and cultural obstacles. Also, most companies providing IT Outsourcing function take in to account the client’s time zone thus guaranteeing uninterrupted service. In most cases, an onsite venture supervisor is appointed by the IT Outsourcing seller to carry out coordination with the onsite consumer administrators and offshore staff customers.

Myth 2: Global Companies choose for IT Outsourcing to lower expenses

The expenses of an organization see a significant reduction when off shoring of IT activities are completed. This is the only reason for consumers to opt for IT Outsourcing.

Reality 2: Simplifying the way IT activities are carried out

Usually, clients look for specialized experts to produce a technical piece or software after the specifications is freezed. Recruiting in house staff and training them is time-consuming and needs specialized interest that the organization people cannot spare. Also getting the right people for the right job is difficult and is quite a headache. So, the consumers outsource this kind of growth pursuits to the companies who give their ideas a credible and possible solution in form of computer application/software

Myth 3: It is about cheap labor

More often than not, organizations associate the expression ‘cheap labor’ to IT Outsourcing.

Truth 3: It is about High quality, innovative and skilled labor

The primary aim of IT Outsourcing is to reveal a modestly priced provider, who specializes in offering high quality output, has predefined methodologies and exhibits innovation in the subject of IT. Inexpensive labor is just a benefit, not the only deciding factor.

Myth four: IT Outsourcing can be accomplished with every little thing

This is genuinely not possible. Even so, some worldwide customers and software companies try to make it happen.

Reality 4: Study, Analyze, Choose on IT Outsourcing regions

The organization needs understand business requirements to realize consumer needs extensively and complete feasibility study. The company needs to check if it is strategically ready to outsource and whether outsourcing will meet its business requirements and help the business grow without affecting the bottom line of the company.

Myth 5: Task cuts, work cuts, Job cuts!

IT Outsourcing is viewed as the primary offender at the rear of numerous jobless natives. However there are many surveys, reports and researches show that it is not so.

Reality 5: Financial expansion

It is about gaining greatest output, with bare minimum input for the country’s economic system when IT Outsourcing is carried out. Consequently a constant economical progress is seen top to much more work opportunities for the natives

 

 

Budget vs Bill – How will it affect Outsourcing

The 2013 US budget is out & it claims to reduce the spending on the outsourcing front & also lowers the interest rates being the lowest in the past six decades. On the other side, the US Senate has passed the bill stating the decrease in the number of foreign employees in the US. These two are the major factors which are going to affect the 2013 year for Indian outsourcing industry.

Indian outsourcing industry had tough time in 2012 in the US market, which now gears up to to 2013 to invest wisely & earn more profits. Most of the companies have been in long term contracts with the employers & are on the verge of extending their contracts for the future. According to the market survey, around $50 billion is at stake which is almost more than half the entire Indian outsourcing industry. The outsourcing owners must use this instance & enhance their business to meet the needs of the budget & act wisely. Companies have to come up with innovative strategies & techniques which will restructure their business entirely rather than just upgrading their business models. The main focus should be cost-reduction, time-saving, improve the service delivery & quality & communication efficiency. Also for the small & medium sized businesses, more importance should be personalizing their services which are more suitable to the customer & also saving-costs at the same time. Some of the following points must be considered moving forward –

• Set-up offshore contact centers with onboarding skillful workforce to bring in more innovative ideas to the table & also help in cost-reduction.
• Think of methods to revamp the entire business model rather than just upgrading the old ones. Traditional models are inefficient & might be vulnerable to your business delivery. It’s better to compete in the market with the latest technology & services.
• Many offshoring companies are switching to the more personalized offerings & providing the customers what they just need for their business. This allows them to stay away from the general business models in the market & also makes them uniquely stand out amongst the rest in the industry.
• Other model which can be used is to maintain a transparent mode of communication between the offshore vendor & the client. This will help in maintain a healthy customer relationship & will also show positive results in your business on a timely basis.

As far as the Bill is concerned, the outsourcing firms will be having a tough time getting their visa’s approved by the United States. Many major companies like Wipro, Infosys, and TCS will face the problems when their employees won’t be able to get their visas. Their workforce percentage will be reduced due to the limitation on foreign workers as stated in the bill. All new workforces will be granted temporary visas at the cost of $5000 for every new employee being fetched from offshore. As for now, supported by the American information technology executives, the total number of H-1B visas will increase gradually from 65,000 to 110,000 in 2013. After 2014, companies cannot employ more than 75 percent of offshore workforce on temporary visas. By 2016, this ratio might drop down to 50% as stated in the bill. Most of the foreign workforce consume of 50 to 75% of the companies staff of United States. However this does not target the Indian outsourcing companies specifically. The companies will now have to revamp their hiring processes & limit the foreign workforce. This will help employment increase in the United States but at the same time it has created a barrier in the trade relations between United States & other foreign offshoring countries. Many companies have invested in building their contact centers in the US even though the economy had slowed in the past few years. According to reports, around $5.9 billion are being invested by the companies in building new centers in the US. Also the US budget now reducing their spending on the outsourcing avenues, the offshore companies will  have think wisely on how to invest & go about their business onshore. The bill also restricts a foreign resource working at the offices of the clients, which according to analyst is essential for business. According to the industry body Nasscom, “this bill is somewhat against the interests of Indian companies & can create disputes between the customer vendor relationships”. This will also indirectly increase the visa & wage cost for the Indian offshoring companies. According to Indian sources, “such restrictions on the new visas, or the existing ones should be applied uniformly to all & not just the Indian companies. This will also affect the competitiveness in the US market and also the effect the US-India commercial relationships.” This will affect the Indian offshoring companies from hiring the workforce in the US. The information technology industry played a key role in the US-India commercial endeavors & also generated revenue for India which will now get affected.

Industry bodies like Nasscom & Confederation of Indian Industry are waiting for any changes in the bill which will better suit the Indian outsourcing. The IT industry is important to the government as it helps in earning domestic profit & also generates employment avenues in India. So now putting into perspective both the Budget & Bill, it seems like an uphill task for the Indian offshoring companies for their business in the US.  The companies now will either have to raise the issue with the government or come with strategic & innovative methods to deliver their businesses as per the current bill conditions. Let’s hope the Indian outsourcing companies win this twin battle of the Budget vs Bill.

5 important aspects to outsourcing

Outsourcing is the most common approach used by companies to handle their business. But this approach also has its side-effects when it comes to the trust factor with the vendor. You have to be very careful when u decide to approach a vendor for an outsourcing contract. Here are a few aspects which 1 should consider before outsourcing to an appropriate vendor-

1. Vendor Stability in market – Be aware of the vendor’s status in the market whether it is worth depending upon a third party. Evaluate the vendor first before getting into a contract with it since it might affect your daily operations and hamper your delivery standards if the vendor fails to deliver. Also check for the infrastructure & technology that the vendor is utilizing in their work methods to deliver your business services. Also consult on the vendor’s performance with its earlier or existing clients. This might give you the slight idea of how the vendor works.
2. Vendor Performance – Outsourcing involves long term contracts with the vendors and you work on a daily basis with the vendor communicating the various deliver methods. Initially when you sign a contract, it is necessary that you define your goals & objectives of the engagement with the vendor. The vendor should be very clear on his part as to what are the services he needs to provide, know about its deadlines, and also in case of emergency come up with remedial solutions on time. For example – if a ticket is raised on a helpdesk portal, the vendor should acknowledge that ticket request to the raiser & resolve that ticket in the time which has been defined in the SLA of the contract.
3. Measure – Outsourcing deals with costs savings, flexibility in business services, financial flexibility & stability which in turn help in increasing the organizational value. But before you contract the vendor, it is necessary the vendor focuses on the core services of your businesses & set SLA’s against these operational activities to track the performance of the vendor. Define specific metrics which would help to evaluate the vendor’s performance which in turn make the vendor perform better in making your business a success.
4. Retain your employees – Outsourcing your business to an external provider can hamper an existing employee’s job. The employees can feel vulnerable that their job is next on the cut-off list of the company. To avoid such situations, it is important that the company forms a committee of members who will analyze the problem areas & come up with appropriate resolutions on retainment of these existing employees into the outsourcing areas. This might also involve third party vendor with whom the company has outsourced its business.
5. Knowledge transfer & transition to vendor – You might know about your business, but the external provider has more valuable insights & broader knowledge of the industry you are outsourcing. But since it’s your business, you know more about its functioning and knowledge within your organization. There should be proper procedure followed by the company to impart all this knowledge transfer to the third party provider. It can be done though various training programs conducted for the provider and effective and frequent communication between the company & the provider.

Who are the top outsourcing advisories?

The International Association of Outsourcing Professionals (IAOP) recently published the results of its research identifying the world’s best outsourcing firms.

One part of this focuses on outsourcing advisors. The numbers of CIOs that outsource without taking independent advice must be pretty much zero. The outsourcing industry transforms every few years in reaction to new technologies, such as cloud computing, and economic changes, such as the 2008 financial crisis. So a CIO will struggle to keep up to date. Then you have an unimaginable amount of possible suppliers and numerous delivery locations. So outsourcing advisory has become big business.

Here are the IOAP top ten outsourcing advisories.

1. Deloitte Consulting
2. KPMG
3. Avasant
4. Alsbridge
5. Elix-IRR
6. Ernst & Young
7. Baker & McKenzie
8. Pace Harmon
9. Kirkland & Ellis
10. Quint Wellington Redwood