A vendor management organization (VMO) is a function that oversees and coordinates all aspects of vendor management, such as contract negotiation, financial management, relationship management, risk mitigation, performance monitoring, and collaboration. A VMO can provide significant benefits to an organization, such as cost savings, improved vendor performance and innovation, enhanced compliance and risk management, and better alignment of vendor strategy with business objectives.
In several large organizations, a VMO capability is largely distributed between IT, finance, procurement, and legal. A centralized VMO even when established is informal and largely plays the role of a coordinator between these functions. A VMO typically grows in five stages as shown below:
Many organizations face challenges in scaling up their VMO capabilities from a small team to an enterprise-wide mature function that can handle complex and diverse supplier ecosystems. Some of the common challenges include:
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- Lack of a clear vision, mission, and objectives for the VMO
- Inadequate governance structure, processes, roles, and responsibilities
- Limited resources, skills, and tools to support VMO activities
- Fragmented and inconsistent supplier management practices across functions and business units
- Low visibility and transparency into supplier performance, spend, and value
- Reactive and transactional approach to supplier management instead of proactive and strategic
Enablers for Scaling Up the VMO
Establishing and operating a full scale VMO is not a trivial task. It requires careful planning, and execution. To achieve higher levels of VMO maturity and value creation, organizations need to focus on seven key enablers: defining the charter, vendor segmentation, operationalization roadmap, governance model, organization structure, processes, tools and the business case. These enablers are interrelated and mutually reinforcing, and they need to be tailored to the specific needs and goals of each organization.
1. VMO Charter
The VMO charter defines the vision, mission, objectives, scope, and value proposition of the VMO function. It also outlines the key benefits and expectations of the VMO for the organization and the suppliers. It aligns with the organizational strategy, culture, and goals and defines the success metrics and KPIs of the VMO. The VMO charter helps communicate the VMO’s objectives and aligns the expectations from various functional stakeholders.
2. Vendor Segmentation
Vendor segmentation is a method that helps VMO classify the suppliers into different categories based on their strategic importance and performance. The method enables the VMO to prioritize the suppliers based on an objective criteria and allocate the appropriate level of resources and attention to each category, such as contract negotiation, relationship management, risk mitigation, performance monitoring, and collaboration. The VMO should review and update the segmentation periodically and adjust the vendor management strategy accordingly.
3. VMO Operationalization Road Map
The VMO operationalization road map is a plan that describes how the VMO function will be established, implemented, and improved over time. It identifies the key activities, milestones, dependencies, and risks involved in the operationalization process. The road map should consider the current and future state of the VMO capabilities and processes and identify the phases and initiatives that will deliver quick wins and high-impact results. The VMO should also measure and track the progress and outcomes of the road map and make adjustments as necessary based on the feedback and changing business needs.
4. Governance Model
The governance model defines the structure and accountabilities of the VMO function and the other stakeholders involved, such as procurement, finance, legal, IT, and business units. A VMO can be centralized, decentralized or hybrid. It can be maintained in-house or outsourced to a third-party provider who can offer specialized skills, resources, tools, and best practices.
The governance model also outlines the governance committees and cadence for strategic, tactical, and operational vendor management that will enable regular monitoring and feedback. It also establishes a clear and effective escalation and decision-making mechanism that can resolve any issues or disputes that may arise during the vendor lifecycle.
5. Organization Structure
The organization structure defines the size, structure, roles, responsibilities, skills, and capabilities of the VMO team with clear and optimal reporting and coordination structure. It must be designed to align with the size, scope, and complexity of the vendor portfolio. It also determines the resource allocation, training, development, and performance management of the VMO staff.
Examples of a few roles in the VMO are vendor manager, contract analyst, performance analyst, relationship analyst, and financial analyst.
6. Processes
The processes define the standard operating procedures, workflows, templates, and guidelines for executing the core activities of vendor management. This would enable a standard and consistent way of performing vendor management tasks, such as vendor selection, evaluation, negotiation, contracting, monitoring, reporting, budgeting and termination. The processes would cover the four key competencies of vendor management: performance management, financial management, relationship management, and contract management:
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- Performance management involves setting and measuring key performance indicators (KPIs) and service level agreements (SLAs) for the vendors.
- Financial management involves tracking and managing the budgeting, payments and benefits. It also involves auditing, validating, and reconciling the invoices and expenses of the vendors.
- Relationship management involves building and maintaining communication and collaboration with the vendors.
- Contract management involves managing contracts and creating, reviewing, & enforcing the terms and conditions of the contracts.
7. Tools
The tools include technology, systems, and platforms that would support and automate the VMO function and processes for relationship, contracts, performance, and financials management. They enable the integration, analysis, and reporting of the vendor management data and information across all vendor competencies adding efficiency, transparency, and effectiveness to the processes.
8. Financial Proposal
The financial proposal provides a detailed breakdown of costs for setting up a VMO function and processes, along with the assumptions, dependencies, risks, and contingencies. The proposal would include cost of hiring/training the vendor management staff, cost of implementing the vendor management processes, policies, standards, and guidelines and cost of acquiring, deploying, & maintaining the vendor management tools.
The VMO spend is typically 1% of the total vendor spend, but it may vary depending on the size and scope of the vendor portfolio, the current and desired state of the vendor management maturity, and the resource requirements. It would also include contingency to account for the uncertainty and unpredictability of the vendor management environment.
Next Steps and Key Activities
In addition to the key enablers, achieving maturity in Vendor Management also requires strategic alignment, effective communication, and diligent execution. It is essential to adopt a structured approach that is well-integrated, supported, and capable of delivering significant benefits. Here is a typical sequence of activities and next steps for scaling up VMO:
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- Align with the senior management and obtain their support for the VMO function and processes.
- Establish a governance structure and roles and responsibilities for the VMO team and the business stakeholders involved in vendor management.
- Develop a communication and change management plan to ensure awareness, buy-in, and adoption of the new VMO processes and tools across the organization.
- Execute the implementation roadmap for the preferred vendors, starting with the pilot phase and then scaling up to the full rollout.
- Monitor and track the progress and outcomes of the VMO implementation against the defined metrics and targets, and identify and resolve any issues or risks that may arise.
Conclusion
Scaling up the vendor management organization is a strategic and complex undertaking that requires careful planning, execution, and monitoring. By focusing on key enables and adhering to key activities, organizations can evolve their VMO function into a full-fledged organization that achieves higher levels of maturity and delivers value.
By Dipankar Dhariwal, Managing Consultant