Best Practices for Structuring Your VMO
Vendor Management Is Key To Realizing Your Sourcing Business Case – Why Leave It To Chance
EXECUTIVE SUMMARY
In early 2008 Alsbridge initiated a study working with its customers who had executed outsourcing deals to determine what makes the critical difference between realizing the projected ROI and coming up short. We discovered that early introduction of a Vendor Management Office (VMO) combined with critical change management and communications initiatives are keys to ROI (Return on Investment) realization. Without disciplined VMO leadership the dreaded shadow IT organization emerges attacking the business case and limiting the vendors ability to do what they do best, leverage capacity.
CIOs NEED AN EFFECTIVE VMO TO ACHIEVE THE PROMISED COST BENEFIT
The business case for outsourcing is the focal point of any strategic outsourcing initiative. Senior management most likely reviewed the cost benefit analysis and approved the initiative based on achieving an ROI with some limited risk. Now that the vendor has been selected and the contract has been signed senior management expects delivery on the numbers. This is where the real work of extracting the value from the organization and from the vendor begins. This is the work of the VMO.
Although having a VMO is a best practice more than two thirds dont have a VMO.
Of those who do have a VMO, most do not believe they have the right competencies and skills to operate the VMO effectively.
Worse still, the demand for VMO management skills are increasing as outsourcing initiatives flounder without good internal transition and vendor relationship management capabilities. Without good governance, the relationship becomes dysfunctional early on resulting in poor hand-offs between the client and the vendor making it impossible for the vendor to drive value for the customer. This means erosion of the cost benefit business case and weaker IT performance.
For example one client told us:
We did not institute our VMO soon enough and we wondered about for nearly 18 months before senior management demanded we either fix our vendor management problems, get them their ROI as promised or terminate the deal. We could have avoided the emergence of a shadow IT organization that attacked the deal from the inside. (Director of IT Outsourcing Initiative, Large Automotive Supplier)
Similarly, another client gave us the following background on the institution of the companys VMO:
We must have a strategic relationship with our vendors or why else engage them. This is enough justification for forming a VMO. We knew transition was complex and we knew that we would have to address vendor problems if we were to realize our business case. We were not about to try to explain to our senior leadership why we are not getting the full benefits outsourcing. (CIO, Large Insurance Company)
THE ATTACK OF THE SHADOW IT ORGANIZATION
We found most companies recognize the need to establish their VMO early but they are struggling with competing demands for people who cannot be freed up early enough to focus on transition and governance issues. As transition begins, communications with business leaders falter, retained staff struggle to understand the new service delivery model and to adapt to new business processes. Business leaders can become confused as old processes are replaced with new ones and familiar IT buddies are replaced with unfamiliar vendor personnel who are focused on driving process discipline and achieving operating efficiency. Without strong central leadership driving communications from the onset, it is not long before IT staff begin reacting to the demands of their business customers.
One client told us that:
within six months of the completion of transition we had a shadow IT organization taking back some of the functions that had been outsourced to our vendor. Our retained organization, just did not understand how to get the job done using vendor resources. So with good rationale, our people implemented their own processes that did not include the vendor. Had we implemented a good VMO, we could have avoided this attack from the inside.
–IT Director, Insurance Organization
THE KEY FUNCTIONS OF A HIGH PERFORMANCE VMO
Successful VMOs have an organizational framework that can orchestrate constituencies to the outsourcing deal throughout the sourcing life cycle. The VMO must also be able to adapt; changing its functional focus as the deal transverses the multiple phases of outsourcing from strategy development through contracting to transition and stabilization to contract renewal. The VMOs primary role is to manage the relationship for optimum value realization from beginning to end. Within this primary function are four distinct VMO functions.
The chart below provides a view of what a VMO organization framework might look like and the four distinct functions of the VMO as a relationship management function.
While this model provides a view of a complete VMO, in reality, the right VMO structure is a hybrid a variation that fits within the organizations business environment, cultural norms, investment profile, outsourcing deal type, and relationship management readiness. For example an existing VMO might include Centers of Excellence (COE) that perform many of the activities associated with contract and service level management, while another COE performs financial and demand management activities.
Service Level Management
Among the strategic imperatives for creating the VMO is long-term performance improvement. Hence, service level management goes beyond making sure that SLAs are measured, monitored and reported. The VMO must exert pressure on both the client and vendor organizations to improve processes for increased consistency and reduced costs. More process discipline is required as the relationship matures and it bridges the gap between pre- and post contract activities.
Contract Management
Once the contract is signed the work of making the contract work takes center stage. The focus must move away from terms and conditions and move quickly to the practical application of the contract in the daily operation of the IT business. The VMO executive must manage the chasm between what is in the contract and what must get done each and every day.
Financial Management
The VMO actively works with the program management office (PMO) to coordinate the delivery and capabilities of multiple vendors, not only sourcing providers but also software, hardware and other technology suppliers. This involves intellectual property management, invoice/payment management and audits, discretionary pool /ARC/RRC management, and service audits. Senior executives are most interested in the financial results of the sourcing initiative, therefore, the VMO must include individuals with the business savvy to provide regular financial performance updates that spell out performance against the original business case.
Demand Management
The ability of the VMO to balance the wants and needs of the business and to forecast demand is critical to the vendors ability to complete annual service planning and to be ready and able to meet service requirements. An effective VMO can eliminate the emergence of IT shadow organizations by creating a central office for gathering, organizing, prioritizing and validating business requests. The VMO should become the unified front of the organization when managing the interface between the organization and its vendors. This unified front is the key to ensuring the client is directing the relationship not its vendors.
BUILDING AND EFFECTIVE VMO
The VMO can be viewed as bureaucratic overhead or as the Business Case Enabler. The difference is in how the VMO is established, its charter and the friendliness of its processes in supporting multiple organizational and IT operating goals. There are five critical factors to consider when building a VMO:
1) Select a VMO leader with the right competencies and skills. The VMO leader must be armed with the ability to coordinate and communicate across many constituencies on both the client and the vendor sides. This means navigating through both the written and unwritten rules of engagement.
2) Engage the business in the design of the VMO organization and management processes. Acceptance of the VMO increases when stakeholders help architect the processes and understand how to leverage the VMO to get things done. The VMO should be flexible while insisting on principles of standardization and adoption of proven best practices. Standardization is an imperative if the organization is going to truly leverage the value its vendors are capable of providing.
3) The VMO should report to a centralized CIO. In a global sourcing deal, it is likely that multiple regional business units are coming together under a single sourcing contract. To achieve standardization across the enterprise the VMO should operate under the sponsorship of a global CIO.
Position the VMO as a COE. Over time the VMO will develop expertise across a wide range of vendor management and project planning initiatives. This is valuable organizational intellectual property. The COE should provide coaching, advisory services for business customers and retained operations to reduce bureaucracy.
4) Promote the VMO. At its inception, the VMO will appear to be more overhead. The VMO must quickly demonstrate its value to the organization by addressing many common problems facing any organization entering into a sourcing relationship. Select three risks that everyone agrees must be mitigated as the organization enters into the sourcing relationship. Set out a plan, provide the VMO with executive sponsors and a charter with teeth. Deliver something that brings value to the business from the onset.
If you are considering entering into a sourcing relationship or if you are currently engaged in outsourcing, look around, does your organization have shadow operations lurking in the IT function. If so, a working VMO can be the best defense against attacks from within that diminish the value opportunity of outsourcing. Dont be caught without a good VMO.
If you are considering entering into a sourcing relationship or if you are currently engaged in outsourcing, look around, does your organization have shadow operations lurking in the IT function. If so, a working VMO can be the best defense against attacks from within that diminish the value opportunity of outsourcing. Dont be caught without a good VMO.