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cial trouble. The topics of vendor management, purchasing and procurement

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384 The Back Office: Efficient Firm Operations

practices, and asset management are linked in most firms, and are covered
here as well.


Why This Topic Is Important
Almost without exception, services firms must rely on a variety of vendors to
accomplish their objectives. Outside vendors provide many of the functions
outlined in this book, including legal, banking, information technology,
telecommunications, marketing, public relations, and real estate services, as
well as more mundane items such as office supplies, catering, and facilities.
Because professional services providers such as lawyers, consultants, real es-
tate agents, or doctors get little training in managing outside partners, in-
cluding experience measuring service levels, selecting service providers, and
negotiating pricing and terms, many professional services firms fall short in
vendor management. This can be highly damaging to the firm, not only be-
cause of the reliance on vendors for such a wide variety of functions, but also
because of the high expenditures on outside vendors. In aggregate, outside
providers generally comprise the largest expenditure of a professional ser-
vices firm besides labor costs. Failure to manage these expenditures and re-
lationships suitably can be devastating to the firm.
A cooperative and amicable relationship is necessary to extract the most
value out of vendor relationships, while applying regular management prac-
tices to ensure that the vendor is performing up to expectation and committed
service levels. This can be challenging because of the periodic incongruent in-
centives of the firm and the vendor sales and delivery teams, and the wide va-
riety of vendors that must be managed. Often, firms cover shortfalls in vendor
performance by adding staff or other expenditures rather than confronting
nonperforming vendors and instituting standard vendor management processes
and procedures. Firm managers and staff must work to be taken seriously by
vendors and to hold nonperformers accountable.
Vendors, like most businesses, pay the most attention to the customers
who provide their largest revenue stream or the customers who are most
vocal. Thus, smaller companies must learn to aggressively communicate
their needs, requirements, and timelines to vendors and, for extremely crit-
ical vendors, to work together with other small customers to inf luence ven-
dor policies and priorities. In addition, larger companies with significant
vendor spending should ensure that the vendor is ref lecting their needs
appropriately in product or service development priorities, rather than sub-
mitting to a vocal minority. While inf luencing vendor priorities is impor-
tant for professional services firms, vendor managers should prioritize their
vendor inf luence efforts based on their individual situations. Paying atten-
tion to finding the best labor lawyers available and ensuring their proper
385
Purchasing, Procurement, Vendor, and Asset Management

performance is much more critical to a staffing services firm than, for ex-
ample, ensuring that the office supplies are always delivered on time. Most
professional services firms with sizable spending on vendors should assign
an individual (or group of individuals) to take responsibility for managing
the vendor relationships, a role that we refer to throughout this chapter as
the vendor manager.
Topics discussed in this chapter include:

• How to work effectively with vendors to ensure that the full value of in-
vestments in products and services of outside providers can be achieved
• How to build a mutually beneficial partnership with a vendor
• The importance of establishing the vendor management function
• How to take control of vendor relationships
• How to set thresholds for determining which vendors to focus on
• The distinction between types of vendor contracts
• Important steps in establishing new vendor relationships
• Methods for establishing and managing vendor performance and ser-
vice levels
• Gaining value and leverage by working with the vendor ™s other cus-
tomers
• When and how to recompete vendor contracts
• Approaches for managing vendors experiencing business difficulties
• How and when to select vendors, including requests for proposal (RFPs)
and contract negotiation

We have devoted specific chapters elsewhere in this book to the selection
and management of particularly critical vendors for professional services
firms, including providers of legal, information technology, real estate, and
finance/accounting services.


Vendors as Partners
The most effective vendor relationships are the ones in which the vendor and
customer build a close partnership. However, this relationship can be diffi-
cult to achieve. Vendors have a different set of incentives and priorities than
the vendor manager, and finding ways to work to mutual benefit takes effort
and willingness on both sides to accomplish. Most often, the proper tenor for
the relationship is set during the selection or bidding process, which is cov-
ered at the end of this chapter. Exhibit 16.1 shows the typical vendor types
engaged to provide products or services to professional services firms.
386 The Back Office: Efficient Firm Operations

Legal Services

Banking and financial services

Tax and audit services

Information technology hardware/software and services

Real estate

Marketing and public relations

Telecommunications

Office supplies

Printing

Staffing/recruiting

Cleaning services

Catering/food service

Exhibit 16.1 Categories of Vendors for
Professional Services Firms




There are a number of ways for professional services firms and vendors to
work in partnership to mutual benefit. Working with clients closely, the ven-
dor can provide a wide range of benefits to the customer, including:

• New services or product features customized for the customer
• Free product updates in advance of official product release
• Free off-the-record consultation or advice on minor matters
• Telegraphing major company announcements in advance of official no-
tification, where appropriate
• Concessions on pricing for future product or service purchases
• Discounts on maintenance, training, or other ancillary services
• After-hours or emergency support or availability
• Information on undocumented product features or provision of special
services reserved for best customers
• Access to vendor internal resources for consultation
• Introductions to other clients with similar requirements or needs for
brainstorming or consultation on specific problems
387
Purchasing, Procurement, Vendor, and Asset Management

In return, the customer might provide:

• Breaks on minor delivery shortfalls by the vendor
• Continued business without any unnecessary or onerous recompetes
• Detailed feedback for improving the service or product
• Press releases and references for vendor ™s sales prospects
• Specific letters of recommendation for vendor ™s sales calls
• Potential sales leads for vendor with companies in same industry or con-
tacts from other professional relationships

Typically, these items are provided to the opposite party on a best-efforts
basis. The items proffered in a partnership are of relatively low cost to the
partner providing them but can be of tremendous value to the other party.
This type of relationship will significantly increase the value of the contract
without requiring arm™s length contract addendums whose cost and difficulty
of enforcement often destroys much of the potential value and usefulness.
The longer the relationship exists, the higher the potential benefits for
both parties. For the vendor, sales costs are virtually eliminated, and over
time, the cost to serve generally declines due to experience effects, resulting
in long-term gross margin improvement. For the customer, the vendor ™s cost
reductions are typically shared with the customer via pricing discounts, addi-
tional no-charge services, and higher service levels or speed. The customer ™s
cost to manage the vendor also declines, and “learning curve” costs from new
vendor entrants are eliminated. Finally, the customer benefits from a vendor
whose staff understands the business in intimate detail and can provide cus-
tomer-specific solutions.
An important benefit of participating in a close relationship with a vendor
is the opportunity to inf luence the vendor ™s product or service development
process. This is particularly true for vendors that provide a critical product
to a professional services firm, such as a software application for tracking
projects and time provided to a business consulting firm or a candidate back-
ground screening process for a staffing services firm. Successful vendors in-
vest immense resources in developing their current and future products and
services. Many product vendors have an income stream emanating from
maintenance contracts to devote to product enhancements and new features.
By partnering closely with vendors and providing input to the prioritization
process for new feature or capability development, the client firm can lever-
age vendor research and development (R&D) investment amounts far in ex-
cess of the amounts it could dedicate to internal development. The client
then steers the product direction to its ultimate benefit.
One software application vendor we worked with invited 25 key customers
to their corporate headquarters twice a year for product development and
388 The Back Office: Efficient Firm Operations

demonstration sessions. The vendor product manager would create an inven-
tory of all enhancement requests, interface suggestions, and functionality
recommendations from the biannual two-day affair, and work with the in-
ternal development staff to incorporate as many of the ideas as were possi-
ble and appropriate. Although the software vendor had thousands of clients
and an annual users™ conference, these 25 clients drove a disproportionate
amount of software enhancements and greatly benefited from partnering
with the vendor.
An important fact to consider in building a partnership is that some ven-
dors may wish to partner initially; however, the partnership can rapidly turn
negative if problems arise. A variety of events affecting the vendor or the
client can cause the partnership to go awry, including turnover of key per-
sonnel, a merger/acquisition, a change in strategic focus, financial difficul-
ties, high growth, new requirements, or even the acquisition of another
customer who is providing much greater benefits and monopolizing the ven-
dor ™s attention and resources. In these cases, it is best to reevaluate the value
of the partnership to ensure that the client organization continues to receive
the expected partnership benefits. It is also important to periodically reeval-
uate each vendor to ensure that the relationship is satisfactory for both par-
ties. This process is described later in the chapter.
In the end, the customer is paying for the product and /or services. This
should naturally put the customer in the position of most inf luence and pro-
vide final control of the terms of the relationship. When money has changed
hands, vendors have a business obligation to discharge their contractual re-
sponsibilities. Often, vendors try to take advantage of the relationship if the
customer is unaware, too busy, or inexperienced in dealing with vendors.
Savv y customers know that they are, ultimately, the boss in any vendor rela-
tionship. Given a choice between a partnership and an adversarial relation-
ship, all parties prefer the former. However, if a partnership is difficult to
achieve, the vendor manager should be certain that his or her company™s needs
are met by the vendor even if aggressive, confrontational action is required.


Vendor Management Role
The vendor management function is vital to capture the benefits of vendor
partnerships as discussed in the chapter. The vendor manager, as well as the
firm professionals who directly use the vendor services, should be involved
in the selection and ongoing management of key vendors. Other functions of
the vendor management role should be delegated to an administrative re-
source. Tasks performed by the vendor manager include:

• Negotiate, execute, file, and maintain all contracts
• Assist firm managers in processing new contracts
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Purchasing, Procurement, Vendor, and Asset Management

• Provide reports on vendor performance and contract status to senior
management
• Coordinate activities between internal teams and vendors
• Define and enforce processes and procedures for vendor management
• Assist with RFP and vendor selection administrative process
• Develop a standard approach to deal with each type of vendor used by
the firm
• Establish and monitor service levels required, by individual vendor
• Execute internal vendor quality and satisfaction surveys
• Track and report upcoming vendor milestone dates
• Take appropriate action based on the results of vendor scorecards and
surveys
• Maintain records related to the successful delivery of products or
services
• Report progress on fixed bid contracts for services, for example, quali-
tative progress, percent complete versus percent billed
• Analyze vendor pricing compared to industry averages
• Collect and distribute service level reports from vendors

The tendency in most professional services firms is to ignore the vendor
management function and by default decentralize all vendor activities. In
fact, often the vendor management role goes to the individual who misses the
meeting where the responsibility was assigned. However, the organization
benefits through reduced costs, reduced risk, and more effective communi-
cation between the company and its vendors by centralizing the function.
The vendor management role helps ensure that the company drives the rela-
tionship versus being driven.


Assigning a Vendor Manager
The first task is to assign the vendor management role. This person (or com-
mittee) will be responsible for the tasks previously described. The vendor
manager will also be integral to the audit /cleanup process. In larger firms
where a specific manager exists for internal functions such as IT or office
management, the vendors used by that department should also be managed
by that department. In these cases, the overall firm vendor manager function
should help keep track of the department-specific vendors. This work in-
cludes ensuring that the department heads are following the guidelines in

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