Vendor relationship Failure? The Six Step Recovery Program

Step #1: Decide if Clients is ready for an Effective Vendor Management Program

Organizations can no longer operate in isolation, if indeed they ever could. Clients ultimately depend on the excellence of its vendors because if they fail, Clients fails. The purpose of a Clients VRM program is to create superb strategic vendor management processes and frameworks to ensure that Clients continues to receive valued benefits from selected vendors.

With suppleir portfolios sometimes numbering in the tens of thousands of vendors, forming enhanced commercial relationships with all of them is just impossible. As an initial step, we have developed a process to segment Clients vendors in order to identify the 'critical few' that merit some form of enhanced relationship or partnership working – and drive anticipated continued value creation with, and from, these select vendors.

Even without this kind of analysis, some vendors immediately stand out as worthy of some kind of closer working relationship.

These include:- Vendors to whom Clients have outsourced all or part of the internal process Vendors with whom Clients has a joint venture in which assets and resources to create

value are shared Vendors that provide critical services or materials without which Clients cannot function. Vendors that provide capabilities or services that could directly impact Clients’s

commercial differentiation, for instance, shorten go-to-market cycle times, gain marketshare or optimize margins.

The implications of poor performance from these types of vendor can be devastating. One aim of the Clients vendor management program is to ensure that this does not happen.

Another question that needs an answer is whether as an organization, Clients is ready for a vendor management program. There are a number of factors that need to be considered. These include:

The availability of senior members of staff who are willing to be sponsors of key vendor relationships. The issue here is that sponsors are needed not only to drive the pace of the program and ensure a quality output but may be needed to unblock barriers to us achieving vendor management objectives.

The perception and reality of the value that vendors are currently delivering to Clients. If there is widespread agreement that they are not translating their capability into effective delivery and value for money, then we are more likely to get support for the VRM program.

The maturity of the VMO in terms of its approach to problem solving. Effective vendor management is largely about identifying and solving problems and this is made easier if there is already a culture of continuous improvement, supported by appropriate processes and toolkits

The strength of VMO leadership at Clients. One key critical success factor is that VMO leadership needs to be well connected to, and supported by, people within the LOB’s of Clients, making vendor management easier to drive and coordinate.

Step #2: Find Out What our Colleagues Value the Most

So, how do we go about persuading that vendor management is a valuable program to implement? My suggestion would be to focus on, and to work out exactly what the proposed VRM program will deliver for Clients.

Vendor management means different things to different people. For example, type the phrase vendor relationship management into a search engine and you will get more than two million hits, many of which relate to software applications for recording and analyzing vendor data. Others think of vendor management as a means of monitoring, measuring and reporting vendor performance.

The current proposal for VRM at Clients is designed to leverage a process with which can systematically identify appropriate strategic vendors, find, deliver and assure opportunities for delivering cost and service benefits (both immediate and longer term) and for leveraging / accessing innovation and continuous improvement. This is what will persuade our LOB colleagues and, perhaps more importantly, our senior executives.

A selection of benefits from VRM includes the following:

Service related benefits Early vendor involvement (Onboarding) helps to shape the way the vendor interacts with

Clients, how their product or service aims to provide a more effective solution and how we expect the vendor to sustain that value

Captures and shares IPR (Intellectual Property) Provides a better balance between technical and purchasing requirements Reduces the vendor learning curve Acts as a free source for “hot housing” and incubating new ideas and problem solving Acts as a source of vendor developed innovation

Commercial related benefits Lower cost of bidding and engagement Marginal costs from account planning Lower costs from target costing and benchmarking Possibly deduced costs from supply chain management i.e. vendors’ vendors Better ”lock in” of vendors if demand outstrips supply Shared risk Establishment and understanding benchmark and to what degree Clients’s spend

commensurate others within the sector

People related benefits Continuity of work allows vendors to have a career path for their people (if you are

buying a professional service such as consulting) and ”refreshes” ideas and lowers costs Enhanced skills from problem-solving with vendors Improved communications and collaboration

Process related benefits Reduced non-value adding tasks Capture and use knowledge and learning for use in future work Faster response to your needs from improved processes

A more consistent pool of people (if a service related purchase) who will build a knowledge bank of your organization

Possibly leverage vendor’s skill sand experience to help Clients with complexity management or, perhaps, embrace “better ways of doing things”

Step #3: Build a Compelling Business CaseThe next step is to start to build a business case for vendor management. I recommend that we begin by forming a view as to whether or not there is an opportunity to deliver more value from Clients key vendors. Often value is leaking out of the back door!

Here’s why: The current Clients selection process requires vendors to have a certain minimum level of capability and experience whatever the product or service that they deliver. Vendors should apply this capability and experience in their delivery process and produce an output (whether it is a product or service) that gives Clients the outcome it expects. Unfortunately, this sequence doesn’t always work well with the result that the expected value Clients thought were buying (sometimes) melts away.

I would propose to establish a business case on a VRM selected vendor by vendor basis, to evaluate the value that is being lost. It doesn’t have to be complicated or extensive; we can do this by using a questionnaire that asks a cross-section of people to score our vendors on a scale from very good to poor against each of the criteria of capability, experience, outputs, outcomes received and value for money.

When the scores are then analyzed, we may find that vendors are often rated very highly on the input scores (in other words their capability and experience). After all, Clients have used these to select the vendors during the tender process.However, as we work through the list of criteria, the scores generally decline until value for money is often the lowest score. In other words, people believe that value is lost once actual delivery of the purchased goods or services starts.

A quick way that we can use to assess the lost value for some of your key vendors is this:- Start by listing Clients top 5 vendors (other than real estate) and draw three columns next

to this list. Title of the first column is “capable”; column 2 is “delivery”; and column 3 is “value for money.”

Now, we consider the first vendor and whether or not we think that vendor is capable of delivering a good service. If the answer is yes, then put a tick in column 1 against this vendor. Complete column 1 for all 5 vendors.

Next, consider whether or not the first supplier is delivering a quality result (column 2) and whether or not they are consequently delivering value for money (column 3). Put a tick in columns 2 and 3 if your answer is yes and a cross if the answer is no.

Now complete the exercise for the remaining 4 suppliers

The result from this exercise will give us a feel for whether value is being lost with these 5 vendors. Generally, if column 3 has fewer ticks than columns 1 and 2 then you are losing value.We should try sharing this easy exercise with selected colleagues and see if there is a consensus view on lost value. If there is, then this is the start of vendor management program

In supply management one gets value from key suppliers by agreeing a purpose for the relationship with them and then measures and specific actions that deliver that purpose. Not doing so means that their failures to deliver real value either goes unnoticed (and so operational

problems are never solved and there is no innovation or at best it is informal and unstructured and therefore never delivers).

To get this value you need a process. The Clients VRM framework imbeds the following components:

Part 1: agree a purpose for the relationship. A client of mine and one of their key engineering services supplier agreed that the purpose of their working together should be to create a relationship that continues to deliver value to both sides. This makes it a mutual strategy and one that continues into the future.

Part 2: write a mission statement based on the purpose. The mission that then flowed from my client’s purpose with their supplier (abbreviated here for simplicity) was for each party to be first choice for the other in commercial matters (for example the supplier bringing new ideas and innovation to the buyer first)

Part 3: set objectives based on achieving the mission. Three objectives were agreed that supported their mission (to identify gaps in the supplier’s service offering that the buyer wasn’t commissioning; to reduce the cost for the supplier from the supplier; and to start open book costing and activity based costing so that the true cost of providing the service could be identified and waste eliminated).

Part 4: develop a strategy for achieving each objective. In my example, one strategy was to extend the range of services it offered my client and start a process of early supplier involvement in setting project briefs that they bid for.

Part 5: decide how you will measure the progress of these strategies. One measure my client and their supplier agreed was the percentage of the supplier’s range of process that my client used in the course of a year.

Part 6: set targets for the measures just agreed. For the measures just described, the target for the first measure was 60% of the supplier’s services used in the following year and for the second measure that bid costs should be less than 10% of the value of the contracts for which they bid

Part 7: develop improvement initiatives that will deliver the targets. Initiatives are delivered by cross-functional teams from both sides assembled for that specific project and then disbanded when the project is completed. The projects are the glue that holds the whole process together and are the means of achieving value for both sides (because they are linked to the objectives, mission and purpose of the relationship).

Step #4: Scorecards. Make Sure We Can Measure Vendor performance and Show Improvement

Implementing the ideas and the core Clients VRNM framework will go a long way to laying the foundations for good performance. However, good performance does not always happen automatically from those good foundations. It has to be managed and the first step in vendor performance management is to measure that performance. If you don’t measure it, it doesn’t happen.

Measurement of performance should be on-going using performance criteria that are specified in your contract and based on your business requirements definition.

Typical factors that are measured include the following. Price - are we getting the best price? – and… what are the benchmarks? Quality - are we satisfied with the quality of vendor services? Innovation - do our vendors regularly inform us of new products and services that might

help competitively differentiate Clients? Delivery - are our vendors punctual? Do the supplies arrive in good condition and are

services delivered in the expected manner? Account management - do our vendors respond quickly to any issues, orders or queries

that we place with them? SLAs - are our vendors living up to their end of the agreement? KPI – if we can’t measure it, it doesn’t exist – KPI’s are established during the

onboarding process

We need to quantify each of these. For this purpose we have established a scorecard framework, modeled after the Vendor Relationship Management Governance framework. The scorecard relates a vendor’s performance on each factor on a scale (poor performance) through (excellent performance). We then put a weight on each factor to take into account their relative importance to Clients.

The sum total of the each weighted score determines an overall performance score for the vendor.

By measuring strategic vendors regularly in this way we can track performance and spot adverse trends early enough to do something about it before it becomes a problem. The way to do it is to plot successive total performance scores over time (weekly or monthly) on a graph using the horizontal axis for time and the vertical axis for the performance score. Our scorecard includes dashboards, showing exactly this level of detail.

If one draws a horizontal line across the graph at the performance level that signifies unacceptable performance. If successive scores show a downward trend, we can extrapolate that trend to forecast when the actual score will hit the unacceptable performance level. This gives us time to discuss with the vendor the underlying causes of the trend and correct them before they become a real problem. This creates a “win-win” for us and our vendor – Clients gets the performance we need and the vendor doesn’t incur any costs or penalties for poor performance. Performance measures aid the delivery of value from our vendors. After all, what gets measured gets done! So, what should we measure?

A common set of performance measures commonly used, is the one we used in the last section - this involves measuring the price we pay for a product or service, the quality of that item and whether or not it was delivered to satisfaction.

The problem with measuring price, quality and delivery is that it is reactive. There is a time lag between receiving the product or service and getting the results of these performance measures. It is too late then to do anything about poor performance. What we really need is a proactive set of measures that look forwards.

If the product or service is mission critical in that poor performance by our vendor will cause a major disruption to Clients’s business then we cannot afford for anything to go wrong. That is why we designed performance measures that allow us to take action before poor performance is received. So here are three suggestions for turning reactive performance measures into proactive ones.

Suggestion #1. The first suggestion concerns price. Although we should never ignore the unit purchase price of the thing we are buying, just focusing on this aspect can lead to the wrong decision. For example, if we are buying batteries then there are other costs for us over and above the purchase price. The lifespan of the battery is important. A battery may be 10% cheaper than the alternative but if it only lasts half as long, and we would finish up buying more of the cheaper battery for a given usage than the more expensive alternative.

Other costs that need to be considered when making purchases are the costs of using the item, any costs of maintaining it and the cost of disposing of the item at the end of its useful life. For these items, the total cost of ownership (in other words the sum of the purchase cost, running costs, maintenance costs and disposal costs) is a more sensible performance measure than unit price.

Suggestion #2. The second is about quality. The problem with most performance measures involving quality is that they measure the quality of what you receive, typically in terms of number of calls for a given number of received items. For Clients, this means involving the LOB to establish a perspective of their impression of performance over time. The Clients scorecard established a quality assurance measure. In other words, identify with the vendor the key processes and inputs that are responsible for the ultimate quality of what Clients are buying and measure these. That way, we align the vendor’s processes, ensuring they are capable of delivering quality and are working well, and hence the probability of receiving defective services is greatly reduced.

Suggestion #3. The third suggestion relates to delivery. Measuring delivery leadtime doesn’t help to reduce costs. All it can do is aid planning and the longer the leadtime, the greater the uncertainty and so the higher the cost. However, taking a similar view to the quality measure, what you need to do is measure our vendor’s operation cycle time. If you know what this is, we can work with our vendor on initiatives for reducing it.

By moving from price, quality and delivery measures to measures of total cost of ownership, quality assurance and cycle times we put ourselves in the position of being able to assure vendor performance instead of having to react to it.

Step #5: Find Out What Isn’t Working and Fix It

Once the contract has been signed and the vendor goes to work, the service we receive doesn’t always match expectations. The question that a vendor management program addresses is “why does this happen and what can I do about it?”

The reason that vendor performance does not always match expectations is this.Whatever the product or service that your vendor delivers, it will involve inputs (such as capability, experience, materials, people) to which the vendor applies a process. This produces an output which delivers outcomes and value for us, Clients the buyer. The failure to turn inputs into the right outputs that deliver the right outcomes is the principal reason vendors fail to perform. An example is that of a consultancy project aimed at producing a new organizational design.

The inputs to this are typically number of consultants, their daily fee rate and their expertise and experience. The process is the methodology that the consultants apply to deliver the project. The output will typically be an organization structure, roles and responsibilities and job descriptions.

One outcome from the assignment should be higher retention rates because there will be a better match between applicants for jobs and the requirements of those jobs and because there will be a more clearly defined career path. Other typical inputs from vendors include their capability, knowledge and experience as well as their dependability, reliability and responsiveness.

The process element of a vendor’s offering includes an approach to identifying and understanding Clients needs as well as project management skills. Elements will vary depending on what we are buying so we should give careful consideration to identifying the attributes a vendor needs during the vendor selection process.

The outputs from the vendor’s process vary from the quality of the work done to the timeliness of delivery. As with the process element, we will need to specificcarefully when contracting.

Finally, the outcome element should deliver what Clients needs. Value for money is one obvious outcome but we should also identify the outcomes that LOB users of the product or service require.

Step #6: Accelerate the ProgramThe anticipated outcome of the Clients VRM program is a good strategic vendor stream of improvement projects that result in increased value for Clients. But this does not just happen. The VRM process is a process designed to deliver it effectively and efficiently.

As with any improvement project, we need to have a baseline as a starting point so we can measure improvements against baseline.

The initial baseline for the relationship is based on a thin slice of the scorecard model. A representative cross section of those involved in some way with the vendor and the delivery of the product or service are sent a one page questionnaire to fill out. They do this twice; once from their own LOB perspective and once from the point of view of how they see the vendor. Putting this together gives a simple measure of where the relationship is in terms of the enablers of good performance as well as the performance itself.

At regular intervals (typically twice a year) the exercise is revisited to measure the progress that has been made. Having baselined the relationship, identified the areas that need to be addressed

and having dug into some of the root causes, the VMO will be in a position to identify at what level the relationship is and how it can move forward.

There are three levels of improvement that should be your aim. The most basic level is called “stabilize”. This is where the analysis of performance shows inconsistencies in delivering the product or service, either from a quality, timeor cost point of view. Early improvement projects are aimed at attacking the causes of variability so that a consistent and reliable service is achieved. The next level up, once a stable performance has been achieved, is to improve onthat level of performance. This involves approaches such as Lean Design or Six Sigma.

The level after this is called the “innovate” phase. This is where we look at transforming the way the service or product is delivered to achieve a step change improvement in service quality, coast and delivery excellence.

The spirit of the VRM program is that it drives and manages continued improvement As a result, the main components of the VRM process need to be evaluated Annually, to should check that our vendor partners are still the right ones and that our joint goals are still the same. More frequently, we should check that the pipeline is still filling with potential ideas and that we still have access to the resources you need to make it all happen.

Step # 7: Use your supplier innovation efforts to your advantageStrategic Innovation is a process – not an event

HCMWorks recommends that organizations, wishing to leverage supplier-initiated innovation as part of their VRM program, appoint a Leader Panel - the focal point of an iterative innovation process that includes several steps: scoping (defining the focus and desired outcomes), planning, panel definition (identifying a provocative set of “focal areas” that address the business issue or opportunity), Thought Leader recruiting and coaching, the panel itself, synthesis, opportunity prioritization and development, and implementation planning. Conducted in parallel with these steps is a series of consumer/customer insight, strategic thinking and market immersion activities that enable the innovation team members (and other stakeholders) to fully participate in the panel.

The focal point of an iterative innovation process is the “Thought Leader Panel” – a custom-designed, unconventional one-day innovation session with Thought Leaders, followed by a two-day synthesis and action planning session. Thought Leaders are forward-looking provocateurs – experts in their respective fields: practitioners, executives, potential partners, industry analysts/observers, academics, venture capitalists, entrepreneurs, consultants and “cultural creatives”. The goals of Supplier-driven innovation is to leverage innovation developed (or under development) from suppliers, allowing you to minimize cost, and optimize shortened cycle times.

An effective VRM program will allow you to identify strategic opportunities, growth platforms and product/service concepts – by understanding emerging trends; consumer insights; best practices; convergence of technologies and markets; blurring business boundaries; and seeking “white spaces”; stimulate “stretch” thinking – and to envision entirely new possibilities; ensure that short-term actions are anchored to long-term vision; create shared understanding and alignment among key stakeholders – to accelerate prioritization/decision-making and facilitate cross-functional support for implementationCombining visionary thinking with pragmatism, the Thought Leader Panel itself is a one-day innovation session followed immediately by a two-day synthesis and action planning session.

The one-day panel approach is significantly more effective than sequential, individual interactions with Thought Leaders because it exploits the interactions between them. Inspiration comes when the Thought Leaders vociferously debate different perspectives on the future, and when they identify connections and opportunities at the intersections of their respective worlds. Secondly, a variety of non-traditional in-session techniques enable Thought Leaders and the innovation team to move beyond static thinking and to take a future-oriented perspective that visualizes breakthrough possibilities.

Thought Panels plus Industry Foresight is a really winning combination – it allows you to understand emerging trends. While most companies use trends as part of their planning process the focus is often on the statistical analysis of historical, established trends. But hindsight is inadequate for future planning in an increasingly volatile and unpredictable world. It is essential to identify emerging trends – and to capitalize on them ahead of the competition.By combining facts, intuition, speculation and “possibility thinking” an organization can develop “Industry Foresight” – an understanding of emerging marketplace drivers, nonobvious trends and possible dislocations. Through Industry Foresight an organization puts itself in a position to create a visionary and proprietary view of the future. This is the foundation for the development of pragmatic growth strategies to pursue potential “white spaces” and other untapped opportunities. Organizations typically keep a relatively narrow set of trends on their radar screen – those directly and obviously related to their industry. But to innovate at a more strategic level an expansive view is required – one that looks at trends both inside and outside an organization’s normal field of view. Supplier-driven strategic innovation requires an organization to look at the intersections of emerging trends in many areas (social, demographic, technological, geographical, environmental, political, regulatory and competitive) – as well as others that may seem extraneous at first sight.

A visionary food and beverage company, for example, would look well beyond historical consumption data, gaps in its product lineup, or a snapshot of today’s competitive product landscape, and would also monitor the early growth stages of alternative distribution channels, emerging technologies that originate outside (but could impact) their world, or try to imagine the marketing communications possibilities driven by the proliferation of consumer electronics devices and the emergence of “social networks”.

Step #8: VRM Governance Framework

Typically, the procurement/supply chain function owns the VRM governance model and processes and facilitates the development of a cross-functional VRM capability.

The VRM office and supply chain function are usually responsible for defining the SRM governance model, which includes a clear and jointly agreed governance framework in place for some top-tier strategic suppliers. Effective governance should comprise not only designation of senior executive sponsors at both customer and supplier and dedicated relationship managers, but also a face-off model connecting personnel in engineering, procurement, operations, quality and logistics with their supplier counterparts; a regular cadence of operational and strategic planning and review meetings; and well-defined escalation procedures to ensure speedy resolution of problems or conflicts at the appropriate organizational levelSupply base segmentation has been conducted using multiple, weighted criteria and reviewed at least annually.

Project governance is the management framework within which project decisions are made. Project governance is a critical element of any project since while the accountabilities and responsibilities associated with an organization’s business as usual activities are laid down in their organizational governance arrangements, seldom does an equivalent framework exist to govern the development of its capital investments (projects). For instance, the organization chart provides a good indication of who in the organization is responsible for any particular operational activity the organization conducts. But unless an organization has specifically developed a project governance policy, no such chart is likely to exist for project development activity.

Therefore, the role of project governance is to provide a decision making framework that is logical, robust and repeatable to govern an organization’s capital investments. In this way, an organization will have a structured approach to conducting both its business as usual activities and its business change, or project, activities.

Three pillars of VRM governance

The decision making framework is supported by three pillars:

Structure

This refers to the governance committee structure. As well as there being a Procurement / VMO Board or Steering Committee, the broader governance environment may include various stakeholder groups and perhaps user groups. Additionally, there may be a Program Board, governing a group of related projects of which this is one, and possibly some form of portfolio decision making group. The decision rights of all these committees and how they relate must be laid down in policy and procedural documentation. In this way, the project’s governance can be integrated within the wider governance arena.

People

The effectiveness of the committee structure is dependent upon the people that populate the various governance committees. Committee membership is determined by the nature of the vendor and the vendor relationship - other factors come into play when determining membership of program and portfolio boards - which in turn determines which organizational roles should be represented on the committee.

Information

This concerns the information that informs decision makers and consists of regular reports on supplier projects, issues and risks that have been escalated by the Project Manager and certain key documents that describe the project, foremost of which is the business case

Core project governance principles

Project governance frameworks should be based around a number of core principles in order to ensure their effectiveness.

Principle 1: Ensure a single point of accountability for the success of the vendor relationship

The most fundamental project accountability is accountability for the success of the vendor relationship. Assigning a vendor “strategic” status without a clear understanding of who assumes accountability for its success has no clear leadership. With no clear accountability for VRM success, there is no one person driving the solution of the difficult issues that beset all vendors at some point in their life. It also slows the project during the crucial project initiation phase since there is no one person to take the important decisions necessary to place the project on a firm footing. The concept of a single point of accountability is the first principle of effective project governance.

However, it is not enough to nominate someone to be accountable – the right person must be made accountable. There are two aspects to this. The accountable person must hold sufficient authority within the organization to ensure they are empowered to make the decisions necessary for VRM success. Beyond this however is the fact that the right person from the correct area within the organization be held accountable. If the wrong person is selected, the project is no better placed than if no one was accountable for its success. The single person who will assume accountability for the success of the project is the subject of Principle 2.

Principle 2: Project ownership independent of Asset ownership, Service ownership or other stakeholder group

Often organizations promote the allocation of the Vendor relationship owner role to the service owner or asset owner with the goal of providing more certainty that the project will meet these owner's fundamental needs, which is also a critical VRM success measure. However, the result of this approach can involve wasteful scope inclusions and

failure to achieve alternative stakeholder and customer requirements: 1. The benefit of the doubt goes to the stakeholder allocated with the Relationship Owner responsibility, skewing the project outcome; 2. Relationship Owner requirements receive less scrutiny, reducing innovation and reducing outcome efficiency; 3. Different skill sets surround VRM ownership, Asset ownership and Service ownership placing sound project decision making and procedure at risk; 4. Operational needs always prevail, placing the commercial relationship at risk of being neglected during such times; 5. VRM contingencies are at risk of being allocated to additional scope for the stakeholder allocated project ownership.

The only proven mechanism for ensuring VRM meet stakeholder needs, while optimizing value for money, is to allocate VRM ownership to specialist party, that otherwise would not be a stakeholder to the relationship. This is principle No. 2 of VRM governance.

The relationship owner is engaged under clear terms which outline the organizations key result areas and the organization’s view of the key vendor relationship stakeholders. Often, organizations establish a VMO (Vendor Management Office), which identifies the existence of strategic vendors and appoints relationship owners as early as possible in a commercial cycle, establishes Supplier Councils which form the basis of stakeholder engagement, establishes the key result areas for a strategic vendor consistent with the organizations values, and, oversees the performance of vendors. These parameters are commonly detailed in a Vendor Governance Plan which remains in place for the life of the relationship. Sometimes vendors have many stakeholders and an effective vendor governance framework must address their needs. The next principle deals with the manner in which this should occur.

Principle 3: Ensure separation of stakeholder management and project decision making activities

The decision making effectiveness of a committee can be thought of as being inversely proportional to its size. Not only can large committees fail to make timely decisions, those it does make are often ill considered because of the particular group dynamics at play.

As vendor relationship decision making forums grow in size, they tend to morph into stakeholder management groups. When numbers increase, the detailed understanding of each attendee of the critical project issues reduces. Many of those present attend not to make decisions but as a way of finding out what is happening on the project. Not only is there insufficient time for each person to make their point, but those with the most valid input must compete for time and influence with those with only a peripheral involvement in the vendor. Further not all present will have the same level of understanding of the issues and so time is wasted bringing everyone up to speed on the particular issues being discussed. Hence, to all intents and purposes, large vendor management committees are constituted more as a stakeholder management forum than a decision making forum. This is a major issue when the commercial relationship is depending upon the committee to make timely decisions.

There is no question that both activities, vendor activity decision making and stakeholder management, are essential to the success of the VMO. The issue is that they are two separate activities and need to be treated as such. This is the third principle of effective project governance. If this separation can be achieved, it will avoid clogging the decision making forum with numerous stakeholders by constraining its membership to only those select stakeholders absolutely central to its success.

Principle 4: Ensure separation of vendor governance and organizational governance structures

VMO governance structures are established precisely because it is recognized that organization structures do not provide the necessary framework to manage a strategic vendor relationship. Managing vendors requires flexibility and speed of decision making and the hierarchical mechanisms associated with organization charts do not enable this. Vendor management governance structures overcome this by drawing the key decision makers out of the organization structure and placing them in a forum thereby avoiding the serial decision making process associated with hierarchies.

Consequently, the VMO framework established for Managing and governing strategic commercial relationships should remain separate from the organization structure. It is recognized that the organization has valid requirements in terms of reporting and stakeholder involvement. However dedicated reporting mechanisms established by the VMO can address the former and the strategic vendor governance framework must itself address the latter. What should be avoided is the situation where the decisions of the steering committee or VMO are required to be ratified by one or more persons in the organization outside of that vendor decision making forum. This is the final principle of effective project governance.

Additional and complementary principles of governance also exist.

The VMO Governance Board has overall responsibility for governance of vendor management

The roles, responsibilities and performance criteria for the governance of VMO management are clearly defined

Disciplined governance arrangements, supported by appropriate methods and controls are applied throughout the commercial relationship life cycle

A coherent and supportive relationship is demonstrated between the overall business strategy and the strategic vendor portfolio

All strategic vendor relationships have an approved plan containing authorization points, at which the business case is reviewed and approved. Decisions made at authorization points are recorded and communicated.

Members of delegated authorization bodies have sufficient representation, competence, authority and resources to enable them to make appropriate decisions.

The project business case is supported by relevant and realistic information that provides a reliable basis for making authorization decisions.

Project stakeholders are engaged at a level that is commensurate with their importance to the organization and in a manner that fosters trust

Additional principles exist where projects are multi-owned

Multi-owned is defined as being a strategic vendor relationship where the board shares ultimate control with other parties. The principles are;

There should be formally agreed governance arrangements; There should be a single point of decision making for the project - refer to

Principle 2; There should be a clear and unambiguous allocation of authority for representing

the strategic vendor(s) in contacts with owners, stakeholders and third parties; The strategic vendor relationship business case should include agreed, and

current, definitions of relationship objectives, the role of each owner, their incentives, inputs, authority and responsibility;

Each owner should assure itself that the legal competence and obligations and internal governance arrangements of co-owners, are compatible with its acceptable standards of governance for the commercial relationship;

There should be strategic vendor activity authorization points and limiting constraints to give owners the necessary degree of control over the relationship;

There should be agreed recognition and allocation or sharing of rewards and risks taking into account ability to influence the outcome and creating incentives to foster co-operative behavior;

VMO leadership should exploit synergies arising from multi-ownership and should actively manage potential sources of conflict or inefficiency;

There should be a formal agreement that defines the process to be invoked and the consequences for assets and relationship owners when a material change of ownership is considered;

Reporting during both the strategic vendor lifecycle and the realization of benefits should provide honest, timely, realistic and relevant data on progress, achievements, forecasts and risks to the extent required for good governance by relationship owners;

There should be a mechanism in place to invoke independent review or scrutiny when it is in the legitimate interests of one or more of the relationship owners

There should be a dispute resolution process agreed between owners that does not endanger the achievement of strategic relationship objectives.