VMOs, Organizationally
A blog reader recently asked me this question (I'm paraphrasing): "How do VMO / procurement roles differ and how are the responsibilities divided organizationally?"
Roughly 10-years ago, companies with large IT consumption became dis-satisfied with their purchasing departments' attention and focus. It was hard to get the purchasing folks engaged, and when they did get engaged, their focus was lowest cost. That lowest cost focus didn't work when it came to complex IT goods and services because the consumers of those strategic, competitive edge-providing goods and services were worried first about getting what they paid for and less about squeezing costs out the old-fashioned way (i.e., vendor bashing).
These IT departments also wanted to establish strategic relationships with value-adding vendors—predominately, IT systems have a lot of "stickiness," so IT departments want long-lasting (read "maintenance and support") relationships. So, unable to control the purchasing departments (usually buried many layers below a CFO), CIOs went on the hunt for procurement talent that had the ability to get a fair (fair for both parties) deal but, more importantly, could extract value out of IT vendors without decimating the relationship. These small groups of procurement talent commonly took on the name of a "vendor management office" or "VMO." One reason for the name was to mask the purpose of the group: the organizational redundancy and budget questions that a corporate procurement department and an IT procurement department raised wasn't something a CIO wanted to explain. The other reason was to emphasize the mission to manage vendors, not dollars.
The CIOs implementing these types of vendor management departments could have been wrong, but they weren't. In fact, VMOs were such a success that other C-levels, also tired of crusty and grizzled purchasing agents, wanted their own VMO function to boost their business lines. That presented an organizational problem—the CIO could get away with having a psuedo-procurement department but everyone having their own little VMO in addition to the purchasing department wasn't going to fly. So, around 2004, companies started to implement enterprise-wide VMOs.
There were, and are, two major variants: one is with the vendor management and purchasing functions combined and the other is with the functions are separate. Having the functions separate (in my opinion) is a symptom of a problem—the leadership doesn't want to take the time or energy to revamp the purchasing function... So, the thought is, just push purchasing to the side, build-up the VMO, and hope the purchasing folks take early retirement.
The better organizational move is to combine the functions, horizontally / vertically align the staff, and have it report into the C-level. Some staff cut POs, other staff order piece parts, other staff just do competitive bids, and other staff manage / monitor strategic vendor performance. While there may be distinct differences in skills, roles, and focus (you have to match job requirements to staff strengths), the overarching benefit of having a combined VMO is to drive the right attitude when it comes to managing vendors—and that's to get value.
Roughly 10-years ago, companies with large IT consumption became dis-satisfied with their purchasing departments' attention and focus. It was hard to get the purchasing folks engaged, and when they did get engaged, their focus was lowest cost. That lowest cost focus didn't work when it came to complex IT goods and services because the consumers of those strategic, competitive edge-providing goods and services were worried first about getting what they paid for and less about squeezing costs out the old-fashioned way (i.e., vendor bashing).
These IT departments also wanted to establish strategic relationships with value-adding vendors—predominately, IT systems have a lot of "stickiness," so IT departments want long-lasting (read "maintenance and support") relationships. So, unable to control the purchasing departments (usually buried many layers below a CFO), CIOs went on the hunt for procurement talent that had the ability to get a fair (fair for both parties) deal but, more importantly, could extract value out of IT vendors without decimating the relationship. These small groups of procurement talent commonly took on the name of a "vendor management office" or "VMO." One reason for the name was to mask the purpose of the group: the organizational redundancy and budget questions that a corporate procurement department and an IT procurement department raised wasn't something a CIO wanted to explain. The other reason was to emphasize the mission to manage vendors, not dollars.
The CIOs implementing these types of vendor management departments could have been wrong, but they weren't. In fact, VMOs were such a success that other C-levels, also tired of crusty and grizzled purchasing agents, wanted their own VMO function to boost their business lines. That presented an organizational problem—the CIO could get away with having a psuedo-procurement department but everyone having their own little VMO in addition to the purchasing department wasn't going to fly. So, around 2004, companies started to implement enterprise-wide VMOs.
There were, and are, two major variants: one is with the vendor management and purchasing functions combined and the other is with the functions are separate. Having the functions separate (in my opinion) is a symptom of a problem—the leadership doesn't want to take the time or energy to revamp the purchasing function... So, the thought is, just push purchasing to the side, build-up the VMO, and hope the purchasing folks take early retirement.
The better organizational move is to combine the functions, horizontally / vertically align the staff, and have it report into the C-level. Some staff cut POs, other staff order piece parts, other staff just do competitive bids, and other staff manage / monitor strategic vendor performance. While there may be distinct differences in skills, roles, and focus (you have to match job requirements to staff strengths), the overarching benefit of having a combined VMO is to drive the right attitude when it comes to managing vendors—and that's to get value.
Posted by Stephen Guth at 1/8/2010 12:36 PM 
Categories: Vendor Relationship Management
Tags: Organizational Performance Vendor Management Procurement Best Practices
Categories: Vendor Relationship Management
Tags: Organizational Performance Vendor Management Procurement Best Practices
I began reading your book - The Vendor Management Office. I have been an internal IT vendor management consultant for a health care insurance firm. I am having the hardest time getting people to understand that we cannot pay talented people to successfully manage vendors and implement effective strategic sourcing with the peanuts they want to pay them. I have been told by colleagues in the "professional buying" arena that it is more uncommon not to be paid on an incentive basis.
Is that what you are finding? Are there companies that are willing to compensate contributing parties that save their company the millions of dollars in annually?
I finally received an additional head count to assist in my efforts but they are admin quality staff. I need an A team!
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Hi Michelle,
It sounds like your employer is being short-sighted. In my personal experience, having worked in Fortune 100 companies in both low and high cost of living areas, a $100K comp package for good, solid vendor management types has been pretty typical over the past few years. Incentive polices range from no incentive (meaning base only) to a significant portion of the comp being based on incentives. I've seen all sorts of ranges in between, but it is definitely more common to have some part of the pay incentive based than not. In this economy, I'm finding procurement / vendor management salaries at the more senior levels really escalating--the reason being is that when sales are down or flat, the only way to increase margins is to cut costs (e.g., negotiating better pricing from vendors or getting more value from vendors for the same amount of spend). And, as you indicated, it takes good people to save those "millions" and those good people come at a price. Good luck convincing your employer, but, at some point, you may want to look for another employer.
P.S. Thanks for buying my book!
Best,
Stephen
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Stephen,
We've had this same discussion in our VMO recently. While we agree that being paid on an incentive basis would be motivating, we also agree that introducing incentives could create ethical and behavioral problems.
It is difficult enough to repair relationships damaged by "vendor bashing" during the normal course of business. If a vendor learned our approach to the relationship was partially based on incentives, they would have a valid reason to question our motives every time we interacted.
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Hey Eric,
Yes, there are a number of ways for incentive-based pay for procurement pros to get side-tracked. One consideration is that incentive pay drives behavior and money + people = occasional irrational behavior. Questions arise such as:
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Great article, it would seem that many people didn't see the value in the creation of the VMO but since we live in a world of copy success created opportunity.
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