Part Two: When Should an IT Leader Use a Vendor?
In the IT space, as in all business areas, there is a constant need to do more with less every year. If you are only producing the same amount of revenue, while still requiring the same amount of resources to produce that revenue, you may not be long for this world. I know that sounds harsh, but in this accelerated day of contracted business model lifetimes, you have to keep speeding towards growth else you may be left in the wake by your competition. We had a fun saying: “You don’t have to be the fastest when running from a bear, you only have to be faster than one person.” In business, it’s more like a long distance run where you need stamina, ideas, and sharp elbows to keep tight competition from getting into your lane and taking over your place.
As businesses grow, their needs change. That’s true to support new products and services, to manage more diverse customers, and to constantly improve the internal mechanics of the organization. The old way of doing business looked something like this: A company buys infrastructure one year, but services for the next 5 to get the most out of that hardware. And it may also require new add-ons and additional services during the life of that hardware.
The company of the future will not get handcuffed to assets (depreciated or not) and will instead look for suppliers that can be as dynamic as the business itself. In the old model, companies needed multiple vendors to get the best price. GE was famous for this. They would offer an RFP, have 3-5 down-selected, then take the cheapest price, subtract 30%, and offer that price to the firm they thought could do the best work. It was a great strategy, for GE only, and is not one built for the long-term. But this is still how many SMBs operate, asking for multiple quotes and going for the cheapest. That may have worked in the past, but now with the value of Vendor Management Offices (VMO) and Procurement Departments chasing smaller and smaller margins, SMBs need to adopt the strategy of the larger enterprises and engage in a Prime Vendor Model.
The Prime Vendor Model ( source ) is one that puts the responsibility of the company’s IT spend on both the supplier and the buyer. Shared responsibility, shared benefits. The model is enabled by a service-oriented supplier and a client who wants to get out of the margin squeezing business (zero-sum game) and trust a specialist to deliver value, while sharing in the reward (positive-sum game). A Prime Vendor Model requires new styles of measurement too. Gone will be the days of looking at the cost of every contract/item, and instead will be the day of your supplier providing valuable service that the SMB can depend on, for a reasonable (agreed upon) margin, while lowering the costs (FTE efforts) to identify, spec, solicit RFPs, assess, and finally manage delivery.
When this model is put to the test, a SMB will experience better overall performance from their IT staff because of these key reasons:
1) Reduced time (FTE) managing the RFP process (identify, spec, solicit RFPs, assess, manage and enforce)
2) Reduced knowledge required to plan and execute complex services (time spent researching, debating,
3) Reduced annual spend on IT
It’s the third one that will get the most attention, and may not occur every year, but will occur over the course of a contract. It has been around for larger firms which needed a blend of products services, and strategic advice. ( source ) When we implemented this model for a client, we understood that we would face significant competition on a number of purchases (hardware, contracts, etc.) and that many vendors would “drop their shorts” to try and gain entry into our client’s annual budget. It took a lot of patience and commitment to not be short-sighted, and to trust another organization to deliver on the promises made to each other. Luckily, we had the full backing from Leadership at both organizations, and the annual spend is being reduced. It doesn’t mean the client gets the lowest price point on every purchase, but year-over-year, we are seeing the downward trend. And that’s build a relationship between both organizations that will benefit all of us for years.
At the end of the day, do you want to do business the old way, constantly spending days and days or weeks to define what you think you need, hosting vendor bake-offs, and ultimately having vendors deliver their service to the “T” with little regard for your company after taking a haircut on every deal? Or do you want to do business the way of the future, with limitless skills available at the ready, and the entire stakeholder set committed to year-over-year improvement, and reduced headcount to justify? I choose the latter.
Karl Burns is the Chief Strategy Officer at ManageOps. He can be reached at firstname.lastname@example.org.
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