Deloitte VMPO

7/27/2019 Deloitte VMPO

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The Outsourcing Vendor ManagementProgram Ofce (VMPO): Art, science,and the power o perseverance

Never say never!


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2

Foreword 1

Executive summary 2

Research overview 3

Introduction 4

I. Evolution o VMPO requirements 7

II. VMPO maturity 10

III. VMPO operating models 19

IV. Understanding and managing risk through the VMPO 24

Conclusion 30

Contents


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Foreword

The outsourcing and oshoring market continues to not only grow, but also evolve with the addition o

new technologies (cloud computing) and geographies (China and Brazil, among others), as well as an

increasing ocus rom key stakeholders (regulators).

Outsourcing continues to deliver nancial benets, although labor arbitrage appears to be diminishing

in importance and is being replaced with a ocus on innovation and continuous improvement.

The Outsourcing Vendor Management Program Oce (VMPO): Art, science, and the power o perseverance is a 2011

Deloitte Consulting LLP report that ocuses on the challenges clients ace once they have executed their outsourcingtransactions and embark on journeys with single or multiple providers. In most instances, this journey begins with

transormational programs across multiple business units and/or multiple geographies, which need to be closely managed

and monitored to realize cost savings and transormational benets. This is an area rich with disappointment and unmet

expectations and peppered with stories o disastrous, ill-conceived, and poorly managed initiatives that proved to be

career-limiting or user and service provider executives alike. Our report aims to shed urther light on a critical underlying

cause o underperormance and oers practical, executable remedies that can make outsourcing more productive and

successul or the enterprises that outsource, the providers that service them, and the executives involved.

The ollowing discussion draws on the results o a survey on vendor management practices that polled 27 business and

inormation technology executives at global enterprises. We have also incorporated additional insights gained rom a

number o outsourcing and vendor management engagements that Deloitte has delivered across the world.

In general, we ound that a large number o companies are increasingly aware o and understand the importance ovendor management to realizing cost savings rom outsourcing and mitigating the applicable risks. However, vendor

management practices at the majority o clients remain relatively immature. There is considerable room or improvement,

not only in terms o investment in tools and people, but also in service provider relationships.

In addition to outlining clients vendor management experiences, this paper also oers our thoughts on leading practices,

which we hope you may be able to leverage and implement. We welcome your eedback and comments.

Yours truly,

Peter Lowes

Global Leader, Outsourcing and Shared Services Advisory Services

Deloitte Consulting LLP

New York, April 2011

As used in this document, Deloitte means Deloitte Consulting LLP, a subsidiary o Deloitte LLP. Please see www.deloitte.com/us/about or a

detailed description o the legal structure o Deloitte LLP and its subsidiaries. Certain services may not be available to attest clients under the rules

and regulations o public accounting.

The Outsourcing Vendor Management Program Oce (VMPO): Art, Science, and the Power o Perseverance 1


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2 The Outsourcing Vendor Management Program Oce (VMPO): Art, Science, and the Power o Perseverance 2

Executive summary

In 2008, a Deloitte outsourcing survey report, Why Settle

or Less?, addressed a number o questions regarding

the eectiveness o global corporations outsourcing

initiatives.1 This report sought to understand the extent to

which companies were realizing the nancial objectives o

their outsourcing programs, as well as the extent to which

companies were realizing additional, nonnancial benets.

The 2008 report did nd that a large number ooutsourcing companies had realized their nancial

objectives. However, it also ound a surprisingly high

number o instances o company-service provider

confict. Many companies expressed disappointment

with their service providers ability to provide continuous

improvement and technology improvements. The report

noted the importance o an eective vendor management

(VM) program that can provide the resources and

inormation to clients to not only get what they pay or,

but also realize value rom the outsourcing transaction.

A number o issues raised in the 2008 survey, including

ineective reporting, lack o transparency, and poorcommunication, continue to exist in the marketplace

today. These issues are the ocus o the current paper.

This paper reports the results o a survey o 27 senior

executives whose companies were engaged in major

outsourcing initiatives. We explored the extent to which

companies have understood the lessons learned rom the

2008 study. A major ocus o the study was to determine

what proportion o companies have established vendor

management program oces (VMPOs) to manage their

service providers: How likely are companies today to

have eective and mature VMPOs in place to manage

outsourcing transactions?

Below are some specic ndings rom this survey:

1. There is a growing awareness among companies that

in order to realize the benets o outsourcing, service

provider relationships have to be actively managed.

Sixty-seven percent o respondents to the current survey

reported that they had already established

dedicated VMPOs.

2. Even though companies are ocusing primarily on

traditional VM unctions (the majority o respondents

to this survey cited activities related to contract

management and service perormance management

as most important), many companies are showing an

increased interest in adopting a broad approach to

VM. This was evident rom the act that most o the

responding companies have adopted practices that

incorporate, in some ashion, Deloittes approach to 10

leading-practice VM unctions.

3. Despite adopting dedicated VMPOs that ocus onbroad VM unctions, the rate o eectiveness or

VMPOs was signicantly lower than our experience

working with clients would suggest: Only 57 percent

o the respondents rated their VMPOs as very eective

to eective.

The results o our survey, as well as our interactions with

clients across industries, indicate that companies still

continue to struggle with operating eective VMPOs

even though they understand the need or VMPOs and

invest in them. Hence, many companies continue to ace

challenges in managing outsourcing service providers. The

question is: Why? Do their struggles refect an issue o

ineective execution?

In our view, companies can no longer solely rely on

stringent contractual provisions to manage service

providers eectively. Instead, they need to adopt hybrid

models in which contracts are managed by eectively

operated VMPOs with the applicable investments in tools

and people.

We believe that i companies invest in the areas identied

in this report, they stand a better chance o eectively

managing their service providers and realizing theobjectives o their outsourcing initiatives. In addition, the

design, build, and implementation o fexible and scalable

tools and processes within a VMPO can urther improve a

companys ability to manage multiple service providers and

deal with the changing nature o regulatory requirements.

When it comes to reaping the benets o outsourcing:

Never say never! By adopting the leading practices

revealed in this report, large enterprises can take a major

step orward in achieving the ull benets o outsourcing

that they have long sought.

1 Why Settle For Less?

Deloitte Consulting 2008

Outsourcing Report, Deloitte

Development LLC, 2007.


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Research overview

The survey research was supplemented by Deloittesrecognized experience in providing services to

organizations across various industries that are designing,

building, and implementing their VMPO initiatives.

Survey respondents included 27 senior executives rom

various mid-size and large companies headquartered in

the United States, Canada, United Kingdom, and other

countries (Exhibit 1). The companies were primarily

engaged in the outsourcing o inormation technology (IT)

and/or telecom services. Survey participants had signicant

exposure to the way the service providers in their

outsourcing programs were being managed. They were

asked a number o questions about how they managed

their service providers across their largest outsourcing

initiative. On average, the value o the outsourcing

programs being managed was approximately U.S. $400

million, with a total contract term o 6.8 years.

Exhibit 1a. Company respondent profile: Country

29%

11%

11%4%7%

4%

4%

30%

Canada

Switzerland

Italy

United Kingdom

United States

Japan

Mexico

Netherlands

22%

4%

33%

4%

4%

11%

11%

11%

Energy and utilities

Industrial products

Telecommunications

Manufacturing

Government

Banking, financialservices, insurance

Life sciences orhealthcareConsumer products

Exhibit 1b. Company respondent profile: Industry

11%

11%

10%

11%

8%

3%

11%

13%

6%

6%

10%

Application maintenance

Desktop support

Application development

Infrastructure services

Network architecture

Data security services

Telecom services

Other

Data center management

Help desk support

Call center operations

Exhibit 1c. Company respondent profile: IT functions/services

outsourced

Deloitte conducted a survey to test the hypothesis

that while companies are increasingly aware o,

and understand the need or, dedicated VMPOs

to manage their strategic outsourcing, oshoring,

and service delivery programs, the maturity o their

VM capabilities remains low.


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4 The Outsourcing Vendor Management Program Oce (VMPO): Art, Science, and the Power o Perseverance 4

Introduction

When asked how they approached VM within their

organizations, 67 percent o executives surveyed said they

had implemented dedicated VMPOs that covered leading-

practice VM unctions.2

The companies surveyed clearly recognized the need

or dedicated VMPOs. At rst glance, a review o the

statistics suggests that companies were actively investing

in establishing VMPOs in support o their outsourcing

programs, ocusing on what Deloitte views as the 10 core

VM unctional areas (as depicted in Exhibit 2).

IT unction operating model

Drive value delivery rom service providers to IT customers with

a ocus on the ollowing value objectives: Service quality, costeciency, risk management, and agility

Strategy and controlAlign IT strategy

and standards withbusiness strategy

and control IT valueand risk

Customermanagement

Match IT services tocustomer needs andmanage customer

satisaction

Product managementManage productinnovation andeconomics and

drive consistency instandards

Service deliverymanagement

Control and improvetimeliness, quality

and cost o IT servicedelivery

Security managementArchitectural standards

managementService delivery

oversight

Contract managementand compliance

Multi-service providerintegration

Transition and transormationproject management oce

(PMO) and oversight

Document management

Service requestmanagement

Service provider riskmanagement

Financial and commercialmanagement

Issue and disputemanagement

Service perormancemanagement

Governance

Customer relationshipmanagement

Strategy and programmanagement

Product liecyclemanagement

Solution advisoryDemand management

Audit and compliance

Business continuityand disaster recovery

planning

Service catalogmanagement

Internal IT servicedelivery

Vendor Management Program OfceMaintain value ocus through eective contract,

commercial, and relationship management

Operating model components

Controls

Skill and capabilities

Tools and technology

Communications

Service

providers

Customers

Leading-practice VMPO unctions

Contract management andcompliance



Service perormancemanagement

Governance

Manageandtrackobligations, manage contractcompliance

Managecontractamendments

Verifyrateandvolumeinvoice charges, ARC/RRC3 commitments againstbaselines

Trackservicecredits

Trackandreportresolutiono issue and archive issues

Createandmanageissueescalation/managementprocess

Providedashboardreportingand MIS4

Developperformancemanagement ramework orSLAs5 and KPIs6

PerformSLAmonitoring,reporting, and trending

Establishandmanagegovernance process andorums

Undertakeassessmentagainst outsource objectives

Multi-service providerintegration

Transition andtransormation

PMO and oversight

Document management Service requestmanagements

Service provider riskmanagement

Developandmaintaincross-supplier standards andprocedures

Develop,negotiate,draft,and execute operating-levelagreements (OLAs)

Providetransitionandtransormation planning

Providetransitionandtransormation monitoringand reporting

Maintainrepositoryofcontractual artiacts

Performauditing,updating,and archiving o contractsand VM process documents

Manageend-to-endprocessor new service requests

Analyzenewservicesagainstthe contract

Determineriskanalysisapproach, tools, andmethodology

Recommendspecicriskindicators, requency, andmetrics to manage, track,and report

Exhibit 2. Deloittes view o leading-practice VMPO unctions placed within IT operating model

2 Leading-practice VMPO

unctions reerenced in thesurvey are dened by the

Deloitte IT operating model

set out in Exhibit 2.3 Additional resource

contribution/reduced

resource contribution4 Management inormation

systems5 Service-level agreements6 Key perormance indicators


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The executives surveyed also indicated that the resources

perorming VM unctions were relatively highly skilled,

with 40 to 65 percent o respondents rating their VMPO

resources at an advanced or master skill level or many

VM unctions.

However, a review o the overall results ails to support

the initial impression that respondents are running mature

and eective VMPOs. Several contradictory results revealed

a confict between how executives view their VMPO

capabilities and the reality o their capabilities in terms

o leading-practice VM. For example, 67 percent o the

respondents said that they had established a dedicatedVMPO that perormed many VM unctions, yet the

percentage o VMPOs that were taking a lead role or

some traditional post-contract VM activities was low.

It is this contradiction that lends weight to the hypothesis

explored by the survey; that while organizations are

addressing specic VM unctional areas, they in act still

lack the maturity required to run ecient and eective

VMPOs that can help organizations to realize the objectives

o their outsourcing programs.

This report is Deloittes assessment o the survey results

on how companies view their VM capabilities. The results

are supplemented with Deloittes experiences and insights

regarding questions such as:

What does it take to build and implement an eective

VMPO?

What types o resources are required to operate an

eective VMPO?

What is an eective balance o cross-unctional skills

and experience needed to run an eective VMPO?

How can organizations build a fexible and scalable

VMPO and create an eective VM operating model

to address new and emerging VM practices, suchas supplier risk management and multi-service

provider integration?

The paper is divided into our sections. Section 1 discusses

the evolution o VMPO requirements in light o the

changing nature o the outsourcing market, changes in

buyer behavior, the shits in the economic climate over

the past ew years, changes in regulatory ocus, and the

increasing need to invest in skills and training to sta

VMPO unctions.

Section 2 covers our ndings and views regarding the

maturity o respondents VMPO unctions. This section

explores the extent to which the respondents had a

clear understanding o leading-practice VM and o the

requirements or establishing and successully operating

a VMPO.

Section 3 discusses the pros and cons o VMPO operating

models centralized or decentralized? Dedicated or

nondedicated? as well as VMPO maturity, approaches

to tools, recruiting, current VMPO practices, and Deloittes

view on leading VMPO practices. Section 3 also explores

some o the actors that have infuenced the need orbroad, fexible, and scalable VMPOs, including:

1. Companies have continued to adopt best o breed

approaches to outsourcing transactions. They are now

seeking to execute multisourcing transactions across a

number o service providers, each provider bringing its

own specic experience and knowledge to the table.

2. This means that companies need to pay greater

attention to how they integrate services across multiple

service providers and, in some instances, across

multiple geographies to keep service delivery intact

rom an end-to-end perspective.

3. In addition, governance and change management

mechanisms in transition and transormation programs

have also become more complex to manage, as several

dierent providers with multiple interdependencies are

typically involved.

4. An increase in M&A activity, as well as specic instances

o captive centers being divested to third parties,

has led to a correspondingly greater need to build

eective VMPOs to manage external third parties.

Previously, companies could rely on internal service-level

agreements (SLAs), typically with minimal governance

and penalty mechanisms. Now, they require more

ormal and commercially astute processes.

5. Advances in technology have seen the introduction o

new tools and platorms to manage not only service

providers contractual and commercial perormance, but

also their service delivery perormance. This, in turn, has

led to an increased ocus on skill set development and

talent retention. In addition, the continuing demand

or global outsourcing transactions across geographies,

which require companies and vendors to work across

multiple cultures, has led to an increased ocus on

relationship management.


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6

6. Changes in the economic climate have driven regulators

to increase their scrutiny o outsourcing and oshoring

transactions. Regulators may ocus on processes

adopted by companies to dene, manage, and evaluate

critical suppliers; inormation security assessments;

contingency plans; business plan continuity; roles and

responsibilities related to governance rameworks; and,

most importantly, data privacy issues.

Section 4 discusses the topic o understanding and

managing risk through a VMPO in light o changing

regulatory conditions as well as changes in buyer behavior.

It also provides our views on the multi-service provider

integration unction, which clients have historically

struggled to successully implement.


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I. Evolution o VMPO requirements

Where has the market moved since 2008?

One o the conclusions o Deloittes 2008 outsourcing

report, Why Settle or Less?, was that certain problems

with service provider relationships existed despite the

act that outsourcing was an applicable solution or

many companies. Respondents to the 2008 survey were

challenged by issues such as inconsistent communication

between the company and its service provider, inadequate

reporting, absence o clear communication plans,lack o transparency, and poor-quality account

management (Exhibit 3).

Exhibit 3. Problems with communication and relationship

management

Dont know

None

Poor account management

Lack of transparency

Lack of communication plan

Reporting

Inconsistent communication 29%

24%

23%

20%

17%

51%

2%

Source: Why Settle For Less? Deloitte Consulting 2008 Outsourcing

Report, Deloitte Development LLC, 2007.

Note: Respondents were allowed to select multiple options.


In addition, the report also concluded that there was

a growing awareness among companies that thecomplexities o managing outsourcing service providers

post deal execution were underestimated and poorly

managed. When asked what they would do dierently i

they could start their outsourcing initiative over again, 37

percent o the executives in the 2008 survey said that they

would do a better job o planning and stang or service

and contract management. This gure rose to 55 percent

among executives who were less than very satised with

their outsourcing initiatives.7

It is thereore unsurprising that, over the past ew years,

Deloitte has experienced a growing demand or services

that can help organizations ascertain the maturity o their

VM models and/or help them design, build, and implement

leading-practice VM models. Sixty-seven percent o the

respondents to the current survey reported that they had

already established dedicated VMPOs. Among respondents

that did not have a VMPO, 33 percent were currently in

the process o creating one. The rest o the respondentscited a lack o resources and experience as the main reason

or not establishing a VMPO (Exhibit 4).

Exhibit 4. Reasons for not establishing a dedicated VMPO

0% 10% 20% 30% 40% 50%

Not thought about VMPO

VMPO in implementationprocess

Maintain close proximitywith vendors

Lack of executive support

Geographical business spread

Lack of resources and expertise 44%

33%

33%

33%

11%

33%

As the survey shows, many companies today are

implementing dedicated VMPO unctions. In doing so,companies oten draw on the assistance o third parties

that can provide specialized unctional know-how and

the industry-leading operating practices, processes,

models, and tools necessary to create fexible, scalable VM

rameworks that can eectively and eciently manage

outsourcing relationships. This trend toward investing in

dedicated VMPOs has been ueled by a number o actors,

including the increased complexity o todays outsourcing

environment (including regulatory and compliance

issues) and the growing need to manage multiple service

providers that provide varying mixes o products and7 Why Settle or Less?, Deloitte

Development LLC, 2007.


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8

services across multiple geographies. The survey results

reinorce Deloittes experience that organizations are not

only recognizing that their traditional VM practices and

their VM practitioners related skills are no longer sucient

to meet current demands, but also are actively addressing

this concern by investing in tools and people.

Almost 70 percent o the surveys respondents invest

between 1 percent and 7 percent o the total outsourcedcontract value on implementing and operating VM

unctions, as shown in Exhibit 5. This gure is consistent

with Deloittes experience with organizations in

the marketplace.

Exhibit 5. Investment in VMPO functions (% contract valuespend on VM function)

1% - 3% 4% - 7% >7% Dont know

44%

25%

6%

25%

Our survey also suggests that VM is taking on a broader

range o activities than in the past, when VM dealt mostly

with basic contract management unctions and themanagement o commercial arrangements with the service

provider. Survey respondents indicated that organizations

are investing in setting up a variety o VM unctions,

including:

Contract management and compliance

Financial and commercial management

Issue and dispute management

Service perormance management

Governance

Transition and transormation project management oce

(PMO) and oversight

Document management systems

Service request management

Service provider risk management (an emerging area

o demand)

Multi-service provider integration (an emerging area

o demand)

How have traditional VM practices evolved?

The current activity in establishing dedicated VMPOs and

the increase in demand or leading-practice VM models

refects companies growing realization o the complexity

o todays outsourcing environment. Organizations are

being challenged, not only by the shit towards integrated

global service delivery models and the management o

multiple service providers across multiple geographies, but

also by the dynamics within their own organizations.

The increasing complexities o outsourcing and oshoring

transactions, as well as changes in the regulatoryenvironment, have led to a greater emphasis on

relationship management and new methods o working

between business units and internal support unctions such

as legal, tax, risk, and compliance. It has also led to a shit

in behavior rom a perorming culture to a managing

culture. For example, whereas client stakeholders would

produce both requirements and solutions in an in-house

service delivery model, a post-outsourcing environment

demands a ocus on dening requirements and allowing

the service provider to produce the solution. Contracts

need to be managed on a daily basis rather than being

monitored and periodically amended, and VM models

must also now be fexible and scalable to adapt tochanging business requirements and external pressures.

Eective relationship management is particularly critical

in an environment where regulatory and risk pressures

are continually increasing as a result o volatile economic

conditions. For example, in the nancial services industry,

regulatory bodies such as the United States Oce o

the Comptroller o the Currency (OCC) are placing an

increasing emphasis on scrutinizing the way organizations

track, measure, and report on risks associated with their

critical service providers. Regulators are examining the


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way organizations assess these risks, how they dene

critical supplier, what internal governance controls and

mechanisms they maintain, and the way they manage

escalations. Regulators are also ocusing on service

providers nancial and operational viability, their ability to

ulll their contractual obligations, and the eectiveness o

their exit and contingency plans. Inormation security and

data privacy controls and processes are another growing

area o exposure. Regulators are also ocusing on howorganizations consolidate risk issues and report them at an

enterprise level; in some instances, this occurs through a

central reporting utility such as a VMPO that also manages

the day-to-day relationship with the service providers.

Regulators are examining the way organizations assess

these risks, their denition o what a critical supplier is,

their internal governance controls and mechanisms, and

the way they manage escalations. Regulators are also

ocusing on service providers nancial and operational

viability, their ability to ulll their contractual obligations,

and the eectiveness o their exit and contingency

plans. Inormation security and data privacy controlsand processes are another growing area o exposure.

Regulators are also ocusing on how organizations

consolidate risk issues and report them at an enterprise

level, in some instances through a central reporting

utility such as a VMPO that also manages the day-to-day

relationship with the service providers.

Service providers interest in increasing revenue rom

their current outsourcing arrangements must also be

careully managed. Failure to implement broad change

management and governance rameworks that closely

monitor and manage alterations to scope may lead to

unexpected costs and, ultimately, to value erosion.

Additionally, the growing complexity o todays

outsourcing environment demands new skills in

order to eectively manage an outsourcing program.

Traditionally, many VMPOs either resided largely within

the procurement or sourcing unction, or were operated

at a basic unctional level by business units that required

some orm o governance in order to eectively perorm

basic processes (such as managing service levels or

managing the delivery o a product). While theseunctions may have been eective at managing parts

o an outsourcing relationship, they have oten ailed

to successully manage entire outsourcing programs.

Eective management o an outsourcing program now

requires specic cross-unctional skills and experience,

specialized toolkits and disciplines, an enterprise view

o the outsourcing program, and the ability to manage

and integrate a large number o service providers (where

required) to deliver an enterprise service. Establishing a

dedicated VMPO can support companies eort to recruit,

retain, and develop the requisite cross-unctional skill sets

required to successully manage the complexity o todays

outsourcing programs.

The current survey clearly demonstrates that todays

executives have built upon the sentiments that executives

expressed in Deloittes 2008 outsourcing survey (as

summarized at the beginning o this section). In addition,

the current survey reinorces Deloittes experience that

companies are increasingly investing in broad tools,

systems, and processes or VM, as well as building VM

organizations that can provide the resources to more

eciently and eectively manage their service providers

and achieve their outsourcing objectives.


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10

II. VMPO maturity

Having established that many companies are now actively

investing in building VMPOs, we now turn to the question

o how they are building and implementing their VMPOs

and how eective those VMPOs are. The current survey

included a number o questions about which VM unctions

companies had implemented, how they had prioritized

these unctions, how eective respondents thought the

unctions were, how skilled the companys VM resources

were, and what operating models were employed or theVM unctions. The answers to these questions were core

to investigating the extent to which the respondents had

a clear understanding o leading-practice VM and o the

requirements or establishing and successully operating

a VMPO.

How are companies building and prioritizing their

VM activities?

In Deloittes view, leading-practice VMPOs incorporate the

10 unctional areas depicted in Exhibit 2. We asked survey

respondents to indicate which o these 10 areas they had

adopted or their current service provider engagements.

Each o the 10 areas was represented among ourrespondents; in act, all but two o the 10 unctional

areas (multi-service provider integration at 62 percent and

transition and transormation oversight at 76 percent) had

been adopted by over 80 percent o the respondents. The

results are displayed in Exhibit 6.

In our view, the most surprising nding was that 62

percent o the respondents were actively addressing

multi-service provider integration, and 95 percent o

the respondents were addressing service provider risk

management both o which are seen as new and

emerging areas o VM ocus. In Deloittes experience,

organizations have typically been slow to recognize the

need or investment in these two areas, and most are

relatively immature in the related controls and processes.

We also asked respondents to rate their VMPOs level o

Experience. In most o the VM unctions, between 40

percent and 65 percent o the respondents considered

their VMPO resources to be at an advanced or master

level (Exhibit 7).

Exhibit 6. Involvement in VMPO processes

0% 20% 40% 60% 80% 100%

Service providerrisk management


Document management

Transition andtransformation oversight

Multi-serviceprovider integration

Governance

Service performancemanagement



Contract management 95

95

95

100

100

62

76

85

81

95

19

10

19

5

5

5

38

5

5

5

Yes No Dont know

Exhibit 7. Resource skill levels in VMPO processes

0% 20% 40% 60% 80% 100%


Service request

management

Document management



Governance




Contract management 33 29 33

30 50 15

95 95 10

100 100

5 38 38 14 5

11

10

5

5

5

35 35 5

5

5

10

15

28

48

33

33

24

38

38

19

19

14

28 33

5

5

5 5

10

Beginner Intermediate Advanced Master N/A

Note: Numbers in Exhibit 6 are percentages.



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Exhibit 8. Importance of VMPO objectives

Very important Important Neutral Unimportant

Very unimportant N/A

0% 20% 40% 60% 80% 100%

Others

Increase collaborationwith joint vendor forums

Mitigate conflict ofinterest across vendors

Performance improvementmeasures

Governance

Ensure timely transitionof services

SLA compliance

Perform financial planning

Process invoices and payments

Check on contractual obligations

Review and approvescope changes

Manage contract scope and costs

Increase operational efficiency 67

67

44

63

30

37

63

37

52

33

35

22

17 83

44 22

46

56

37

37

15

30

37 37

44 7

7

7

7

8 8

711

37

30

15

30

26 4 4

4

4

4 4

4

4 4

4

4

4

4

4

4

4

4

When respondents were asked to rate the importance

o each VM unction, activities related to contract


were seen as the most important elements o a VMPO

(Exhibit 8). Fity-two percent o the respondents thought

governance was very important, while the importance o

activities related to nance and commercial management,

transition and transormation oversight, continuous

improvement, and multi-service provider integration were

evenly distributed across the 30th percentile. A airly high

percentage o respondents were neutral on the importanceo reviewing and approving scope changes in a structured

manner, perorming nancial planning, supporting timely

transition and transormation, and increasing supplier

collaboration by establishing joint orums.

What does this tell us?

Given the growing complexity o managing todays

outsourcing service providers, as well as Deloittes

experience with companies VM eorts, it was surprising

to see that so many companies had established VMPOs

that covered a number o what Deloitte considers to be

leading-practice VM unctions. In our experience with

multiple clients, we have observed that companies are

struggling to understand how to build and manage

capability in this space. Given that the skills and experience

to manage these unctions are rare, one might question

the depth and breadth o the VM capabilities being

provided at our respondents organizations. Are companies

really using skilled, experienced resources to eectively

manage the leading-practice VM unctional areas? Orare they actually embracing these areas utilizing the

resources available to them, perorming these unctions

in a reactive, ad hoc manner without sucient substance

to operate eectively?

What is clear is that companies are choosing to move into

emerging areas o ocus or VM. They are also recognizing

the need or strong governance over their own internal

organizations as well as that o the service provider.

The results clearly indicate recognition o the need or

multi-service provider integration and risk management

(discussed later in Section 3 o this report). However,

the question remains: How eective are companies atmanaging these unctions?

Although organizations have made headway in identiying

and addressing leading-practice VM areas, responses to

the survey demonstrate that many companies are still

approaching service provider management in a traditional

manner, with the majority o respondents citing contract

management and service perormance management as

being the most important aspects o their VM unctions.

In our experience, service perormance management

has been a historical area o ocus in which processes

have oten been traditionally executed using standard

metrics and measurement techniques such as SLAs and

key perormance indicators (KPIs). Our work in assisting

organizations with their VM eorts suggests that

companies should now be considering additional

measures and techniques or managing their service

providers through multiple levels o governance

throughout the organization. This increases the probability

that company stakeholder interests will be met and that

the strategic value desired rom service providers will

remain intact. For example, some companies are starting to



14/36

12

utilize executive perormance indicators (EPIs) to measure

and monitor the strategic aspects o their relationships

with service providers, rather than measuring only the

operational aspects o their partnerships (e.g., attrition

rates, volume o incorrect invoicing, and the volume o

incorrect change orders).

The act that companies are continuing to adopt and

deploy traditional approaches seems inconsistent withour respondents view o their involvement with VM

and the level o experience in their VM unctions. When

viewed in light o the continuing prominence o traditional

approaches to VM, cracks in the appearance o the

maturity o companies VMPO organizations begin

to appear.

It could be argued that the traditional areas o contract


should still be the highest priority, that organizations are

actively perorming many leading-practice VM unctions,

and that they are doing so at an advanced or master level.

Certainly, this is how organizations seem to be viewingthemselves and their VM capabilities.

However, Deloittes experience and understanding o

VM capabilities, o the market, and o organizations

requirements in this area challenge this belie. In our view,

while companies are making large inroads into identiying

what they require rom their VM capabilities, they have

not yet reached a sucient level o maturity to recognize

whether the substance o what they have built will provide

them with a sustainable, fexible, and scalable capability

that is eectively resourced to deal with changes in

business requirements and technology.

Recruiting or an eective VMPO

Understanding what is required to successully manage

complex outsourcing service provider arrangements is

not a straightorward and easy task. As the outsourcing

environment continues to increase in complexity, so

too do the skills, experience, and qualications needed

to manage it. Vendor managers must move away rom

traditional mindsets and develop dierent cross-unctional

skills, including relationship management skills, legal

skills, nancial/commercial skills, and planning and

project management skills. VMPO proessionals also

need to understand risk, contract management, service

management, and business development areas.

Deloittes 2008 outsourcing report indicated that nding

executives with a relevant set o skills or eective vendor

management was not easy. In act, nding resources withan applicable combination o skills at any level is oten a

challenge. Our experience has shown that organizations

oten retain existing employees to manage a new service

provider, believing that the people who previously

perormed the outsourced process are suitably qualied

to manage the service providers now delivering products

and services. In reality, such retained resources oten nd

the transition rom a service perormance culture to a

service management culture extremely dicult. Oten, the

retained resources tend to dictate solutions to the service

provider instead o buying a managed service and an end

result. Such behavior can prevent the service provider not

only rom realizing value rom existing obligations, butalso rom generating value rom additional opportunities.

It also creates additional management overhead and gives

the service provider the opportunity to disclaim liability or

poor service, on the grounds that the service provider was

not solely responsible or the outcome.

Similarly, our experience suggests that approaching service

provider management with a traditional procurement

mindset is also ineective. Oten, procurement

proessionals lack the applicable ocus, skills, and

experience to successully manage the complexities o

new outsourcing arrangements. Specically, procurement

proessionals ocus largely on negotiating the agreement

itsel; in their view, the agreement is where the deal is

made and where success is measured. Competent VM

proessionals, on the other hand, consider a deal successul

i service providers deliver on their contractual obligations

during the contract term and, at the end o the contract

term, the service provider has successully delivered against

the organizations objectives.


15/36


In a ast-paced environment involving complex outsourcing

agreements, recruiting and deploying resources with the

requisite cross-unctional skills can provide the knowledge

and experience to protect business-case savings, mitigate

risks, and provide visibility into progress through clear

communication and reporting, thereby supporting

executives in the achievement o their outsourcing

agreements objectives. It is this critical yet generally

unrecognized act that can make or break the successo a companys outsourcing program

How are companies stang their VMPOs? Exhibit 9 shows

the number o ull-time employees (FTEs) our respondents

employed on their VMPO teams.

Exhibit 9. Number of resources on VMPO team

23%

22%

11%

22%

22%

5-10 FTEs 21-25 FTEs

26-50 FTEs >50 FTEs

11-20 FTEs

Upon reviewing the activities being perormed by our

respondents VMPO resources, it becomes clear that

many are taking a lead role in both pre-contract and

post-contract execution activities (reer to Exhibits 11 and

12 below).They thereore have broader responsibilities

than leading-practice VM roles would recommend.

Considering the number o VM activities being perormed

and the number o resources perorming them, along

with the nding that only between 5 and 50 percent o

our respondents rated their VMPOs as very eective

in the various leading-practice areas (Exhibit 13), it

can be concluded that many companies are still not

eectively recruiting or dened VM unctions. This raises

the question o whether these resources are actually

procurement or service delivery resources undertaking

a variety o sourcing, operational, and VM roles. How

ecient are these VMPOs, given the size and sheer

number o activities that they are perorming in both lead

and supporting roles?

It appears that while many executives believe that they

have skilled resources or VM, there may in act be someconusion as to vendor managers applicable roles and

responsibilities, which points to conusion about the skills

and experience required to operate VMPOs eciently

and eectively.

Approaches to VM tools

In our experience, companies oten see VM tools as

a supplement to their core VM needs rather than as a

priority ocus area. However, this attitude is changing

as the management complexities o outsourcing deals

evolve and as executives increasingly look to decrease

management overhead and obtain real-time visibility into

the current state o their outsourcing programs.

The challenge acing both clients and service providers is

how to develop and implement a holistic enterprise VM

tool to eectively manage the service providers and the

services pertaining to a specic outsourcing program.

To date, the available sotware has ocused on discrete

unctions; it has not accommodated a ull suite o

unctionality or VMPO purposes that can adequately track,

measure, and report against the metrics associated with

each o the 10 VM leading-practice areas.

An interesting observation is that some o the more

traditional VM unctions, such as contract management

and issue and dispute management, continue to remain

lower priority or technological enablement. This can

potentially prevent companies rom realizing the ull

benets rom these traditional core unctions.

Which unctions are companies choosing to ocus on with

respect to implementing tools? We asked respondents

to identiy which o seven VM unctions were enabled

with sotware tools (Exhibit 10). Interestingly, yet not

surprisingly, the responses showed that companies were

using tools predominantly in traditional VM areas. Service

request workfows, nance and commercial systems,


16/36

14

service perormance management, and document

management were the most common areas o sotware

investment. The results also suggest that companies are

becoming increasingly aware o the importance o issue

and dispute management: Although only 23 percent

o our respondents currently possessed tools to enable

issue and dispute management, an additional 14 percent

planned to implement tools in this area within the next

12 months.

An interesting observation is that some o the more

traditional VM unctions, such as contract management,

remain a lower priority or technological enablement. This

can potentially prevent companies rom realizing the ull

benets rom these traditional core unctions.

Exhibit 10. Process-level utilization of VMPO tools

0% 20% 40% 60% 80% 100%

Others

Governance



Document management



Contract management 36

64

64

23

59

55

68

68

40 60

9 32

9 23

23

9

14 50 14

9 50

27

5

5

5

5

5

5 5

5

5

Yes No, but plan to inthe next 12 months

No, and nofuture plans

Dont know N/A

Deloittes view on leading-practice VM

Deloitte denes a VMPO as a highly skilled organization

whose purpose is to bring maturity and process discipline

to strategic outsourcing programs in order to reduce

costs, improve productivity and overall perormance,

preserve business-case savings, and mitigate risks. While

it is essential or VM proessionals to support pre-contract

execution activities, their lead role should be in post-

contract execution activities, ocusing on managing the

agreement in order to meet the outsourcing objectives.

Pre-contract execution activities should be led by sourcing

proessionals. This is not to minimize VMs important

supporting role in the sourcing process; in act, in

Deloittes experience, many companies are continuing

to make the mistake o bringing VM to the table too late.

VMs role is to assist the companys sourcing proessionals

in negotiating specic contract clauses to protect against

the risks that commonly arise ollowing execution o the

agreement. For example, a VM proessional can provideinormation on how to build eective governance

models, change controls, and reporting requirements

into the agreement.

Bringing a VM proessionals knowledge and experience

to bear on pre-execution contract activities can be critical

to the success o a companys outsourcing program. But

despite the importance o involving VM in pre-contract

execution activities, VM is still very much in a supporting

role. The VM proessionals assistance is delivered in

the same way that other subject-matter specialists are

engaged to dene the services and agree on terms within

the contract.

In contrast, post-contract execution is where the VMPOs

core competencies lie: VM proessionals take the lead role

in making the outsourcing program work. To put it another

way, the VMPOs job is to provide eective management

so the company can realize the desired value rom the

outsourcing program. The VMPO should ocus on the 10

leading-practice unctional areas o VM. It should design

the detailed governance model, including guidelines or

interactions with the service provider and the roles and

responsibilities o the parties involved in the management

o the agreement. And it should design and implement

processes, systems, and tools to manage the service

providers; conduct training; implement eective transition

and transormation oversight; and conduct negotiations

with service providers (e.g., or new services arising under

the agreement, amended services, or any extensions or

terminations o the agreement). A VMPOs success can be

measured by its ability to reduce cost, increase productivity,

achieve fexibility, improve quality, and mitigate risk.



17/36


The table below summarizes the potential benets o an eective and dedicated VMPO.

Success criteria What an eective VMPO can do Potential result without a VMPO

Reduced cost Trackresultsversusoriginalbusinesscase

Determinewhetherproductivitytargetsandobjectives

are being met

Negotiatechangesandmanagescopecreep

Difculttomeasuresavingsyearoveryear;initial

savings may not be realized

Contractsdonotstaystaticthroughtheterm,making

original cost savings even harder to track

Increased productivity Determineleadingmethodfortrackingproductivity

Establishbaselineandtrackprogressagainstcontract

terms

Translateproductivityimprovementsintobottom-line

savings or increased capacity

Three to 5 percent annual improvement i mandated;

0 percent improvement i not mandated

Dicult to measure/test

Flexibility Forecastdemandandreducevariance

Balanceexibilityagainstcostandutilization

Utilizecontractuallycommittedvolumeseffectively

Minimumcommitmentrequiredtoachieve

desired rates

Short-termrates30percenthigherr

Ineffectiveutilizationofdemandandcapacity

management models

Improved quality Encourageutilizationofserviceprovidersbeyondpure

sta augmentation

Track,report,andimproveservicelevels

Determinethatqualitygoalsarenotexcessive

Serviceprovidersusedasstaffaugmentation

Fewservicelevelcommitments

Norealopportunityforserviceproviderstoinnovate

Risk mitigation Deneandimplemententerprisemethodology

or assessing the progress o transition and

transormation programs

Denegovernancestructureforapproving

milestone payments, exceptions, and monitoringinterdependencies between programs

Inabilitytomeetcost-savingtargetsduetodelaysin

programs, scope creep, and escalation delays

Dissatisedinternalstakeholders;delaysinachieving

steady-state status

Companies current VM practices

How closely did the survey respondents VMPOs align

with Deloittes views on leading VM practices? The

results continued to build support or the hypothesis that

most companies VM maturity remains low. A majority

o respondents answered that VM took a lead role in

the pre-contract execution activities listed in Exhibit 11

(an average o 55 percent across all activities). Fewer

respondents reported that VM took a supporting role (an

average o 34 percent across all activities). Five percent o

the respondents VMPOs took no role at all in one o the

specic pre-contract execution activities one might expect

VM to be involved with designing the operating model

and governance structure. Clearly, these responses are at

odds with Deloittes view that VM is more eective in a

supporting role or pre-contract activities rather than in

a lead role, and suggest that many VMPOs are acting as

sourcing groups in addition to perorming VM activities.

Exhibit 11. Pre-contract execution

0% 20% 40% 60% 80% 100%


Design targetoperating model andgovernance structure

Draft, negotiate,and execute contract

Conduct due diligenceand short-list vendors

Create the RFPand analyze responses

Create value propositionand business case

Lead role VM not involvedSupporting role Dont know

55

50 41

14

32

55

55

68

32

59 32

32

23

5

5

55

9

9

9

9



18/36

16

With respect to post-contract execution activities, a

majority o respondents again indicated that the VMPO

took a lead role in nine out o the 16 post-contract

execution activities listed in Exhibit 12 (an average o 53

percent across all activities). Interestingly, 36 percent o

the respondents, on average, indicated that the VMPO

took a supporting role in post-contract execution activities.

In other words, where one might expect to see a large

discrepancy between VMs level o involvement in pre-and post-contract activities, the results instead showed

very little dierence at all.

At many companies, the VMPOs played a supporting role

in budgeting, orecasting, and tracking business case

savings. For activities such as perorming risk analyses on

the service provider, reviewing and reconciling invoices,

and developing and executing operating-level agreements

(OLAs) between service providers, there was only a 5

percent dierence between the percentage o companies

where VM played a lead role and the percentage o

companies where VM played a supporting role.

Exhibit 12. Post-contract execution

Lead role VM not involvedSupporting role Dont knowor N/A

0% 20% 40% 60% 80% 100%

Provide overall governance

Perform risk management analysis

Develop and maintaincontractual artifacts

Plan, monitor, and reporttransition activities

Consolidate end-to-end SLAand OLA reporting

Develop, negotiate,and execute OLAs

Develop and maintaincross-supplier standards

Manage, track, andreport adherence to SLAs

Report on actualvs. business case savings

Provide inputto budgeting and forecasting

Reconcile invoicesand facilitate approvals

Track, manage,and resolve disputes and issues

Negotiate newservice and scope changes

Track, manage, andreport on performance

Train on contract operating model

Design systems and tools 64

64

68

55

55

52

59

48

71

43

38

29

33

32

32

50

55

55

50

36

41

41

19

41

45

45

59 36

27

27

23

9

14

14

24

9

9

9

9

9

32 5

5

5

5

5

5

5

5 5

5 5

5

5

These results are inconsistent with how an eective VM

organization should operate. Clearly, although the majority

o our respondents said that they had a dedicated VMPO

that perormed all unctional activities, the high percentage

o VMPOs taking a supporting role in these activities would

suggest that VMPOs have been disenranchised in many

areas, operating as supporting unctions to other areas o

the business rather than holding primary responsibility or

driving service provider management.

A critical question, thereore, is: How eective are the

dedicated VMPOs that many o our respondents claim

cover all leading-practice VM unctions and more? How

eective can they be i they take a lead role in pre-contract

execution activities and play an almost equal measure o

lead and support roles in post-contract execution activities?

Exhibit 13 shows respondents ratings o the eectiveness

o their VM organizations in a variety o areas. The results

were not strongly avorable in any category. On average,

across all VM objectives, executives reported that:

57 percent o VMPOs were perorming very eectively oreectively

34 percent o VMPOs were somewhat eective

3 percent o VMPOs were not eective

These results can be interpreted in a number

o ways.

It could be argued that, because an average o only 3

percent o the executives elt that their VMPOs were not

eective, our hypothesis that VMPO maturity remains

low is invalid. This result might support the view that

the VMPOs that organizations are establishing are

in act leading-practice VMPOs with skilled andexperienced resources that work eectively to manage

outsourcing programs.



19/36


Exhibit 13. Effectiveness of VMPOs in achieving objectives

Very effective Effective Somewhat effective

Not effective N/A

0% 20% 40% 60% 80% 100%

Increase collaborationwith joint vendor forums

Mitigate conflictof interest across vendors

Perform continuousimprovement measures

Resolve issuesand provide governance

Ensure timelytransition of services

SLA compliance

Perform budgetingand forecasting

Process invoices andpayments accurately

Meet contractual obligations

Approve changes with astructured framework

Manage contract scopeand costs

Increase operational efficiency 23

23

23

23

23

36

32 32

32

32

32

32

50 27

27 27

18

18

18

45

41

41

41

41

43

41

32

27

27

27

5

5

5

5

9

9

9

9

99

5

5

5

5

23

24

14

14

14

14

14

55

5

However, i this were true, we would expect to see more

than an average o 57 percent o respondents rate their

VMPOs as eective to very eective. In our experience, at

least 90 percent o dedicated VMPOs with highly skilled

resources that employ leading-practice VM tools, systems,

processes, and procedures should be rated as eective to

very eective at governing outsourcing programs.

Are our respondents VMPO organizations being spread

too thinly across too many pre-contract and post-contract

execution activities? Do their VM resources have the right

skills to be perorming both pre-contract and post-contract

execution activities? Are we, in act, looking at a situation

in which organizations, in aggressively setting up VMPOs,

are doing so based on either traditional VM practices

or partially inormed emerging VM practices? Or do our

results simply refect the lack o objective criteria against

which companies can measure the eectiveness o their

VMPOs? Perhaps this interpretation would explain why

responses to the query on how executives would increase

the eectiveness o their VMPO organizations were not

high in any category (Exhibit 14).

Exhibit 14. Increase effectiveness of VMPOs

0% 20% 40% 60% 80%

Other

Increased level of executivesupport within the organization

Better delineated roles andresponsibilities for VM

Alignment of VM activities withoverall business objectives

Establishment of performance metrics

for the VM function

Performance of end-to-end VMactivities, pre and post-contract execution

Increased level of skill-set of VM resourcesthrough training and external recruiting

Standardized VMprocesses and tools

63%

59%

56%

48%

41%

33%

4%

59%


What can be concluded about the efciency and

eectiveness o companies VMPOs?

Our survey results clearly show that executives believe

that their companies are operating ecient and eective

VMPOs and utilizing skilled resources to do so. A closer

look at the results, however, suggests that this belie may

be misplaced or the ollowing reasons:

a. The large number o resources on the respondents

VM teams, and the act that these resources tend to

lead both pre-contract and post-contract execution

activities, suggests that conusion may exist with

regard to VMPO roles and responsibilities and/or that

resources may be being leveraged rom across d ierent

organizational disciplines.

b. Respondents indicated that some emerging VM

unctions are being managed and staed with skilled

resources, which casts doubt on the respondents

understanding o leading practices in these areas.

c. While many respondents reported that they utilized

highly skilled resources, with between 40 percent

and 65 percent rating their resources at an advanced



20/36

18

or master level, only 57 percent o respondents, on

average, rated their VMPOs as eective or very eective.

Based on our experience, the use o such highly

skilled resources should have yielded better ratings on

eectiveness. Moreover, respondents could not identiy

any denite means o improving eectiveness. This

set o ndings raises questions around respondents

understanding o the skill sets and disciplines required

o VMPO resources, the roles o these resources, andthe breadth o their activities. Our ndings also raise the

issue o whether there exists any established metrics by

which VMPO eectiveness is being measured.

d. While it was clear that companies are addressing

emerging VM ocus areas, such as supplier risk

management and multi-service provider integration,

their responses to questions on the priority o unctions

and their investment in tools show a traditional rather

than a leading-practice approach to VM.

It is clear, thereore, that the survey results support our

hypothesis that VMPO maturity remains low at many

companies, even though they have made great inroadsinto recognizing and actively establishing VMPOs and

believe that they have done so eectively.

Respondents also elt that they were getting a higher

return on their VMPO investments. The average cost

savings that could be directly attributed to the operation

o the VMPO was higher than the average investment

required, which would make the VMPO a valuable

contributor to a companys success. While cost should not

be the ultimate measure o a VMPOs success other

actors, such as risk mitigation and avoidance o potential

cost overruns, should also play into this evaluation itshould certainly be a actor in a VMPOs measurement.

We believe that by increasing the maturity o their

VMPOs, companies can close the gap between their

current operations and leading practices by establishing

eective operating models, engaging the right VM

unctions, and employing resources with the requisite skills

and experience. This can allow companies to increase

operational eciency and reduce overhead time.


21/36


III. VMPO operating models

Deloittes view on VMPO operating models

There are no generic models as to how a VM ramework

should be developed and applied within a company.

The questions o whether a VMPO should be retained

within an organization; whether some unctions should

be perormed onshore, oshore, or by a third party; and

whether the VMPO should operate in a centralized or

decentralized ashion will be infuenced by a range o

actors, including the geography o a companys services/activities, the service provider mix, the locations where

services are being perormed, tax structures, the

scope o service provider solutions, and the companys

strategic direction.

In order to determine what operating model would be

eective or its business requirements, a company should

ask specic questions such as:

Is the unction manual in nature, and would it be

compromised i it were removed rom the local site?

Is the unction responsible or making strategic business

decisions on a daily basis?

Can the work be delivered globally in a standardized

manner?

Does the unction require organizational decision making

or developing and implementing leading practices?

A number o challenges and benets are associated with

both a centralized and a decentralized model. Some o the

benets o a centralized model, or example, may include:

The ability to leverage the skills o global service

providers where skills do not exist at the regional level

Greater standardization, leading to greater eciency and

cost savingsEstablishing accountability or the agreement in one area

Aggregation o volume levels, resulting in a stronger

negotiating position and greater cost savings

These benets, however, may be balanced by challenges

such as:

A lack o buy-in and application o centralized systems

and processes by the regions

Increased complexity in managing the service provider

and the cost o delivery

Time zone, cultural, and language dierences

Changes in legal and regulatory requirements thatare dicult to incorporate into the model on an

ongoing basis

Decentralized operating models, in contrast, can realize

benets such as:

Tighter control regarding internal decision making,

leading to better alignment o choices with the

regional location

Tighter control around the service provider and thereore

around service delivery

Greater fexibility with regard to adopting changes in

response to legal or regulatory requirements

Clearer and aster communication and collaboration

However, a decentralized model can ace challenges

such as:

The inability to benet rom economies o scale and

the resulting price and service advantages rom global

agreements

The existence o multiple contracts with the same service

provider or the same services across regions, leading to

greater management overhead

Diculty in meeting global strategies when regions

agree on nonstandardized systems and processes,leading to greater ineciency and cost

Reer to Exhibit 15 or schematic representations o

decentralized and centralized rameworks or VM

operating models.


22/36

20

Exhibit 15. Operating model structure

Decentralized

CFO

Oshore supplier

Business unit

control

Supplier

managementSupplier

management

Supplier

management

Supplier

management

Supplier

management

Statutory and

regulatory reporting

Product controlMI and decision

supportCentral unctions

Illustrative

Centralized

CFO

Business unit

control

Business unit

control

Supplier

management

Supplier

relationship

manager

Supplier

relationship

manager

Supplier

relationship

manager

Statutory and


Statutory and


Product control

Product

control

MI and decision

support

MI and decision

support

Central unctions

Illustrative


23/36


Other choices that need to be careully considered are

whether to retain a VMPO or to outsource some or all o

the unctions to a third party, as well as where to locate

the VMPO (onshore or oshore). Both these topics are

addressed later in this section.

In any event, the decision as to what operating model

would be eective or a company must be careully

considered and made with an appreciation o thedierent options benets and challenges. Perhaps most

importantly, it must be made with a clear understanding o

the risks o each option so these can be careully managed.

What VMPO operating models are companies

employing?

Our survey showed that 62 percent o the respondents

were operating their VMPOs under a centralized model.

Twenty-nine percent were operating their VMPOs under

a decentralized model, and 10 percent were unsure

(Exhibit 16).

Interestingly, the number o executives who rated theirVMPO as eective closely aligns with the number o

companies that had adopted a centralized operating

model. Traditionally, centralized operating models have

typically provided more control over the outsourced

environment. Thereore, it could be argued that our

respondents satisaction with the eectiveness o their

VMPO organizations is due in part to their centralized

Exhibit 16. Respondents VMPO operating model

62%

29%

9%

Centralized Dont knowDecentralized

operating models, which is in line with our experience.

Placing accountability or the management o service

providers in one area, as well as being able to dictate

the VMPOs processes, tools, procedures, templates, and

requirements or resources skills and experience, could

arguably result in a more controlled and broad VMPO. Had

the responses been the other way around (i.e., i most o

the respondents had adopted a decentralized rather than a

centralized model), would the satisaction o the executiveswith the eectiveness o their organizations have been

even lower?

Operating model considerations were oten a driving

actor behind whether to implement a dedicated versus a

nondedicated VMPO. Typically, we have ound that clients

tend to adopt decentralized models in circumstances

where 1) businesses are spread across geographies and 2)

service providers are in close proximity to client locations,

thereby providing ease o access. Indeed, each o these

actors was cited by 33 percent o respondents as a reason

or not establishing a dedicated VMPO (Exhibit 4).

According to Deloittes view on operating models,however, neither o these reasons should stand in the way

o the establishment o a dedicated VMPO. A dedicated

VMPO with leading-practice processes, procedures, tools,

and templates can deliver more benets to an organization

than would be gained with a nondedicated VMPO.

Choosing not to establish a dedicated VM unction or

the reasons cited by our respondents may only exacerbate

issues that typically arise in outsourcing programs, such as

inconsistent communication, poor or unreliable reporting,

and an underestimation o the complexities o managing

outsourced service providers.

Certainly, being close to and having easy access to

service providers can be benecial, since it can oer more

fexibility. This fexibility and ability to respond quickly

to change, however, may result in greater reliance on

relationships rather than on ormal agreements with

service providers, which may in turn lead to potential

disputes later as to the substance o an agreement. A

dedicated VMPO that acts as an organizations single point

o contact or service provider management i it is set

up with leading-practice models, systems, and processes

can achieve the same fexibility while also providing

additional benets around risk mitigation, cost protection,


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22

and operational eciencies. Similarly, a dedicated VM

unction that implements leading practices consistently

across a global organization can be o great benet to

the enterprise. A key to achieving success in this case is

to oster unity and understanding among the dierent

geographies, as well as to establish common intent and

understanding with regard to managing outsourced

service providers.

Approaches to outsourcing VM unctions

When asked whether their VM unctions were outsourced

or retained and whether they were perormed onshore or

oshore, 93 percent o executives, on average, reported

that they had retained their organizations internally. Only

5 to 9 percent o executives responded that the areas o

service perormance management, multi-service provider

integration, transition and transormation oversight,

document management, and service request management

were being perormed by a third party (Exhibit 17). O

these unctions, service perormance management, multi-

service provider integration, transition and transormation

oversight, and service request management were beingperormed oshore.

Exhibit 17. Operation of respondents VMPO processes

0% 20% 40% 60% 80% 100%

Contract management


Issue anddispute management


Governance



Document management



95

91

86

90

77 14

100

100

100

5

95 5

5

9

91 9

9

9

5 5

In-house Third party N/A

Our results show that the majority o executives who had

outsourced their VMPO unctions did so because they

wished to leverage the experience o a third party and/

or because they had identied a lack o the applicable

skill set within their organization to successully perorm

the unction themselves. Interestingly, the motivating

actors or outsourcing VMPO unctions dier rom those

commonly attributed to typical outsourcing initiatives.

Specically, none o the executives cited the need toreduce costs, obtain objectivity, or respond to an internal

ailure as reasons or outsourcing their VMPO unctions.

This is in line with Deloittes experience working with

organizations over the past two years.

While many executives who had not outsourced their

VMPO unctions said that they would not consider doing

so, 41 percent acknowledged that they would either

consider it or were unsure. This indicates a possible

emerging awareness that outsourcing the VM unction

may be an attractive option that can allow companies to

leverage specialized skills and knowledge.

What can be concluded rom the nature o the unctions

that organizations have chosen to outsource? Interestingly,

the unctions that respondents said they had already

outsourced were similar to the unctions that respondents

said they would choose to outsource i they were to

do so in the uture. Our conclusion, supported by our

experience, is that these unctions have increased in

management complexity with the advent o global multi-

vendor outsourcing programs. In addition, they are areas

o ocus or regulators (e.g., or regulations around risk

management). They are thereore attractive candidates or

transitioning to third parties that have demonstrated core

competencies in perorming these activities.

Organizations should nevertheless take care when making

the decision to outsource some o these unctions. Service

request management, or example, relies on the internal

client organization to dene its business requirements, and

it is central to a companies strategic direction. Thereore,

any eort to outsource this unction should be approached

with caution.Note: Numbers in Exhibit 17 are percentages.


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Companies should be careul when choosing to outsource

or oshore VM unctions. They should embark on any

such program with a deep understanding o the risks

associated with this decision. Multi-service provider

integration, or example, is a unctional area where

organizations have struggled to adopt models regarding

how service providers will work with each other. Executing

OLAs and managing joint supplier governance orums are

not trivial tasks. In our experience, clients have typically notconsidered the complexities o relationships with internal

stakeholders and the proximity o service providers when

oshoring VM unctions to their captive centers.


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IV. Understanding and managing riskthrough the VMPO

Why is risk management so critical? A look at

supplier risk management and multi-service

provider integration

One o the specic benets o an eective VMPO is that it

can implement controls and tools that provide inormation

to track, measure, manage, and report the inherent risks o

outsourcing transactions in which services are transitioned

to a third party. VMPO risk management capabilities

have become more critical in light o recent economicconditions that have led to increased regulatory scrutiny,

compliance and governance issues, and an increasingly

complex outsourcing landscape.

How are companies approaching risk management with

their VMPOs? What programs are they implementing

to manage risk? How are they acing the challenge o

managing relationships with multiple suppliers that are

oten individually responsible or delivering separate

elements o an end-to-end service to their customers?

Risk management

Volatile economic conditions and increasing regulatorypressures are driving demand or broad supplier risk

management rameworks that provide the experience and

inormation to address the risk o nancial losses, business

disruptions, and regulatory interventions. Companies are

now asking questions such as:

How do we bring our supplier risk management (SRM)

capability in line with industry practices to enable

eective governance and meet regulatory requirements?

What are the specic risk drivers that can provide

inormation to gauge the level o risk associated with our

critical suppliers?

What preventative or mitigating actions can we take tomanage supplier risk?

How should we measure and report supplier risk, and

what data elements need to be captured?

In addition, regulators are asking related questions

such as:

How do companies dene who their critical service

providers are?

What are the individual components o risk that

determine i a supplier is critical?

Does the company have clearly dened and well-

understood supplier tiers?

Does the governance ramework have clearly dened

roles and responsibilities?

To what extent is reporting automated? What tools are

utilized?

How much business knowledge and core process

knowledge has been outsourced?

How eective are the companys inormation security

assessments?

How is the company addressing business plan

continuity?

Although our survey did not directly ask respondents about

their approaches to service provider risk management,

some insights into the maturity o this unction can be

gained rom their responses to other questions.

As indicated in Exhibit 18, 95 percent o respondents

conrmed that their VMPO perormed SRM, and 43

percent o these said that these resources possessed either

advanced or master level skills. These percentages seem

high, as SRM is an emerging discipline and the skills and

experience or leading-practice SRM are dicult to assess.

Exhibit 18. Respondent supplier risk management skill level

62%

62%

62%

29%

9%

Master Intermediate Beginner N/AAdvanced


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Additional areas o risk, set out in Exhibit 20, must be

managed using a stringent governance ramework with a

ocus on risk at the enterprise level, line-o-business level,

and individual supplier level. This can give a company a

holistic view o risks. It can also give lower levels o the

organization the inormation and resources to help them

make eective decisions on matters, such as reputational

risk and concentration risk, which may expose the

enterprise as a whole.

Reporting requirements should also be a specic ocus

area. Organizations should ocus not only on the quality

and accuracy o data, but also on reporting useul,

actionable data and metrics to senior stakeholders.

Perhaps most importantly, as the economic and regulatory

environment continues to change, companies must fex

and adapt to accommodate this change. As new risk

scenarios arise, companies should be vigilant in identiying

challenges and enhancing their regulatory risk denitions

in order to improve their supplier risk management

practices. For example, risk management processes shouldbe fexible and scalable enough to report metrics at a level

o detail in which metric measurements can dierentiate

between supplier A and supplier B, especially as there are

oten several dierent types o critical suppliers.

Deloittes experience indicates that by implementing an

eective supplier risk management model with applicable

processes, systems, tools, and templates, companies can

achieve the rigor and structure to eectively identiy,

manage, and mitigate supplier risk at the enterprise level

and address certain questions. Doing so can provide

inormation to companies to:

Meet regulatory requirements

Standardize and manage operational risk

Achieve a strategic and holistic view o risk within a

portolio o providers spread across various unctions,

services, and geographies

Utilize metrics and reports to assess supplier risk at the

enterprise, line-o-business, and supplier levels

Make applicable management inormation available

to support eect

Deloitte VMPO

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