Insight | February 16, 2013

IT Strategic Vendor Management: Achieving Savings and Improving Performance in Austere Times

By Behrad Mahdi

In this article, Censeo Principal Behrad Mahdi discusses the obstacles federal IT leaders in providing mission-critical services with limited resources, and provides recommendations on how IT leaders can leverage strategic vendor management to achieve significant savings.

Savvy IT leaders are pivoting to strategic approaches for working with critical IT vendors to meet cost-cutting mandates. Federal information technology (IT) leaders increasingly face a dilemma—delivering the same or higher levels of mission-critical IT services to their constituents while managing with fewer resources and dollars. To solve this dilemma, many leaders are scouring their IT portfolios for money-saving opportunities. As they conduct this exercise, many are discovering strategic vendor management (SVM) to be a critical enabler—one that yields significant savings while also increasing effectiveness and mission delivery.

Strategic Vendor Management: An Idea Whose Time Has Come

Typically federal IT leaders begin with a functional/categorical view of IT only to realize that most of their critical IT infrastructure is provided by large IT manufacturers—think Microsoft, Oracle, IBM, and so on—that offer products and services across many functional IT categories. The realization that a few large companies dominate an agency’s IT vendor base clarifies a critical vendor management challenge: identifying near-term savings opportunities while developing long-term approaches to increasing competition and managing total costs. Moreover, agencies must seek ways to engage directly with vendors to maximize performance, develop enterprise visibility, and most importantly, yield optimized enterprise pricing.

Unfortunately, as federal IT leaders attempt to manage their vendor base, they face common challenges:

  • Limited visibility into enterprise-level spend and technology deployments
  • Inefficient internal planning that leads to inaccurate and unrealistic demand planning and forecasting
  • Lack of enterprise engagement with key IT vendors resulting in fragmented relationships and no unified “voice” representing the enterprise
  • Misconception that only limited pre-acquisition engagement can take place within federal government rules
  • Vendor lock-in preventing true competition across the vendor base.

 

With SVM, federal IT leaders can employ tools and methods to identify, implement, and sustain specific strategies to reduce costs and create value by working collaboratively with an agency’s most strategic IT vendors. SVM is predicated on bringing the IT and acquisition communities together and working cooperatively with enterprise partners to create “win-win” opportunities through the use of data analysis; market, vendor, and technology intelligence; and Federal Acquisition Regulation (FAR)–compliant vendor engagement.

Applying Strategic Vendor Management Principles in Your Agency

While SVM is something that is quite common in the private sector, it has emerged in the federal government as a new, comprehensive approach for maximizing value from vendor relationships while achieving rapid near-term savings and sustaining long-term performance. The introduction of new management approaches in IT is often seen as difficult given entrenched practices. In the case of SVM, our experience shows that the introduction of a few basic SVM principles can lead to significant gains.

The graphic below shows the end-state benefits that agencies can achieve through the successful implementation of SVM principles.

IT vendor mgmt

As a starting point, implementing basic SVM principles can yield immediate results for agencies. Below, we have identified a few key principles of the SVM approach that federal IT leaders can consider as they look to achieve near-term savings and sustain long-term efficiencies:

  1. “Follow the money” as a starting point
  2. Enlist your vendors
  3. Don’t let the lack of data prevent you from taking action
  4. Think “Outside the CLIN”
  5. Cross swim-lanes to collaborate

 

1. “Follow the money” as a starting point

Federal IT leaders with a “save money now” attitude have recognized that many, if not most, significant near-term savings strategies involve the large IT vendors with whom they spend the most. While focusing on a category (hardware, software, or service) or capability (data centers, software licensing, etc.) can yield significant medium-to-long term savings, a focus on vendor spend is the fastest way to yield meaningful cost-reduction. Some strategies include:

  • Consolidating hardware or software support payments into enterprise agreements
  • Renegotiating support-levels and service delivery for existing products or services
  • Right-sizing and standardizing hardware specifications
  • Securing enterprise licensing for future software demand.

 

To start the “Follow the money” approach, a federal IT leader should assess the current capabilities and technologies deployed within their organizations. While a full and detailed view can be difficult to obtain, a team can sample asset inventories and spend data, or interview key technical leads. This scan will quickly identify the main vendors providing technology for particular capabilities. Many federal IT leaders will find that their organization has stakeholders or technical leads who can easily name these major providers.

2. Enlist your vendors

Federal IT leaders who engage with their largest strategic IT vendors have a head start on overcoming many of the challenges identified at the outset of this paper. In our experience, IT vendors and many of their resellers look forward to discussing critical questions posed by their federal customers, including:

  • What are we buying?
  • How much are we buying?
  • For whom are we buying?
  • From whom are we buying?
  • How are we buying?

 

To begin cost-cutting efforts, federal IT leaders must marshal internal data and enlist their strategic IT partners to collaborate on answering the questions above. This structured engagement with vendors is well within government rules and regulations pertaining to vendor dialogue. The resulting conversation about improved vendor performance and enhanced relationship value may help vendors to better meet customer requirements and both parties to jointly reduce costs.

For example, one federal agency and an enterprise storage vendor began discussing the challenges in understanding asset visibility and utilization. For the customer, this visibility was a direct input into effective forecasting of future demand. For the vendor, this visibility enabled identification of viable alternative approaches to an enterprise-level relationship and supported development. Even more, the vendor understood the criticality of this data in supporting rough order of magnitude costs (ROMs) for these alternatives. This collaborative approach also enabled both parties to assess a range of future risks, including terms of level support coverage, security, information assurance, etc. Most importantly, the dialogue provided senior leadership with the information necessary to make effective business decisions. In short, smart vendors recognize the importance of answering the key customer questions outlined above, because answering these questions is the quickest pathway to discussing future approaches to effectively acquiring their products and services.

3. Don’t let the lack of data prevent you from taking action

Federal IT leaders scour their organizations for data to support informed strategic decisions about their IT portfolio, conducting a range of historical spend analysis, data calls, spend/deployment forecasts, and more. This effort often yields unsatisfying results. The scale and complexity of public organizations is vast—many federal agencies comprise bureaus and commands whose budgets rival those of FORTUNE 500 companies. Faced with the prospect of untangling fragmented, incomplete data, many managers fail to proceed with valuable cost-cutting strategies simply because they believe there is insufficient data. As a result, opportunities are lost.

SVM approaches consider data as a window into the IT portfolio. Data completeness and accuracy are an indication of risk. On their own, they do not indicate whether to take action. Accordingly, federal IT leaders must assess their appetite for risk related to the decisions they will make based on the data. With this risk-based approach to data, federal IT leaders can not only better understand the level of risk inherent in their cost-cutting approaches, but also identify next steps to decrease their risk exposure and improve the quality of data for future decision-making.

4. Think “Outside the CLIN”

Most cost-reduction efforts focus on upfront reductions to contract line-item pricing, often referred to as the Contract Line-Item Number (CLIN). Standard contracting practices are well known to IT vendors, and many take advantage of CLIN-level analysis to conceal true costs. Vendors may bundle CLINs to bury the prices of pieces or parts, or use “special CLINs” to hide specific item pricing.

SVM borrows practices from strategic sourcing to address the drivers of the total cost of IT capabilities, not just upfront pricing. Through engagement with the vendors, extensive market research, and deep insight into future demand, chief information officers (CIOs) can identify strategies that will not only reduce short-term costs, but also sustain or drive out costs over time. “Outside the CLIN” cost reduction approaches identified through SVM include:

  • Mechanisms for agencies to be treated as a single customer
  • Enterprise agreements by product or service pillars
  • Structure and flexibility for enterprise-level software and hardware maintenance and support
  • Agency support caps, reinstatement fee tracking, and caps
  • Tailored advanced customer support
  • Structure and delivery models for enterprise-level training
  • Value-added programs and briefings
  • Periodic sales and asset tracking reports.

 

The items listed above address broad agreement dimensions that involve value, cost, visibility, and management approaches. Federal IT leaders will find that many of the dimensions, as well as others tailored to their organization, are relevant to achieving both near-term savings and sustaining long-term value to their organization. Fundamentally, the goal of thinking “outside the CLIN” is to ensure that we are not focused exclusively on upfront discounts, but rather on a long-term model for sustaining and continuously improving the value of strategic relationships.

5. Cross swim-lanes to collaborate

As federal IT leaders embark on implementing the principles outlined above, they will almost certainly hear these words from colleagues from different functions in their organization: “You are asking for information that is outside of your domain. You shouldn’t be crossing swim-lanes.”

Experience has shown that a collaborative and cross-functional approach is a necessary ingredient to successful cost reduction efforts. IT vendors, whether original equipment manufacturers (OEMs), resellers, or integrators, are well aware of the functional silos within federal agencies—and some take advantage of them. Whether it is the gap in communication between requirement owners and financial managers or between the contracting function and CIOs, the cost challenges facing many organizations are rooted in the organizational silos that have developed over time within agencies.

Organizations that bring internal stakeholders together have proven the value of this approach time and time again. The contracting community is informed by vendor engagement to define enterprise acquisition strategies and support broader efficiencies. Collaborative discussion of topics outside the CLIN, such as value-added services, delivery models for training, and shared performance and compliance management have yielded benefits to CIOs and requirements owners. Executing broad strategies in conjunction with the CIO, acquisition, finance, and requirements owners working together enable ongoing cost management and continuous improvement.

Looking Ahead

The pressure on federal IT leaders will continue to intensify as budget tightening becomes the new normal. Agencies must seek ways to achieve greater capability and performance from fewer resources. The principles and processes associated with SVM have begun to transform the operations of a few successful agencies across the federal government, while creating win-win vendor relationships that foster collaboration and innovation. Even with limited time and effort devoted to implementation, agencies have begun to realize measurable and tangible savings, while aligning themselves for long-term, sustainable cost reduction opportunities. Now is the time for the rest of the federal government to follow in the footsteps of these savvy federal IT leaders.