In recent years, end-user organisations have been paying increasing attention to their vendor and sourcing management strategies as they look to streamline their costs and maximise their flexibility.
This new focus on establishing deeper buyer-vendor relationships holds true right across the board, but is perhaps most prominent when it comes to the procurement of information and communications technology (ICT) services.
Indeed, buyer-vendor relationships in the ICT space are increasingly evolving from short-term transactions into long-term relationships that resemble more of a partnership than a conventional supplier-consumer transactional affiliation. This is because the rise of transformational third platform technologies such as big data and analytics, mobility, cloud, and social media is introducing a new level of complexity when it comes to organisations managing their existing portfolios of vendors and suppliers.
The need to balance multiple service providers, maximise the financial benefits, and manage performance, supplier productivity, and risk is driving organisations to develop a deeper understanding of the different vendor engagement models that are most often used in IT sourcing. These models typically range from basic time and materials (T&M) and fixed-capacity agreements at one end of the maturity scale to more complex managed services and fixed-price contracts at the other.
IDC’s global research suggests that by 2017, 35 per cent of vendor sourcing relationships around third platform technologies will fail, causing CIOs to revisit existing sourcing governance processes and consider implementing new sourcing processes and engagement models. But adopting new technologies, engaging with emerging vendors, and attempting to manage an ever-changing list of outsource vendors will inevitably put buyers in an increasingly complex business environment.
Despite this, organisations are continuing to turn toward external vendors to achieve their business goals. The external sourcing of IT and business functions has always been associated with inherent risks, but the types of risk organisations face in today’s environment have grown along with sourcing practices. The popularity of third platform technologies has complicated this situation, forcing organisations to find ways to confront the risks associated with relying on outsource vendors.
To determine the most suitable model of engagement with vendors, IT initiative owners should consider the maturity and risk of the different vendor engagement models. At IDC, we have developed a model that shows how higher levels of vendor engagement maturity typically drive lower buyer risk. So for the T&M and fixed-capacity models, the buyer needs to assume all the risk, while in the case of managed services and fixed-price models, the buyer shares the inherent financial and performance risks with the vendor.
By comprehensively assessing the level of maturity and mitigating the risk of a vendor engagement, organisations can put themselves into a desired position where cost and business impacts are reduced in the case of a risk event occurring. In this regard, the use of developed and mature vendor engagement models will help drive a competitive advantage, optimise costs, and deliver predictable quality for their organisations. However, IDC also stresses the need to understand that there is no way to avoid all risks because buyer risks will always exist.
It is clear then that selecting and implementing the right model for any given situation is an essential step in managing complex, high-value vendor and sourcing engagements. Indeed, the increasing scope and complexity of outsourcing engagements make it imperative for organisations to leverage different vendor engagement models to hold suppliers responsible for on-time, on-budget delivery and quality of the final product.
Organisations that are looking to go beyond gaining short-term benefits from their vendor engagements will need to develop trusted relationships with vendors, enabling them to use more mature vendor engagement models. The use of these more complex models will allow them to gain transformational and innovative insights and go beyond just traditional cost savings to create long-term competitive advantage and enterprise value.
It is no surprise then that IDC is witnessing a shift in vendor and supplier relationship models from a short-term transactional model that focuses on simply buying, building, and running a particular solution to a longer-term relational model in which ongoing delivery, integration, and performance management take precedence over pricing. By utilising a combination of vendor engagement models that go beyond cost-focused procurement and short-term benefits, vendors are transformed into valuable partners that can help organisations achieve their strategic goals.
In such a scenario, buyer-supplier relationships should be based on trust and information sharing and designed for competitive advantage, and it is this state that all progressive end-user organisations should be looking to achieve from their sourcing engagements because, ultimately, a risk shared is a risk halved.
The columnist is group vice-president and regional managing director for the Middle East, Africa and Turkey at global ICT market intelligence and advisory firm International Data Corporation (IDC) He can be contacted via Twitter @JyotiIDC.
