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directors to get together and exchange information as a small group. The in-
formation exchanged, particularly on pricing or input to product or service
development, can be used to win some concessions from a vendor or to signif-
icantly inf luence the research and development process for products. This is
particularly true for smaller customers of a given vendor. As noted in the
opening to this chapter, small customers often find it difficult to manipulate
vendor agendas. By working together with several other small customers, they
multiply their leverage considerably. Small customers should take the advice
of Ben Franklin in working with other small customers: “ Yes, we must, indeed,
all hang together, or most assuredly we shall all hang separately.”6
Other sources of information can include analysts, consultants, publica-
tions, and even the vendor ™s competitors. A detailed list of these information
sources is included in a later section of this chapter, which covers information
gathering as part of the initial vendor selection process. These information
sources (research analysts, Internet sites, consultants, and others) continue to
be highly valuable sources of information on the vendor, postselection.
A frequently underused source of information for vendor managers is in-
dustry analysts working in investment banks or money management firms.
These professionals are typically charged with having a complete under-
standing of how a given vendor is expected to perform in the future. One of
the most important ingredients for their research is the current opinions and
experiences of customers. For this reason, analysts are usually enormously
interested in talking with a vendor ™s customers about their experiences, and
they may even collect informal surveys to quantify user opinions. These ana-
lysts can become a nerve center of information about particular vendors,
providing insight into the health of the vendor, marketplace changes, and
competitive outlook. In exchange for customer viewpoints and opinions, they
are usually willing to share not only their objective third-party opinions con-
cerning vendor direction and performance, but also their published periodic
research reports. Further, the analysts are often willing to facilitate the in-
troduction of the vendor manager to other customers for the formation of
the informal information-sharing groups discussed previously. While this is a
402 The Back Office: Efficient Firm Operations

highly effective strategy, the vendor in question must be of a size and type to
attract the attention of an industry analyst, which limits the number of ven-
dors for which it is relevant.
In summary, the wide variety of information available on vendors with a
minimum of research and effort should not be overlooked as a critical com-
ponent of managing vendors, setting metrics, and ensuring best pricing.

Vendor Recompetes
If the vendor selection process is done correctly and the vendor relationship
is properly managed as a mutually beneficial partnership, the need to recom-
pete business should be infrequent. However, it is important to periodically
test the market for enhanced products, services, and pricing. A recompete
may not result in a new vendor choice, but it can be the springboard to intro-
ducing new thinking to an existing vendor relationship or to a firm. As a long-
term client once remarked to a services provider, “ We like your services and
value the partnership; you just don™t necessarily have the market cornered
on good ideas.”
Times to consider a recompete include:

• The end of a lengthy (5+ years) contract because products and services
will have evolved considerably, so retesting the market for pricing,
product, and service changes is appropriate.
• Major changes in the marketplace in terms of pricing or service quality
because newer products or services in rapidly changing markets often
improve in reliability and diminish in cost rapidly as the marketplace
• Emergence of additional service providers offering better and /or more
cost-effective products and services.
• Step-change evolution in technology, necessitating a new product or
• Discontinuation of a product or service, necessitating a new provider.
• Any severe performance problems with the vendor resulting in damage
or potential damage to the customer ™s business.
• Significant structural changes at the vendor or client (e.g., merger, ac-
quisition, divestiture).
• Material financial problems at the vendor or client.
• Mandate from firm senior management to investigate additional vendor
• Overreliance on a single vendor, resulting in business continuity
Purchasing, Procurement, Vendor, and Asset Management

When any of these events occur, a recompete should be considered, but a
full vendor selection as outlined later in this chapter should not necessarily
be completed. Exhibit 16.5 shows a decision tree for deciding whether to
recompete. The first step should be an economic analysis to determine the
expected value to be created by recompeting the contract.
The benefits of recompeting should include:

• The difference between the present value of all the expected expendi-
tures from a new vendor and the present value of all the expected ex-
penditures from the current vendor
• Other decreased internal costs (e.g., maintenance, management, train-
• Increased revenue
• Improved control over the business (reduced risk)

In many cases, there are significant switching costs associated with
changing a vendor. The costs should include all costs involved with switching
between the original vendor and a new vendor. Examples of these costs in-
clude, but are not limited to:

• Time and resources to be expended in a new vendor selection process
• Any mandatory close-out costs dictated in the current contract

• Negotiate with existing vendors
• Review contract
No recompete
No gain • Discuss pricing discounts
and favorable terms


• Expected value
of recompete

Evaluate Select vendor/
High gain Recompete N vendors recompete

• Includes • New or revised
existing and contract with
new providers selected vendor

Exhibit 16.5 Vendor Recompete Decision Tree
404 The Back Office: Efficient Firm Operations

• Initial upfront costs that must be incurred with the new vendor
• Internal resources lost to managing and implementing the transition
• Any probable business disruption during the transition
• Additional internal costs that must be incurred to achieve effectiveness
with the vendor ™s service or product (e.g., management time, training)

Even with significant gains from switching vendors, the costs can often
heavily outweigh the benefits. Vendors are very aware of these switching
costs, and these costs are precisely the reason they are often able to increase
prices for current customers while offering “great deals” to new customers.
This switching cost only further emphasizes the importance of properly es-
tablishing contractual obligations and measuring vendors, covered previously
in this chapter. The vendor manager should understand vendor relationships
that entail high switching costs and those relatively easy to switch and ag-
gressively manage the inclusion of tight performance metrics and severabil-
ity in the contracts of the vendors with the highest switching costs.
If the economic analysis shows that the benefits still greatly outweigh the
costs, a recompete should proceed to the next step. If the reason for the rec-
ompete is based purely on pricing advantages, a simplified form of the analy-
sis shown to the vendor usually results in a price concession. If the reason for
the recompete is more than price or the current vendor will not budge on
price, the recompete should proceed using the standard vendor selection
process detailed later in this chapter.
The length of the contract up for recompete should be based on the po-
tential discounts available from vendors in exchange for a guaranteed term.
For products or services that are rapidly changing and are rapidly coming
down the cost curve (e.g., telecommunications services), the contracts
should be no longer than a year. The savings of a new contract usually more
than compensate for the lost term discounts on the original contract. For
vendors that are difficult or unlikely to change, longer term contracts with
heav y discounting are more appropriate.

Managing Troubled Vendors
Because of the wide variety of vendors used by a given professional services
firm, inevitably, one or more of the vendors will experience financial or exe-
cution difficulties. The forward-looking vendor manager usually has ample
warning of these troubles, particularly if he or she is participating in the in-
formal forums, alternative information gathering, and vendor measurement
activities discussed in this chapter. In these cases, it is crucial for the vendor
manager to aggressively protect the firm™s interests by ensuring that adequate
Purchasing, Procurement, Vendor, and Asset Management

coverage for the vendor product or service is available and that the com-
pany™s financial exposure to the vendor is minimized or eliminated.
For well-established, competitive vendor marketplaces, ensuring adequate
coverage in the case of vendor failure should be a relatively straightforward
process of assessing competitive offerings and estimating the associated
switching costs. For vendors providing highly specialized niche products or
services, the vendor manager may have to conduct additional research to find
alternative products, approaches, or workarounds. Often, the effort of con-
ducting this research can be shared among several customers who coordinate
through the informal information-sharing groups.
The financial exposure to a vendor can come from a variety of sources.
Prepaid or partially paid orders for equipment or products, prepaid or cur-
rently due maintenance fees, or other contractually obligated sums are com-
mon instances. We have seen many companies victimized by vendors that file
bankruptcy while significant receivables have been paid by customers in ad-
vance of product or service delivery. Not only is delivery of the product de-
layed, but the monies spent to acquire the product are usually lost forever.
The vendor manager should work with the CFO, finance department, or firm
senior management to minimize the risks of lost capital and work with the
vendor to ensure that contractually obligated amounts due result in actual
services received by the client. In extreme cases, the company must halt pay-
ment to the vendor and file a lawsuit to line up for restitution when the ven-
dor refuses to refund for services not performed. Many times, the filing of
the lawsuit will provide leverage”the vendor often cannot raise money or
proceed with any restructuring until the suit is settled, which provides moti-
vation for the vendor to step to the negotiating table.
In one client situation, a worried vendor manager consulted us about the
quarterly maintenance fee due to a product vendor. While not concerned
with the stability of the product, which was operating properly, the manager
was worried that additional money invested in maintenance fees would be
lost if the vendor continued to struggle. Careful research indicated that the
vendor was indeed in serious trouble, and the client delayed the $100,000
maintenance payment based on various vendor contract breaches. One
month later, the vendor filed bankruptcy, leaving no hope of additional prod-
uct development or support. The impact of $100,000 spent for services that
would never be delivered would have been devastating for the financial posi-
tion of this particular client.
In every case, the vendor manager should ensure that the firm senior
managers are fully informed of the company™s operational risk and financial
exposure because of troubled vendors. The senior management team can be
instrumental in helping reduce the risk and can help the vendor manager
manage the advance planning and alternative brainstorming needed to mini-
mize the potential risks.
406 The Back Office: Efficient Firm Operations

Vendor Selection
This section outlines the process for selection of major outside service and
product providers and the subsequent management of the vendors. The list
of external vendors used by even a small firm is often lengthy. Vendors pro-
vide products and services across a wide variety of categories, as outlined in
Exhibit 16.1. Within a category, multiple vendors may be used by a larger
professional services firm.
The selection approach defined here is an abbreviated version of a full-
f ledged, comprehensive methodology and should be adequate for most pro-
fessional services firm vendor selection processes. For an overview of the
exhaustive selection process for a large-scale vendor, particularly for IT, we
suggest reading The Executive™s Guide to Information Technology (Wiley,
2003). Chapter 10 covers the selection process topic in detail. As with all
other frameworks described in this book, common sense should prevail, and
the applicable portions of the approach should be applied to the specific sit-
uation at hand.
The successful selection of vendors plays a critical part in determining
the overall success of the professional services firm and, as important, the
ease with which the firm achieves success. Successful vendor selections can
be complex and lengthy processes that require the collection and analysis of
significant amounts of information, particularly for telecommunications and
systems vendors. Well-thought-out vendor choices and solid vendors who be-
have as partners can ease the work of the vendor manager and the firm in-
ternal and professional staff considerably. Conversely, poor vendor selection
can hamstring the organization with constant firefighting, failed initiatives,
and angry staff and customers. Because outside vendors are generally a large
source of expenditure for the professional services firm, the vendor manager
cannot afford to ignore their proper selection and management.
Vendor interests and incentives, unfortunately, are not always precisely
aligned with those of the vendor manager. While client satisfaction is a part
of the equation for vendors, so are other factors such as product advance-
ment, profitability, sales commission, quarterly revenue, and market pene-
tration. A vendor salesperson™s natural role is that of an advocate for his or
her product or service. This means that to be most productive for the firm,
the vendor manager must supervise and actively manage the delivery of ser-
vices and products on an ongoing basis to ensure that vendor delivery and ex-
ecution are consistent with the expectations and goals of the organization.
Picking the vendors on which to rely can be a risky proposition. The selec-
tion process can go awry, wasting significant dollars, disrupting the business,
and ending careers for vendor managers.
In spite of the criticality and risk associated with vendor selection, expe-
rience has shown that vendor managers are at a significant disadvantage in
the vendor process, particularly vendor selection. A vendor manager may
Purchasing, Procurement, Vendor, and Asset Management

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