Taking Care of Business

S. James Mazarakis, EVP & CTO, WSFS Bank

S. James Mazarakis, EVP & CTO, WSFS Bank

In the past, managing your technology shop was an “inside job” which consisted of well-structured procedures, strong processes and hiring the right people. All of that is still true today, however another key component has emerged: contracting with the right vendors. It is very rare today to find an organization which does not have a major dependency on outside service providers for significant internal processes and many customer facing services. Some of these vendor services are so critical that if not well executed, can put a company in jeopardy or cause it to go entirely out of business.

"Getting a good deal requires that you have covered all the areas of the contract and are not missing major components just to get a good price"

Since this issue can be so important to a company’s survival you would surmise that the Vendor Management Offices (VMO) are well established and running strong in most companies. Unfortunately, as I talk to peers and other practitioners it is easy to see that many companies, of all sizes, have not paid enough attention to this very critical function. It isn’t that vendor management is not viewed as important, but it is more that many pre-existing practices, within a company, have long been in place creating some bad habits. Unfortunately, some of these bad habits seem to still persist even today.

What are some of these long-established, not-so-good vendor management habits?

Falling In Love:

What happens when you fall in love with a vendor or a product they’re selling? Your eyes tear with joy, you see everything in front of you that will make your life better, you’re ready to agree to whatever is necessary to make this dream a reality, and you let everyone know that this is the real thing. And because it is the real thing, you haveto have it.

Letting your feelings show when you fall in love with another is great, but not so good when you’re buying a product and signing a contract. When you’re in love with a product, your Vendor Management team will have a hard time making contractual service level (SLA) changes, your Legal department will find it impossible to change terms and conditions and you will have great difficulty getting any pricing concessions.

“We’re running out of time”:

Contracting for a new product or even product renewal requires enough lead-time to assess the competition, establish who are the best service providers and determine what the range of expected costs should be. Getting full requirements for the product, making appointments with multiple service providers, setting up demos, scheduling reference calls or reference visits and negotiating contracts are activities that require a significant amount of time to accomplish. Allowing 3-9 months for these activities is not unusual, depending on the complexity and cost of the product. If the appropriate amount of time is not allotted, something will inevitably need to be cut short. When you take a short cut, problems, which can cost you dearly, are likely to occur at a later date. Knowing how long it takes to negotiate a contract and allowing that time up front, will lessen the chances that you will run out of time and ultimately feel pressured to complete a negotiation before you have properly vetted the product.

“But I never had to do this before”:

In the not too distant past, each business unit executive could structure their own deals for software products and services. They could then speedily finalize a contract and sign up for the service. Those were the days before we had a serious need for indemnification, significant concern for lax cyber security protections and huge liability for any potential exposure of customer confidential information. Unfortunately, some senior managers still forget that there are now new processes to follow when considering the acquisition of new products or services. The occasional lapse occurs when someone signs a contract, which they considered to be low risk, or alternatively did not appropriately remember who to call prior to finalizing a contractual agreement. In these cases, constant education and review of the benefits of a strong vendor management practice need to be highlighted across your entire organization.

“You need to act before the end of the month”:

This happens so frequently that it almost becomes something we forget to pay any attention to. I agree that there are times when there is a year-end or quarter-end when the vendor is willing to provide significant price concessions to achieve their sales goals. However, more frequently than not, there are occasions where the offer will be just as good the following month or the month after that. Getting a good deal requires that you have covered all the areas of the contract and are not missing major components just to get a good price.

“We got the best deal possible!”:

Who can argue with that logic? If the deal is so good why would the VMO ever think we can do any better? Let’s not forget that a deal is good if it contains all the major elements we need for success. A good deal is more than just a good price. A good deal requires several other components to be properly negotiated. A good deal:

• Contains a well-structured contract

• Provides the correct Service Level Agreements

• Includes appropriate penalties when SLAs are missed

• Maintains strong data security protections

• Contains the required indemnification language

• Appropriately covers service renewals

• Provides for contract termination options

• Maintains the right to examine any third party vendors that our service provider uses to provide their services

If one feels secure about all these contractual points then we can be confident that the best possible deal was negotiated. When some of these elements are missing, then a gap exists that might prove to be very costly to remedy at a later time.

The Final Chapter:

As you can see from the issues discussed, Vendor Management is an area that continues to evolve. It is also a function that has become essential for our companies as our service interdependencies continue to grow and become more complex. Overcoming the issues mentioned here will certainly help your company be more successful in procuring products and ensuring that the risks for using service providers are understood up front. Because vendor management practices are now more complex, the staff hired for your Vendor Management Office needs to have the appropriate skill set to perform negotiations and continuous service monitoring after the initial agreements are signed. Simply having all the right contracts will not be enough unless appropriate ownership is assigned to a senior executive, for each contracted service. Additionally, responsibility needs to be assigned within your organization to a person who will be accountable for monitoring SLA performance for these services. Accountability and monitoring are a virtuous cycle that will help your company structure better contracts as your vendor management practices continue to mature.

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