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The case for outsourcing vendor management

Complex, multi-provider outsourcing arrangements have become the norm for today’s enterprises, as businesses seek to leverage the specific capabilities of specialised providers. While this best-of-breed approach can yield significant benefits, overseeing myriad providers and managing multiple moving parts presents a significant challenge in terms of ensuring quality service, addressing cybersecurity risks, and adhering to regulatory compliance requirements.

Vendor management

Recognising the importance of overseeing the vendor ecosystem, businesses are paying greater attention to the vendor management function. Designed to facilitate collaboration among multiple providers within the sourcing model, as well as alignment between the sourcing model and the business, vendor management provides critical governance oversight and is uniquely positioned to act as a bridge that connects myriad stakeholders.

Vendor management has traditionally been retained by the client organisation. Intuitively, this approach has certain merits, as it can enable consistent oversight to multiple agreements. Increasingly, however, mature enterprises are engaging third-party specialists to manage the day-to-day oversight of transactional activity and collection of operational data related to vendor management. By outsourcing the management of their outsourcers, clients are able to reduce costs, improve service delivery, and focus their internal resources on developing richer relationships and strategic value.

Cost savings

The most striking benefit of an outsourced model is cost savings. To oversee an IT services contract valued at $25m (£17m) to $30m (£21m) a year, a typical in-house VMG function requires a relationship management role supported by contract, performance, risk and financial analysts (approximately five FTEs), together with an investment in asset management and utilisation tools. Under an outsourced services scenario, meanwhile, vendor management activities are delivered largely by offshore resources, and client staffing requirements are limited to relationship management (typically one FTE). Over a five-year contract period, annual savings average approximately 30 per cent.

The outsourced model is also more scalable, since a high proportion of additional workload can be absorbed by cost-efficient offshore resources. While a retained function can replicate standards and process discipline across multiple contracts, an increased volume of work requires the hiring of additional retained – and more expensive – staff.

Driving efficiencies

Outsourcing vendor management to a third party is also more likely to drive the process standardisation and consistency required to enable the transparency essential to effective governance. Any single contract for IT or business process services is characterised by a wide range of recurring commitments, deliverables, and obligations. These include day-to-day activities related to service delivery such as identifying, tracking and closing incidents and problems, responding to and implementing change requests, resolving problems, and collecting and reporting data. These daily activities, in turn, inform contractual documentation such as monthly obligation, risk and service level compliance reports, in addition to resource unit consumption and invoices.

Effective oversight of daily obligations comprises the operational layer at the base of a governance strategy pyramid. Clearly defined and consistent data, processes and reporting mechanisms provide an operational foundation for sound decision-making and continuous improvement. Meanwhile, flawed data, inconsistent reporting and one-off processes compromise the foundation of the governance strategy and limit the business’ ability to drive value from the outsourcing relationship.

How service providers use ITIL

The challenge lies in driving true consistency across the service delivery model. While the Information Technology Infrastructure Library (ITIL) framework provides a widely accepted set of standards around basic operational activities that include managing incidents, problems and changes, different service providers tend to apply subtle but unique flavors to their interpretation of ITIL guidelines.

This creates the potential for inconsistencies to arise when different providers execute and report basic tasks and functions. One provider might classify an incident as closed when the technician reports that the incident has been resolved. A second provider, meanwhile, might classify the incident as closed only when the user who reported the incident indicates that the incident has been resolved. This subtle difference has a significant impact on the performance metric of incident resolution time. Specifically, resolution time will be notably faster under the first provider’s approach, which does not factor the time it takes the end user to send an email to close the incident. At the same time, that approach doesn’t account for situations where the technician closes the incident, but the user is still having a problem.

Even this subtle difference in reporting procedures – if repeated thousands of times a day across multiple processes and multiple vendors – creates inconsistency in data collection that can have a significant negative impact.

Rather than collecting consistent operational data to be analysed to drive continuous improvement, the business gathers sloppy data, seriously compromising the effectiveness of the governance function. Put differently, if the granular data comprising the base of the governance pyramid is flawed, the strategy layer at the pyramid’s peak will yield minimal value.

The key is in the detail

In-house vendor management resources often fail to take the essential deep dive into clarifying the nuances of how different providers interpret standards that are seemingly clearly spelled out. For one thing, they will wrongly assume that a standard and consistent process is in place, simply because it is described in a statement of work.

Moreover, the attention to detail and depth of administrative minutiae that characterises operational governance is both tedious and time-consuming. As a result, many in-house vendor management teams will abdicate their oversight responsibility, either through a lack of commitment or a lack of resources.

The value proposition of a third-party vendor management specialist, meanwhile, is built on efficiently executing the tedious and time-consuming tasks of operational governance.

Another advantage of outsourcing transactional vendor management and governance functions is to offload responsibility for recruitment and retention. While talent management is a basic benefit of any type of outsourcing, finding the rare breed of individual with the skills and inclination to be effective at VMG presents an especially daunting challenge.

A vendor management analyst’s typical day begins with a list of 15 to 20 overdue obligations that require tracking, inquiries, repeated follow-ups and persistence. In addition to organisational skills and attention to detail, the role requires bulldog tenacity and commitment.

The analyst role, moreover, is by definition characterised by one-offs, exceptions, and special cases. As such, while Robotic Process Automation (RPA) is eroding the competitive advantage of labour arbitrage in many areas, VMG remains a people-focused domain requiring a high level of human intervention.

After years of neglecting outsourcing, business stakeholders are paying close attention to how outsourcing supports key business objectives. As the vendor management function faces growing pressure to deliver, many businesses are finding that third party specialists are ideally positioned to address the challenges involved in overseeing complex, multi-provider service delivery models.

David England is a Director with Alsbridge