In financial services, vendor relationships shouldn't be left to chance. We must ensure that vendors are meeting their commitments and delivering value at the lowest possible total cost of ownership (TCO). For some exceedingly well-run organizations, this is procurement's job. But for most of us, having an independent group -- one that complements procurement's charter -- is a more likely route. At SVB Financial Group, this group is the Vendor Management Office (VMO). Traditional procurement focuses on evaluation and purchase, while the VMO drives the entire vendor relationship life cycle.
With a significant portion of IT budget allocated to vendor spend, SVB initially focused the VMO on IT. Within about three months, we saw results. For example, we could easily see which contracts were expiring within 60 days, or when we next needed to perform the evaluations that show regulatory agencies we're adequately managing vendor risk. In less than six months, we saw about $350,000 in savings -- much of this accomplished because we had the solid information needed to rationalize or consolidate vendors.
The VMO is not an island. We partnered with business teams to understand the value required from each vendor, and whether the business' current systems and vendors could deliver that value. We are creating a single system of record to bring most vendor-related data into one location, streamlining how we manage these relationships. By centralizing the control and information for 80 percent of our vendors, we expect to reduce our efforts around vendor-related compliance by as much as half. After all, your company's success depends on maximizing vendor value and reducing vendor-related risk and expenses. Here's how:
- Recognize the need: I like to think of the vendor life cycle as "eyeing, buying and flying." While procurement tends to focus on the middle portion (and sometimes the first), organizations with a VMO recognize the value of a balanced approach. "Eyeing" involves understanding the overall company and market shifts, and creating ROI analysis or value statements on any new products or services that you may want to introduce. "Buying," traditionally the heaviest procurement focus, introduces vendors into the equation, including vendor and product evaluations, due diligence and selection, and contract negotiation. But the longest-running portion of the cycle -- consuming nearly 80 percent of vendor management over the long haul -- is in "flying," or managing operations, maintenance, support and continuing evaluation. Eyeing and Buying lay the foundation for Flying, and only by well-managed Flying can a company understand if the vendor relationships are creating value. If these elements are not balanced, this is a sure sign that you need a VMO.
- Tier vendors: Rank how strategic each vendor is to the institution. Since best practice dictates spending 80 percent of your effort on the most strategic 20 percent of vendors, identify this 20 percent and begin VMO work here.
SVB created three tiers of vendors based on their strategic importance, including the problems and risks involved, in case we needed to cut ties rapidly. Our Tier One vendors are "critical" to operations -- the provider of our banking platform, for example. Vendors in the "moderate" zone, such as our hardware vendors, are important, but less painful to replace. Vendors of lower strategic importance may still represent a high spend, but they can be managed and replaced most easily.
- Catalog and monitor obligations: Managing expectations is at the heart of a VMO. Beginning with a few top-tier vendors, work with the business team to catalog the factors that define success, including ROI and service-level agreements. SVB created a standard review process allowing key business owners to examine every facet of performance, including everything from overall satisfaction to the vendor's track record in delivering promised new features.
- Evaluate the vendor life cycle: By systematically tracking vendors, expectations and metrics in a single system of record, a VMO is in a great position to understand vendor TCO and ROI. Using our VMO solution's pre-built analytics and vendor performance dashboards, SVB can now easily look at measures such as spending by vendor, region, or product and service category.
- Build a solid foundation: Though it's possible to manage a few vendors with spreadsheets, this won't work long term. A comprehensive solution easily and securely allows all stakeholders to participate in the life cycle. Automating many aspects of managing and administering the vendor relationship, from initial evaluation to performance score-carding, will dramatically reduce the effort required to build and maintain a VMO. Any systems you deploy should integrate with other solutions, providing the most complete view of the total vendor costs.