As a sourcing or vendor management leader faced with the task of building a new sourcing or vendor management capability, you inherit an unwieldy and inefficient vendor portfolio, which adversely affects costs and performance.
Does that situation sound familiar?
“With cost optimization a top business priority, you must take a structured approach to develop a business case for rationalizing your vendor portfolio in order to improve costs, while maintaining quality,” says Matt Corsi, research director at Gartner.
He adds: “Sometimes pressures to reduce spending quickly lead to reviews of only existing vendors and bypassing of competitive sourcing procedures. However, if you undertake a sourcing event that allows proposals from new vendors, this creates competitive tension and provides insight into new pricing and technology solutions.”
Gartner recommends that vendor management leaders take a five-step approach to optimize their vendor spending and improve performance.
Step 1: Analyze spending and prioritize subcategory opportunities
Undertake a spending analysis to understand how much you are spending with technology vendors, and what you are buying from them. Having captured spending details, identify where you have the greatest opportunities for vendor rationalization by counting your vendors by subcategory. Then prioritize the subcategories where you spend most and develop a roadmap that identifies which categories you will address and when. Start with the subcategory from which you can derive the most benefit with the least resistance, in order to show your value and gain credibility. Then continue with other subcategories.
Step 2: Develop a plan for each subcategory
Your internal demand profile should include an overview of historical spending with each vendor and of expected future demand. It should be complemented by market analysis of both incumbent and potential vendors. This will enable you to develop a sourcing plan, and likely savings targets, along with the series of exercises required to rationalize your vendors. The plan should cover the collection of detailed requirements, the building of a formal RFP, the soliciting of vendor responses, the deselection of vendors and the transition between vendors.
Step 3: Socialize the plan and gain buy-in
To be successful, the subcategory plan must have widespread support from the principal vendor relationship owners, stakeholders and executives. Without buy-in from the relationship owners in particular, making changes to the supply base is likely to be futile. You need to demonstrate the likelihood of measurable returns that equate to the value they can see. Your goal is to have the business case speak for itself, while identifying the risks and how you will lessen them.
Step 4: Execute the plan and identify preferred vendors
A subcategory steering committee made up of key stakeholders and sponsors can help keep the plan on track as you review vendors’ responses and bids. Before making any final awards, mitigate the possibility of business disruption by preparing for transition. Consider extending existing supplier agreements before undertaking a transition, as this can reduce business disruption and make for a smoother transition.
Step 5: Implement governance to maintain a rationalized portfolio
Finally, develop a list of preferred suppliers for each subcategory, and establish a governance process for executing new contracts. To ensure that preferred vendors remain competitive in terms of both cost and technology, assign owners to each subcategory and have them review their strategies annually. These reviews should include monitoring of changes in the market in relation to suppliers, prices and technology bases.
“No one wants cost optimization or vendor rationalization to become a roadblock obstructing innovative initiatives that justify the use of new suppliers. But similarly, you don’t want to let innovation become an excuse for adding too many suppliers to your portfolio,” says Corsi. “To strike the right balance, establish an innovation committee within the project management office. It can approve and manage the process for adding suppliers that help drive innovation.”