Vendor Management - Project Managers Get a C-minus

March 8, 2010 | Author: PM Hut | Filed under: Procurement Management, Solicitation & Source Selection

Vendor Management - Project Managers Get a C-minus
By Samuel Prasad

Project managers are woefully ill-prepared in the area of procurement and/or vendor management. I am being very generous when I give them a grade of C-minus.

Price doesn’t matter and SLA’s (service level agreements) are only marginally important. It sounds quite dubious, and I am sure I will be hearing an earful from procurement managers vehemently condemning my statement. But having negotiated technology contracts for over 15 years with vendors across the globe - from Asia to Europe to America, I have found that traditional negotiating practices have inherent flaws and do not help in accurately calculating the ROI of a vendor engagement. Why? Because when using traditional methods - many components of the value proposition provided by the vendor do not even figure in the calculation of the ROI.

First, price should not be the only factor in selecting a vendor because organizations who are focused on the lowest bidder typically end up paying for it in other ways, as in marginal performance and sub-standard quality from the vendor.

Second, while SLAs are important to the extent that they describe service guarantees it means different things in different countries. SLA’s for the most part are enforceable only in developed countries. In developing countries I have found that SLAs are used mostly as guidelines and not as legal binding contracts, which means that the customer has no legal recourse if the terms of the SLAs are not met.

No, I am not against SLAs. I do believe in identifying the right metrics or key performance indicators (KPIs) in drafting an SLA not only to define service guarantees but also to evaluate the performance of a vendor. On-time delivery, adherence to industry standards, low defect rates and a product that meets specifications are metrics that are agreed upon universally. But there are other heuristic factors that cannot be empirically quantified which are equally important in assessing not only the performance of a vendor but also the ROI.

There is a new school of thought that is starting to take hold where vendor performance is measured not just on “tangible” ROIs but also on “intangible” ROIs. A tangible ROI has a direct impact on the bottom line of the company. Intangible ROIs in most cases may not have a direct cash impact on the company. Here are a few examples of intangible ROI’s:

  • Innovation
    • Does the vendor have the domain knowledge and relevant industry certifications to participate in the evaluation and re-engineering of the customer’s processes?
    • Is the vendor willing to share industry best practices and business improvement methods that they have adopted with success elsewhere which they believe would benefit the customer?
    • As a result of vendor participation how has the customer’s CIR (continuous improvement ratio) changed, which is defined as the number of process improvements implemented by the customer divided by the number of process improvements suggested by the vendor?
  • Flexibility

    • Is the vendor willing to change product scope or service offerings to meet the changing market needs of the customer?
    • How easy is it to negotiate with the vendor?
    • What is their ability to respond to unanticipated events?
  • Commitment

    • Has the vendor proven to be trustworthy based on their actions?
    • Has the vendor invited you, the customer, to tour their facilities?
    • Has the vendor provided unfettered (but reasonable) access to their domain experts?
    • What has been the quality of the relationship between vendor and customer executives?
    • Last, but not least - how high is the trust ratio, which is defined as the number of promises kept by the vendor divided by the number of promises made by the vendor?

Dr. Samuel Prasad is a renowned global technology manager with a 15-year track record in helping companies on their implementation of strategic plans and programs related to technology projects for major media, entertainment, data warehousing and financial companies in the U.S., China, Europe and India. His domain expertise extends into areas of financial transaction processing, mobile, wireless, RFID, online media, casual gaming and business intelligence. Sam is a certified Project Management Professional (PMP) and a Certified Software Quality Engineer (CSQE). Sam has a Ph.D. in Robotics & Computer Science from the Stevens Institute of Technology (USA), and a master’s degree in Computer Science from the Indian Institute of Technology. Dr. Prasad can be reached at Intelligent Software Systems. Blog: http://blog.prasads.com/ - Email: blog@prasads.com - Telephone: 631-368-8130

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2 people have left comments

Good article, but stating that most project managers take only price into consideration is inaccurate. Most project managers I’ve known, including myself, consider first the reputation of the vendor to make an informed decision. Low price is not the top nor the only requirement for selecting a vendor for most project managers.

Thanks - David A.

David Atkinson wrote on March 8, 2010 - 11:52 am | Visit Link

Good article. As you point out there are many aspects to be considered by PM’s in creating their plans surrounding the performance and risks of vendors and subcontractors.

The approach of creating a more inclusive plan beyond the immediate tangible cost and schedule is a reflection of the trend away from contract-based supplier and customer relationships towards a more integrated, holistic, end-end supply chain. The treatment of suppliers and customers as long-term mutual partnerships vs disposable and replaceable accessories is long overdue in many industries.

The challenge for the PM remains how to quantify the intangible ROI’s and to justify them based on their long-term value (potentially beyond the scope of an individual project) vs short-term cost. This requires a method for capitalization vs expense, which is a whole other [financial] can of worms!

JohnD wrote on March 8, 2010 - 6:18 pm | Visit Link

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