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sent and without fees. This enables the company to outsource a function
without approval from the vendor.
• Payment terms: Payment terms specify the cash payments to be paid.
Net 30 days is typical for service vendors. Allow for suspension of pay-
ments if vendor or product is not performing as agreed.
• Warranty: Require the vendor to warrant that the vendor has the right
to license the software or provide the services.
• Training: Negotiate free training with software products and specify it
in the contract.
396 The Back Office: Efficient Firm Operations

• Volume/service-level discounts: Prearrange volume or service-level dis-
counts and specify it in the pricing section of the contract.
• Vendor certifications: For some vendors, special third-party certifica-
tions, such as SAS-70, CMM, ISO-9000, or other qualifications may be
required.

The number of high-profile lawsuits involving the delivery of products
and services to firms of all types confirms that contract negotiation and tight
management of the vendor relationship is crucial to avoid business disruption
and litigation, which can follow. This has been especially true in the IT field.
In a study of technology vendor litigation, Cutter Consortium found that the
top three causes for litigation include missing functionality or performance
in the product, missed delivery or promise dates, and defects in the product,
yielding it unusable.3 Exhibit 16.3 shows percentage of grounds claimed in
the technology lawsuits researched by Cutter. A solid contract will help build
a strong relationship by clearly articulating key provisions and avoiding am-
biguous statements that lead to future disputes.




80

70
67%
Percentage of Respondents




60

56%
50

40 45%

30

20

10

0
Functionality and/or Promised delivery date Defects in a vendor™s product
performance of slips several times yield the product unusable
delivered product not
up to claims of maker




Exhibit 16.3 Primary Causes for Litigation in Technology Lawsuits
397
Purchasing, Procurement, Vendor, and Asset Management

Managing Vendor Performance
A key piece of managing vendor relationships is building a mutual under-
standing of partnership expectations and ensuring that the vendor fulfills
those expectations. Often, the success or failure of the vendor hinges on
clearly setting performance metrics to be achieved and following through on
those metrics. Ineffective vendor managers rarely get past the first step of
setting the metrics, and when they do, they do not follow up with periodic
measurement of the vendor ™s performance.
The process is basic. For each vendor, define expected performance,
which may or may not be explicit in the contract; then track and monitor the
performance, periodically report performance, take action to improve per-
formance, or remove poor-performing vendors. The vendor manager should
manage this process, with input from professional and administrative staff in
the firm who have direct experience with the vendor providing the service
or product.
Because of the large number of vendors that may be found in even small
professional services firms, determining measures and monitoring them can
be a resource-intensive and, therefore, cost-prohibitive process. The most ef-
fective way to determine how to measure and evaluate vendors when the con-
tract does not have specific deliverables (e.g., vendors selling a specific
product on a one-time basis, such as an office supplies provider or a caterer),
or when the product or services is sophisticated or complex, is to ask them to
provide metrics they believe are the most important determinants of their
success with clients. Vendors know the most about their particular services
and should be able to quickly articulate the top three to five metrics on which
they should be judged. If they cannot identify how they should be evaluated,
they are most likely not a vendor that the firm should be working with. The
best vendors most often have internal benchmarks by which they measure
their own performance, and they are usually happy to share those with cus-
tomers who ask. In fact, the very best vendors drive the process by voluntar-
ily scoring their performance on a monthly or quarterly basis for the benefit
of the client.
By having some vendors design their own performance metrics, incorpo-
rating them into contractual guarantees, and then having vendors self-
monitor, the bulk of the effort to monitor and measure performance is
absorbed by the vendor. This process should not change the pricing materially
because a quality vendor will have these reporting disciplines built into its
processes to start. To ensure that vendors are behaving honestly, the vendor
manager should periodically and randomly audit one or two of the vendor-
supplied, vendor-reported measures. If the vendor falls short, the potential of
a random audit, coupled with contractual penalties, is generally enough to
eliminate or at least minimize any dishonesty or lack of diligence.
398 The Back Office: Efficient Firm Operations

For the most mission-critical vendors, in addition to the vendor-driven
approach outlined previously, the vendor manager should generate his or her
own set of two to three key measures and perform the vendor assessments on
a regular schedule. The vendor manager cannot afford to find out that a key
vendor is falling short of agreed-on goals too late to mitigate the failure. The
vendor manager should combine the key measures provided by the vendor
with any other desired performance metrics to create a performance report
card. This should be regularly completed and reviewed with the vendor to
monitor ongoing performance and adherence to contractually established
SLAs. If any SLAs have been violated, the customer can demand remedia-
tion in accordance with the contract specifications. Alternatively, in the
spirit of partnership, the customer could make concessions in exchange for
other benefits that could be provided without a monetary exchange, as illus-
trated previously. In every case, the client should be rigorous in establishing
and adhering to the regular reviews. Without these reviews, vendor relation-
ships can go unmonitored for long periods, and significant problems can
often go unnoticed and unresolved.
In addition to vendor performance reviews, the vendor manager should
periodically review all vendor contracts. This ensures that all service levels
promised in the contract are being enforced or at least that goodwill is being
built and acknowledged by not enforcing an agreed-on standard. Further, a
review of the contract will ensure that any changes to terms or conditions
based on changing business imperatives can be managed early on. We recom-
mend reexamining every vendor contract annually at a minimum. For ven-
dors on which the company relies significantly, these reviews should be done
on a quarterly basis.
This periodic contract review is neglected surprisingly often in companies
of all types. For example, a Cutter Consortium survey estimates that 7 per-
cent of IT product and service provider contracts are never reviewed, and
fewer than half of contracts are reviewed at greater than annual intervals.4
Exhibit 16.4 shows Cutter ™s research results in this area.
In all cases, the client should ensure that it can withhold any fees (mainte-
nance or otherwise) due the vendor in the case of contract breaches on the
part of the vendor. One of the most rapid methods for getting the attention
of a vendor experiencing performance problems is to withhold approval on
accounts payable. We have seen countless client situations with poorly per-
forming vendors who do not return phone calls or repeated appeals to fix
problems.
The speed with which vendors respond from the highest levels once a
steady f low of receivables dries up can be remarkable. While this approach
should be a last resort, it is generally successful. When it is not successful,
the firm has at least avoided continuing to fund a vendor that will not be part
of the long-term picture and has saved money to invest in a relationship with
a replacement vendor.
399
Purchasing, Procurement, Vendor, and Asset Management


Never
Time between reviews
7%
greater than one year
Every month
20%
7%



Every three months
15%




Once a year
Every six months
34%
17%


Exhibit 16.4 Contract Review Frequency in Surveyed IT Departments


Because typical professional services firms engage a wide variety of ven-
dor types and sizes, vendor managers should be sure to allocate their time
and attention according to vendor importance. The most critical vendors or
those who receive the largest fees should be the focus of any measurement
program. The vendor manager should set spending or criticality thresholds in
advance, to be approved by firm senior management, to determine which
vendors will be closely managed.


Automated and Online Purchasing
For many commodity products used by the professional services firm, pur-
chasing is best completed using online services or brick-and-mortar enter-
prises with an online component. For example, office supplies, coffee
service, magazine subscriptions, or related vendors can be easily managed
online:

Computers continue to have a major effect on the jobs of purchasing managers,
buyers, and purchasing agents. In manufacturing and service industries, com-
puters handle most of the routine tasks, enabling purchasing workers to concen-
trate mainly on the analytical and qualitative aspects of the job. Computers are
used to obtain instant and accurate product and price listings, to track inventory
levels, to process orders, and to help determine when to make purchases. Com-
puters also maintain lists of bids and offers, record the history of supplier per-
formance, and issue purchase orders.
Computerized systems have dramatically simplified many of the acquisition
functions and improved . . . efficiency of determining which products are sell-
ing. . . . Firms are linked with manufacturers and wholesalers by electronic
400 The Back Office: Efficient Firm Operations

purchasing systems, the Internet, or Extranets. These systems permit faster selec-
tion, customization, and ordering of products, and they allow buyers to concen-
trate better on selecting goods and suppliers.5

The vendor manager should establish a single account or point-of-inter-
action with the chosen commodity vendor and ensure that all approved pur-
chasers throughout the organization have access to the account login
information. Many professional services firms fail to aggregate their purchas-
ing, losing potential volume discounts and causing undue work for their ac-
counts payable team and vendor manager.
Often for recurring purchase items, vendors perform automated replen-
ishment by gauging usage and automatically delivering the appropriate items
and quantities. Again, office supplies or other perishables such as snacks and
soda can be set for delivery with minimal intervention or effort on the part
of the internal resources.


Working with Vendors™ Other Customers
An important resource in managing critical vendors, particularly larger ven-
dors, is information sharing with their other customers. There are usually
well-established user groups for almost every product or service on the mar-
ket that has a reasonable-size client base. These groups typically communi-
cate in online forums and web sites. For some of the major products, regional
or national user group meetings or conferences can help facilitate communi-
cation among users. These groups provide a wealth of information, such as:

• Latest news about the vendors and their affiliated service or product
provider partner networks
• Features, functions, and enhancements planned for future products or
releases
• Best practices for using current products or services
• Workarounds for common (or obscure) problems
• Assistance with common contract terms and SLAs
• Useful third-party services or products
• Informal answers to common questions
• Direct response and ideas for addressing specific problems
• General pricing and contract terms information
• Shared metrics for vendor performance measurement

While most vendor managers usually pay attention to the “official” vendor-
sponsored special interest groups, an often-overlooked and powerful tool for
inf luencing vendors and driving pricing discounts is informal work with other
401
Purchasing, Procurement, Vendor, and Asset Management

customers in the same geographic region or industry. More direct interaction
with other customers can provide deeper and more candid insights than are
likely to be shared in a vendor-sponsored, public forum. Coordination with
other vendor customers may reveal specific pricing information, specific SLAs
or vendor metrics, legal problems or issues with the vendor, and other infor-
mation useful in negotiating with and managing the vendor. The best customer
partners are those using the same vendor, located in the same locale, but in a
different industry. While working with other vendor customers in the same in-
dustry can provide highly valuable information on specific applications of the
vendor ™s products or services, the competitive dynamic usually minimizes the
information that each party is willing to share. The vendor manager may want
to consider coordinating informal periodic meetings between managers and

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