Earlier I wrote about the value proposition for IT Leaders of SMBs to engage in a Prime Vendor Model to satisfy the diverse needs of their departments. That article was based on the principles defined and implemented across many larger enterprises across the US and the world. Much debate and discussion has been had about this topic, with many asking “How can one vendor really meet all of my needs? And if I think there could be one, how do I know which one is the best fit for my firm?” In this article, I will address these two critical questions facing IT Leaders.
First of all, we have been speeding towards the Prime Vendor Model for a number of years when procurement departments started developing an echelon of “Preferred” vendors with whom they were expecting to spend more money year after year. The goal of the procurement department was simple: beat down the vendor’s price to insure the budget numbers were met. This is a way of being from the 20th century, where someone has to win and someone else has to lose. Our firm, and really the avant-garde set of firms like us, is not interested in a 20th century model. We embrace the 21st century models of co-opetition, win/win business scenarios, and loyalty generated by consistently delivering value and exceeding expectations.
The Prime Vendor Model can be constructed a number of ways. The most simple (and thus easiest to implement) is a pre-determined cost sheet for products and services that are purchased year-over-year. The best example is laptops or server purchases. In a Prime Vendor model, the single vendor will provide the required hardware for the same price for a set period 12-24 months. The price should be low enough that the customer feels that the deal is pretty good (it doesn’t have to be the absolute lowest), and the vendor will take on the responsibility of delivering machines in the timeframes required and at the lowest cost the vendor can secure. This scenario requires a consistent purchase pattern and few changes on the product mix in order to operate seamlessly.
The next easiest model requires more transparency: The cost-plus or fixed-margin model. In this model, the vendor shows the customer actual costing numbers from orders and there is a pre-determined margin percentage determined for the duration of the contract. The margin number will obviously be impacted by the make-up of the annual purchases, but when a customer shows their annual spend, the vendor will be ready to have a guaranteed revenue stream for the coming year or two. This scenario allows for a bit more fluidity in purchases (type, number, frequency, etc.) because both sides will know exactly what they are getting.
One of the more advanced models is a SLA-based model. In this model, the vendor guarantees delivery of the services required by the customer and the price up-front, but it is the choice of the vendor how to deliver those services. More advanced contract techniques can be employed here as well, including bonuses and penalties based on SLA performance. This model requires the most trust between the customer and the Prime Vendor and can even be tied to metrics outside of the IT Organization to insure alignment.
Now that we’ve discussed how the business relationship of this model can look, how will an IT Organization know which of their vendors to promote to this “Prime Vendor” position? Remember, it’s not just a guaranteed spend amount, but it’s transparency in intimate business details and requires rigorous planning to provide the Prime Vendor the information necessary to support the business. And the level of involvement of your Prime Vendor in more business conversations will increase if you want the maximum value out of the relationship. Because of these increased expectations on all sides, the Prime Vendor could look very different from firm to firm. There really isn’t a set description for a Prime Vendor, but there is a good framework of expectations that you can use to assess your vendors to determine if any could fit this role, or which could fit the best.
When determining the best “fit” for a Prime Vendor, the critical areas to focus are:
Proven track-record – Measuring the relationship not only by the times the vendor achieved the expected service level, but also by the times when things went sideways (supplier shock, disaster, etc.)
Capabilities match needs of organization – Insure the skills the vendor has (or has access to) match the needs of the organization long-term. It’s better to get high-value skills at a discount with the power of large purchases. The vendor must also get you access to something your firm needs but hasn’t/cannot acquire.
Knowledge of the firm/industry – The Prime Vendor should know your organization very well based on length of time in the relationship or by industry expertise. While neither of these are absolutely required, having a vendor versed in your industry might also gain some contextual and comparative information during the arrangement.
Willingness to engage – Vendors not willing to do business in this manner might have more to hide than you think. And if vendors are not willing to help build new operating models with shared responsibilities, you might re-consider where to spend your firm’s resources.
Once you have chosen to go down the Prime Vendor path, you will also need to consider the impact to your own organization. For instance, the procurement department will not need to be as large if all the business terms are agreed-upon during the contract. Also, your internal planning meetings will need to include representatives from the Prime Vendor so they can get the inside scoop on what to expect for upcoming orders. Your Prime Vendor should also be providing you expertise in things like hardware selection, service delivery, and solution requirements/capabilities.
These are just a few of the things to consider when embracing a Prime Vendor model for your organization. The business case is there, and the benefits are significant for all involved, as long as you and your Prime Vendor are willing to do business in a more open, more transparent, more 21st century way.
Karl Burns is the Chief Strategy Officer at ManageOps. He can be reached at firstname.lastname@example.org.