Before embarking on supplier relationship initiatives, most organizations try to segment their key suppliers. This helps to understand the type of relationships that currently exist, and what relationships would be most effective in delivering value.
During our training courses, we use ADR’s Portfolio Analysis model to support this analysis. We like this tool because rather than assigning suppliers a relationship classification based solely on spend value, it considers the (sometimes volatile) market conditions of the suppliers’ industry.
ADR’s Portfolio Analysis Model:
For IT contract managers, suppliers are often positioned in the “critical” or “strategic” quadrants, where the market can be challenging. This area is characterized by suppliers who have higher power relative to their customers, which they may or may not exploit for commercial advantage. The “critical” or “strategic” positioning is due to the nature of technology hardware, software and services purchases, where (in the event of performance failure of the incumbent), supply choices after supplier selection can be greatly reduced, compared to the original sourcing options.
It may seem unusual to label suppliers as “critical” or “strategic” when there is a choice of suppliers that display competitive behavior. The reason is that the effort and cost of switching suppliers can be considerable, due to the high investment required for the technology infrastructure. Therefore, performance challenges are best resolved through problem-solving with the incumbent supplier, instead of replacing them. There are advantages to long-term relationships with IT vendors, for example:
- After suppliers recover the cost of selling to their customers, they can invest an agreed sum into innovations that benefit the buyer (if the relationship is contract managed in this way).
- The suppliers learn much about the needs and constraints of their key customers. This helps them to plan their product roadmap.
- Where the IT contract manager has agreed continuous improvement targets and rewards with the supplier, there is adequate time to implement such initiatives fully.
When ADR are working with procurement professionals, many IT managers report difficulties in the communicating effectively with IT vendors. Such relationships are described in various ways during our training and consulting discussions. Sometimes they are called one-sided (because of a perceived balance of power in favor of the supplier). Often they are called acrimonious (often due to the long contracting process of complex IT agreements). Usually, they are described as over-complicated (because of the “many to many” relationships between the customer’s IT project managers and supplier’s technical teams). The most common IT contract manager complaint we hear at ADR is a lack of visibility of the historic and planned expenditure and total cost implications for the organization.
But the market landscape is shifting. Typically, IT teams relied on technology or solutions requiring a fixed infrastructure. Now, more organizations are moving to the cloud for their IT solutions, making use of the Software-as-a-Service (SaaS) model. This means that the underlying technologies and platforms that support the software are not rigidly tied to the customer’s organization. In the former model, there was high dependency on a few suppliers. Customers often perceived the suppliers as complacent. In the cloud environment, the stakeholder is theoretically free to switch solutions where another option would yield better value. In practice, there could still be challenges in switching source (for example, changing processes, practices and messages to the user). But the IT vendor recognizes that a “take it or leave it” attitude is ineffective, and this opens up a constructive dialogue with their customers.
The impact of cloud computing on the IT contract manager can be summarized in this SWOT analysis:
SWOT analysis of the impact of cloud computing for IT contract managers:
So how could the IT contract manager respond to this environment, to optimize the current and planned IT spend in their organization? These tips may help:
- Understand the global relationship with each vendor in terms of spend, stakeholders, projects and their associated lifetime costs. Then, ensure there is an IT contract manager responsible for coordinating the management of the master services agreement, project bids, approvals and performance across the organization.
- Determine the gaps to an effective working relationship. ADR’s Supplier Relationship Needs Analysis tool is a 360 degree feedback model for supplier evaluation, addressing factors like trust and attitude. Such tools avoid a subjective assessment approach.
- Link suppliers’ likelihood of winning new projects to measured success in current assignments. This will keep suppliers constantly motivated to perform, innovate and learn about your needs.
- Don’t neglect the sustainability agenda. Even with the Software-as-a-Service (SaaS) model, there are still physical purchases and movements in the supply chain. The customer should consider how their buying behavior is contributing to the reduction and re-use of waste.
- Make a conscious effort to understand relationship style and whether it is helping or hindering the motivation of the supplier to perform well for you as a customer. ADR’s supplier relationship style quiz is used during our training courses, and is good place to start assessing the most suitable style.
Cloud computing brings opportunities to improve both supplier competitiveness and the dynamics of existing supplier relationships. This should prompt IT contract managers to re-evaluate their desired relationship outcomes with current IT suppliers. A subsequent change of expectation, performance measures or relationship style could alter the agenda and style of the next supplier performance review meeting. Most importantly, it could reenergize the relationship and bring all parties together to explore how it could yield greater value.