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this chapter and that vendor contracts and pricing are being reviewed by
senior management. The vendor manager in many ways functions as the
company purchasing agent. A variety of seminars, classes, and organizations
390 The Back Office: Efficient Firm Operations

are available to provide training and expertise on purchasing and vendor
management. The U.S. Bureau of Labor Statistics has this to say about
training, certification, and continuing education for purchasing and vendor
managers:

Regardless of industry, continuing education is essential for advancement. Many
purchasers participate in seminars offered by professional societies and take col-
lege courses in supply management. Professional certification is becoming in-
creasingly important, especially for those just entering the occupation.
In private industry, recognized marks of experience and professional compe-
tence are the Accredited Purchasing Practitioner (APP) and Certified Purchas-
ing Manager (CPM) designations, conferred by the Institute for Supply
Management, and the Certified Purchasing Professional (CPP) and Certified
Professional Purchasing Manager (CPPM) designations, conferred by the Ameri-
can Purchasing Society. In Federal, State, and local government, the indications
of professional competence are Certified Professional Public Buyer (CPPB) and
Certified Public Purchasing Officer (CPPO), conferred by the National Institute
of Governmental Purchasing. Most of these certifications are awarded only after
work-related experience and education requirements are met, and written or
oral exams are successfully completed.2

The National Association of Purchasing Management (now known as the
Institute for Supply-chain Management; NAPM/ISM) has information on
certifications available. The APP certification requires passing two exams as
well as two years of experience (or one year of experience and an associate™s
degree). The CPM certification requires four exams and five years of experi-
ence (or three years and a four-year degree from an accredited institution).
The details on certifications available can be found at the NAPM/ISM and
American Purchasing Society web sites. A full list of related resources is
found at the end of this chapter.


Taking Control of Vendor Management
There is a well-defined process for taking control of vendor management.
This process is appropriate for companies with a track record of failed ven-
dor relationships, a variety of unruly vendors managed by disparate groups or
individuals across the firm, or simply a new vendor management process.
Most professional services firm managers or partners at some point inherit a
variety of disparate vendor relationships in various stages of health and effi-
cacy. Without gaining control of these relationships, service and spending
problems can quickly arise from malicious vendors in poor partnerships who
are looking to take advantage of the chaos or changes at customer organiza-
tions or from benign vendors who are simply paying attention to the cus-
tomers that work the hardest to manage the relationship. Inattentive vendors
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Purchasing, Procurement, Vendor, and Asset Management

can wreak havoc on a firm relying on their services; a period of business
change or ongoing weak management of the function can cause vendor and
client agendas to diverge, and the relationships deserve special attention and
tight performance management during these times. Exhibit 16.2 depicts the
vendor audit /cleanup process.
The first task is to assign a vendor manager, or vendor management com-
mittee, as described in the previous section. Once this has been completed,
the second task is to identify all current vendor relationships. These may exist
in various departments, business units, functional units, and geographies.
For every vendor relationship identified, all related legal, financial, and op-
erational documents should be collected in a single repository. The vendor
manager should review each contract and make particular notes about ser-
vice level commitments, prices, maintenance agreements, evaluation/report-
ing procedures, and start and end dates of the agreement.
It is often difficult to locate the contracts for all service vendors in a pro-
fessional services firm. The contracts may have been signed by a manager
who has since departed and the original documentation lost, particularly for
long-standing arrangements. A contract may be filed in the purchasing de-
partment, legal department, or human resources department; in larger or-
ganizations, the purchasing manager should keep a copy of the contract, as
well as the manager of the functional area directly involved with the vendor
(e.g., IT department, human resources department). Failing the location of
an internal copy, the vendor manager can request a contract copy from the
vendor. As a last resort, the vendor manager and vendor can renegotiate a
contract to govern the ongoing relationship without necessarily changing the



Collect Establish
Assign Identify inventory, Meet ongoing
administrative all review and with vendor
responsibility vendors store all vendors management
contracts process

• Serve as vendor • Produce vendor • Audit • Goals • Procurement
management inventory “ Contracts • Objectives process
function •Best approach “ Terms • Alignment •Payment terms
• Individual or is working “ SLAs • Performance •Revised contract
group, depending with accounts • Discard outdated expectations and
on firm size payable area vendor contracts SLAs
• May include
coordination
with functional
department heads
in larger firms


Exhibit 16.2 Vendor Audit/Clean-Up Process
392 The Back Office: Efficient Firm Operations

original terms. Often, long-standing contracts will have expired without re-
newal, while the firm continues to use the service or product. These situa-
tions create an ideal opportunity for the vendor manager to renegotiate the
terms of the agreement.
As a next step, the vendor manager should meet individually with each
vendor (if possible depending on the number of vendors; otherwise, select a
vendor audit team to assist) to gain a deeper understanding about the vendor,
its organization, products and services, history of the vendor-client relation-
ship, contractual obligations, recent events, and to resolve any outstanding is-
sues. This vendor checkup provides a clear view on which vendors are true
partners with the firm and which vendors simply have arm™s length relation-
ships for specified products or services.
Finally, the vendor manager should rapidly implement vendor performance
management processes to manage the vendor relationships based on the self-
reporting and audit cycles described in this chapter. This rapidly drives out
underperforming vendors and ensures that fees paid to vendors are providing
the company the maximum possible return.


Beginning New Vendor Relationships
Getting off to a positive start with new vendors is critical to the success of
projects and to the overall productivity of the firm. The vendor manager
should develop an on-boarding checklist and one-page information document
for new vendors. This document includes information about invoicing, ad-
dresses, key personnel, and so on that will ensure that the vendor and organi-
zation are ready to work together smoothly. One process we have seen work
well is a “readiness” check performed by the vendor manager one week be-
fore the vendor comes onsite. This checklist, which is signed off by all in-
volved internal parties, ensures that the internal team is freed and ready to
begin work with the vendor on the agreed-to start date, the dependent prod-
ucts and staff are ready to go, the work space is ready, the contract is signed
and filed, and the vendor has reconfirmed the start date. If any of the items
are not checked, the date is postponed. A process such as this ensures that no
vendor shows up before the company is ready. This process saves critical
downtime for both internal teams and vendor teams. It helps to keep vendor
costs down”in the spirit of the partnership and, ideally, benefiting the com-
pany in the long term.


Vendor Contracts
A solid legal agreement should always form the foundation of any vendor re-
lationship. While contract negotiations can be painful, contracts often out-
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Purchasing, Procurement, Vendor, and Asset Management

live the tenure of the individuals negotiating the terms on either side. We
have seen many contract negotiations fall short of the proper due diligence
because the individuals involved had personal relationships or ample reason
to trust one another. After these individuals have left their respective firms,
their successors are left to interpret what may have been agreed on but not
documented, producing contention and sometimes resulting in a termination
of the agreement entirely. Therefore, it is in both companies™ best interests
to clearly document their agreement for working together.
In every case, the contract should explicitly set forth the terms that gov-
ern the relationship and define each party™s responsibilities to the other in
unambiguous detail. Further, the contracts for many vendor relationships,
such as IT services or software, are most often turgid, impenetrable, and
complex. For purchases of any material significance, we recommend engag-
ing attorneys or company legal counsel with experience negotiating contrac-
tual terms for large purchases or long-term, complex agreements. These
professionals have seen the outcomes from poorly negotiated contracts and
know which contract terms are of material interest, and they can identify the
sometimes hidden, but significant, clauses in a contract. Chapter 19 contains
information on entering into contractual agreements, as well as obtaining
legal counsel.
We have seen that the outcome of poor contract negotiations is often
detrimental to the client company, who is generally the loser in interpreting
ambiguities in the contract. In one case, a product vendor found enough
room for interpretation to ensure that the new features in its product be con-
sidered a “new product” and required new product use licenses to be pur-
chased by the end client. The new features to be added should have most
likely been included in a typical upgrade to the product and, therefore, pro-
vided free to all clients paying maintenance fees.
Negotiating the best terms for a vendor contract requires understanding
the potential organization requirements not only today, but also in the fu-
ture. In two other examples, clients have made smart decisions on possible
future business actions and protected their rights contractually. In the first
case, we assisted a mid-size firm in the spinoff of a subsidiary unit. Fortu-
nately, some forward-thinking negotiator had crafted terms that allowed the
licenses for the application system used to run the business to be split be-
tween entities and reassigned in the case of such a transaction. This point
was at variance to the standard contract from the application vendor and
would have likely resulted in significant new license fees payable to the ven-
dor had it not been contracted in advance.
In another case, a firm decided to outsource a portion of its operations to
a third party. The vendor that supplied IT systems to the firm was also in the
business of outsourcing. The vendor protested vigorously against a third
party operating its system, arguing an invasion of its intellectual capital
rights and asserting that its licenses could not be reassigned to third parties.
394 The Back Office: Efficient Firm Operations

Again, a prescient negotiator for the firm had included the irrevocable and
perpetual right to assign the application license to any third-party vendor
chosen as an outsourcing partner. Certainly, there was no consideration of
outsourcing the technology department at the time of the contract signing,
but the negotiation team made sure that all options were covered.
Several important contract terms for vendor services and products are de-
scribed in the following list. Because of the broad number and types of ven-
dors used by a typical professional services firm, the specific terms will vary
from contract to contract; therefore, this list should be treated as merely a
starter set for any vendor negotiation conversations:

• Insurance: In many cases, clients taking on significant business risk re-
quire the vendor to maintain malpractice insurance (often called errors
and omissions [E&O] coverage). In any case, critical vendors should be
required to provide proof of general and professional liability coverage.
Additionally, the firm may choose to be specifically named as an addi-
tional insured under the vendor policy.
• Completion sign-off: Acceptance of services or delivery of the services,
particularly for large projects or implementations of critical products, is
an important negotiating point. Typically, the vendor chooses the first
possible logical point in a project or service implementation to require
payment. The risk to the firm is that the product may not perform as
promised or the services are not completed as agreed. To reduce the risk
that the company will be obligated to pay regardless of performance,
specific acceptance criteria should be constructed. For services, detail
the specific deliverables required for satisfactory performance of the
contract, the requirements for the deliverable, quality metrics for ac-
ceptance, and required delivery dates and milestones.
• Assignment rights: Product vendors generally prefer to restrict the as-
signment privileges of the customer. However, this practice is not in
the customer ™s best interest. To allow for company reorganizations and
potential merger and acquisition activity, the customer should include a
provision to assign rights and transfer the contract in the event of own-
ership changes, reorganizations, and to subsidiaries and minority inter-
est affiliates.
• Product license and maintenance fees: The best case in purchasing prod-
uct licenses is to obtain a perpetual, fully paid-up license that requires
no annual license or maintenance fee. However, many product com-
panies charge maintenance fees and aren™t willing to support or provide
upgrades unless an annual maintenance fee is paid. Set the future main-
tenance fees before the contract is signed; otherwise, the vendor will
gain tremendous leverage during future fee negotiations. Maintenance
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Purchasing, Procurement, Vendor, and Asset Management

fees should begin only when the product or service passes the accep-
tance criteria, not when actually delivered.
• Nonsolicitation clauses: It is in the interest of both the client and the
vendor to specify that neither party may solicit to hire each other ™s em-
ployees or customers, both during the contract and for some period
(usually 24 months) after the termination of the contract. This is gener-
ally not an issue for professional services firms, which employ delivery
staff who would not be likely to join a vendor supplying a service out-
side their expertise.
• Description of products or services: Ensure that the description of the
product or service to be provided is unambiguous and complete. Often,
disputes arise postsigning on what specific service or product was
agreed on. With product vendors, this is generally an easy exercise, but
it can be particularly difficult to define for business consulting or other
professional services vendors.
• Right to withhold payment: Ensure the right to withhold fees if vendor
services are not properly delivered or product upgrades are not delivered
as promised. The end customer or a clear and unambiguous deliverable or
result should be the arbiter of what constitutes proper delivery.
• Dispute resolution: Consider mediation and arbitration alternatives,
which can reduce the cost of disputes and require negotiation prior to
legal action.
• Future pricing: The vendor will obtain significant leverage in the fu-
ture if future pricing for products and services is not detailed in the
contract. At a minimum, specify that future product or service pricing
will be no more than the then-current list less the current customer dis-
count percentage. Ideally, the prices are specifically fixed.
• Liability: Vendors will attempt to limit liability to the total sum of fees
paid. Clients should attempt to achieve higher, but reasonable, liability
limits.
• Outsourcing clauses: Provide the right for the customer to transfer li-
cense for a product to an outsourcing partner without the licensor ™s con-

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