Webinar Notes: Why Vendor Management Must Change: 3 Most Common Dysfunctional Aspects of the Current Model

This week’s webinar notes are from a March 25^th webinar presented by the Outsourcing Institute and Alsbridge. This is too soon to expect the on demand version to be available (assuming it will be) but here is the link to the page where OI posts their on demand events. There was also talk of a whitepaper related to the webinar content, and I will post the link to that’s as soon as I am sure which one it is.

I attended this event because there is no question that the supply base is playing an increasing role in the ability of enterprises to maintain a competitive advantage. Whether you use the label outsourcing or vertical dis-integration or corporate virtualization or just think you are fully leveraging the capabilities of your suppliers, how you work with suppliers is critical. In this event, OI’s Frank Casale and Alsbridge’s Craig Nelson took some of the existing thought leadership in this area and pushed it forward.

For instance…

You know you are supposed to collaborate more with your suppliers, but what if it’s a group effort?

Most of the examples we hear about supply base innovation and collaboration are one to one: one buying organization and one strategic or critical supplier. What if, in order to accomplish your goals and objectives, you need to collaborate with multiple suppliers? By extension that means that in order to deliver, those suppliers need to collaborate and innovate with each other in addition to working with you. In the past, such an arrangement might have been seen as introducing risk by allowing suppliers to point fingers at each other if something goes wrong. We may no longer have the choice to avoid that approach today. As the speakers mentioned, more complex solutions require more parties to work together, despite how much we might like to have “one throat to choke” in the event of a missed deliverable.

One solution mentioned was to move away from reactive service level agreements (SLAs) in contracts and instead establish proactive ones that are more focused on motivating collaboration than outlining consequences. These SLAs must address the day to day requirements of procurement as well as legal, risk, and business owners.

Loss of visibility does not equate to freedom from accountability.

Even though increasing the role of suppliers in an operation reduces line of sight visibility and real time transactional awareness, it does not get us off the hook from ensuring compliance to established laws and regulations. The speakers used the examples of insurance, banking, and pharmaceutical industries as cases where buyers are required by law to ensure that their suppliers are compliant with regulations. While other industries have less regulation in this area, the time is likely coming where that will no longer be the case.

Part of what makes it possible to ensure third party compliance is integration. For needs such as compliance, but also including innovation/collaboration and the benefits of increased automation, being fully integrated with suppliers is not an option, it is a requirement.

It’s not easy being in procurement, but it may be worse to be in HR.

As procurement professionals, we are so focused on our objectives and challenges that we do not realize how the changes we are seeing affect other functions in the enterprise. Less work being completed by direct hires means less work for HR organizations. Even when that work is completed through contingent workforce programs rather than full outsourced arrangements, the management of the services and spend either requires HR professionals with different skills or procurement is given responsibility.

Based on research done by Alsbridge, “vendor management has a six times greater impact on EBITDA than focusing solely on labor cost reductions.” Translation: even when HR is able to reduce the cost of labor done in house, they still can’t have the financial health that a well managed supplier program can. In order to qualify as well managed, a vendor or supplier management program must also be proactive rather than reactive, incentivizing desired future outcomes rather than addressing past activity.

A last thought from the event worth sharing is a shift in attitudes towards contract management. It used to be that if procurement didn’t have to open or unfile a contract for the term of the agreement, it was considered a good contract. Now that is viewed as a wasted opportunity and an undermanaged supplier relationship.

So true.