Vendor Management Best Practices for Successful Outsourcing


Please note that this paper presents professional opinions intended to apply generally
and that clients must take appropriate care to evaluate them in light of their specific

It has been our experience that these practices lead to improved vendor relations,
enhance negotiating positions and a lower cost of doing business. Building a proper
set of vendor practices for your external providers can and should save you and
additional 5-15% of your total outsourcing spend.

Once the contract is signed and the chosen vendor comes in the door to begin the
transition, the honeymoon is over and the challenging work begins. The selected
vendor always looks good on the sales call, but seldom lives up to expectations
during the transition. This happens partly because there are inevitable cultural
differences, process differences, and language” differences. More importantly, no
matter how rigorous the due diligence and negotiation process, each side will probably
have a different concept of what they signed up for.

If both company and vendor are vigilant, they can work together to minimize the
impact of their differences. This paper presents a framework that companies can
use to effectively establish and manage vendor relationships from the start. It
includes some examples of TBI’s experience in transitioning sourcing relationships
and in establishing vendor management organizations. The following subject areas
are key considerations for establishing a successful Vendor Management program:

  • Critical Success Factors
  • Key Inhibiting Factors
  • The Vendor Management Organization
  • Vendor Management Calendar
  • Communication and Relationship Management
  • Billing Analysis and Review
  • Service Levels, Performance Analysis and Improvement
  • Customer Satisfaction Performance Metrics and Reporting
  • Issue and Dispute Resolution
  • Change Management
  • Transition Monitoring
  • Conclusion

Critical Success Factors

  • Communication — In recent TBI research, end users who expressed satisfaction
    with their contracts indicated they had excellent communications with their vendors.
    One of the communication tools that companies use successfully with their vendors
    are regular meetings where end users can provide input to their vendors on the services
    provided. These allow the vendors as well as the company to share information and
    be on the same “page in terms of service expectations.
  • Performance Measurement — Clearly establishing the expected level of service
    has also been found to be critical to successful sourcing contracts. Regular vendor
    reporting on service levels, employee turnover, staffing levels, disaster recovery,
    security, customer satisfaction, etc. is important to effective service management.
    Performance results and issues should be discussed with users regularly.
  • Roles and Responsibilities Definition— Effective vendor management requires
    that the Vendor Management program clearly defines what the roles are between the
    company and the vendors. This is most effectively stated as a part of the Statement
    of Work, prior to contract award. Defining roles and responsibilities beforehand
    helps to avoid potential disputes down the line.

Key Inhibiting Factors of Vendor Management

  • Reliance on a handshake or, conversely, the lack of due diligence.
  • Lack of trust in original decisions to source will undermine working relationships.
  • Relying on a vendor as a business advisor, strategic advisor, thought leader in
    new or emerging technologies, unless this is specifically the service they are contracted
    to provide.
  • Assuming that cost saving will be the overriding benefit.
  • Significant personnel change at the vendor.
  • Sourcing a problem to an outside vendor will simply yield an externally sourced

The Vendor Management Organization

In TBI’s experience, many groups find it beneficial to centralize vendor management
either as a function within the Program Office or as a separate entity, depending
on the company’s specific organization. If the Program Office is managed by or heavily
dependent on an outside vendor, a separate Vendor Management Organization would
probably be appropriate. Whatever the specific circumstances, the centralized Vendor
Management model allows for more effective contract control, cost tracking, and
resource/asset management and performance measurement across all vendor-related
projects/programs. This is particularly true if the vendor environment is complex
(many vendors, vendors crossing functional areas, few vendors with many contracts,

Contract Executive

The Contract Executive is a member of Senior Management who would be responsible
for the executive oversight of the vendor contract and would be ultimately responsible
for the program’s success. The Contract Executive would interact with the Vendor
Manager and the vendor’s Account Executive periodically to review contract status
and issues. Depending on the complexity of the business group, the Contract Executive
would be responsible for all contracts within his/her functional area or for a group
of contracts.

Vendor Manager

A full-time Vendor Manager, under the direction of the Contract Executive, works
closely with the vendor, having day-to-day responsibility for the quality and cost
effectiveness of the vendor’s services. Depending on the complexity of the particular
program or contract, there would be one Vendor Manager assigned to a single contract
or to a group of contracts. This is generally a full time responsibility with the
following roles reporting to it:

Financial Analyst

Provides financial analysis and audit work in support of one or more service contract.
The Financial Analyst would identify, catalogue and monitor a contract’s financial
requirements and commitments.

Performance Analyst

Monitors and analyzes vendor performance in order to assure compliance with service
level agreements and continuous improvement of the service. The Performance Analyst
would identify, catalogue and monitor an agreement’s performance standards, reporting
requirements and any financial “penalties” for poor performance on the part of one
or more vendors.

Administrative Support

Performs Contract Administration procedures to ensure that all changes to the contract
are made in accordance with the base agreement and the interests of the company,
and that an audit trail is maintained. The Administrative Support person would be
responsible for identifying, cataloging and monitoring requirements for reports,
meetings, decisions, analyses, etc. throughout the year; and maintaining a calendar
of contract activities (schedule of dates for milestones, key deliverables, meetings,
reports, invoice delivery, etc.).

Communication and Relationship Management

The Communications and Relationship Management Process ensures that issues of mutual
interest and importance are communicated to the appropriate persons on a regular
basis. This is true for internal communication as well as communication between
the company and the vendor.

Key players in the communication process would be:

  • Business Clients
  • Contract Executive
  • Vendor Manager (Contract Manager)
  • Business Leaders
  • Program Management Office (PMO)
  • Change Management Committees (if they exist)
  • Other technology groups that may have a key role in the implementation of the contract
    (for example, a core infrastructure services group).
  • Key vendor personnel

Internal Communications

The Vendor Management office should establish communications with internal groups
to communicate contract activities and to gather information about ongoing contract
requirements and issues. There should be frequent written communication, in the
form of email and reports, as well as verbal communications, in the form of scheduled
meetings and conference calls.

Company/Vendor Communications

Communication with the vendor will be both written and verbal (meetings). Formal
meetings should be scheduled in advance for the Transition activities as well as
for the ongoing arrangement. In addition, the vendor will be required to submit
formal, written reports on key dates throughout the contract term.


Meetings should be structured and lead to make the most constructive use of time.
The following is a suggested guideline for meetings:

  • Meeting Chair
  • Agendas
  • Meeting Output
  • Voting Attendees
  • Non-Voting Attendees

At a minimum, the following administrative meetings should be scheduled into the
services contract:

  • Weekly Contract Operational Review
  • Monthly Management Meeting and Invoice Review
  • Quarterly Steering Committee Meeting
  • Semi-Annual Contract Meeting. Reports

At a minimum, the following reports should be scheduled into the services contract:

  • Weekly Internal Status Report
  • Monthly Management Report
  • Customer Satisfaction Report.

Billing Analysis and Review

Good billing analysis and review procedures ensure that billing is reasonable and
accurate. In addition, they provide vital information about deployment of resources
and costs for types of services.

Depending on the contract arrangements, the vendor would submit invoices that reflect
base line contract charges and charges for changes to the contract scope. Wherever
possible, rates for additional and reduced work (by staff position or a predetermined
unit of work) should be negotiated into the contract.

Invoices should be submitted with a summary page and with backup detail sheets that
reflect the program components and the units of work.

Periodic billing should be analyzed for cumulative contract baseline costs and change
request costs. The Vendor Manager should review these analyses with the Contract
Executive at least monthly.

Service Levels, Performance Analysis and Improvement

Performance analysis and improvement procedures ensure that performance standards
are being met through effective performance measurement and reporting. In addition,
Business Clients should expect continuously improving services.

Key reasons for tracking performance are to identify:

  • Problem areas that need improvement and improvement tracking
  • Program risks and risk mitigation strategies
  • Hidden program costs
  • Vendor strengths and weaknesses that may indicate their appropriateness for other
    projects or programs being planned
  • General improvement or deterioration trends
  • Fulfillment of Service Level Agreements.

A key component of the service contract should be a Service Level Agreement, which
clearly outlines the levels of service that the vendor is expected to maintain throughout
the contract term. Service Levels should be measurable, attainable and reasonable
for both parties. A small subset of the Service Levels may be critical to the business
and should have service level credits (penalties) associated with them.

Customer Satisfaction Performance Metrics and Reporting

Customer Satisfaction data can be gathered on an event basis, a periodic basis,
or both. Event basis data would be gathered after a specific event such as a call
to the help desk. An end user would be surveyed to gather information on his/her
specific experience during the help desk call. Periodic data would be gathered over
a period of time, capturing trend information over that period. The timing content,
scope and method of surveys should be predetermined and spelled out in the Service
Level Agreement. Email is the simplest and most direct method for deploying Customer
Satisfaction surveys, though some companies have had success with web page surveys
that are linked to an email message.

Issue and Dispute Resolution

Effective issue resolution and Dispute Resolution procedures ensure that problems
and disputes are handled as quickly as possible and are solved at the lowest possible
management levels.

Issue Resolution

Issues should be resolved using an Issue Resolution Process. An “issue” is a decision
that needs to be made regarding how a task is to be completed or is perceived as
a discrepancy in the deliverables completed or work performed by the vendor. Issues
do not include work to be performed as part of the contract.

The issue resolution process should consist of the following steps:

  • Each issue would be determined by the vendor staff and the company staff person
    responsible for delivery of the program component. Issues should be documented in
    an electronic Program Issues Log that is readily accessible to the Vendor Manager,
    vendor Program Manager, and IT/Business Process staff. The Program Issues Log includes
    a description of the problem, the person the issue is assigned to for resolution,
    the resolution description, the escalation and escalation date. For each issue,
    the IT/Business Process staff and the vendor staff should jointly determine the
    persons responsible for resolving the issue and the resolution date. Each party
    should be informed of their responsibilities and give confirmation of resolution
  • The most appropriate level of management should resolve issues depending on the
    nature of the issue. Unresolved or open issues that are past the due date should
    be escalated to the company’s Vendor Manager and the vendor’s Program Manager during
    regularly scheduled status meetings.

If the Vendor Manager and vendor’s Program Manager cannot agree, these issues should
be escalated to the Contract Executive and the vendor’s Account Executive.

Dispute Resolution

The purpose of a Dispute Resolution process is to define what should be done should
an issue or series of issues lead to a dispute. Provisions for dispute resolution
should be clearly identified in the contract. The parties should attempt to resolve
disputes informally before taking legal action, for many obvious reasons.

Change Management

Change Management defines how changes are defined, approved, implemented and controlled.
Effective Change Management procedures ensure that all levels of the vendor’s and
the company’s organization are updated on changes that could affect service delivery.

There are several types of “change” that should be taken into account in the management
of a contract. Each type of change would be dealt with differently.

All changes that affect company operating procedures/environments and/or services
requirements/ delivery should be carefully controlled and tracked through a joint
Change Control Team, co-chaired by the Vendor Manager and the vendor Program Manager.
The Team should meet on a regular basis as part of the change review, approval,
and scheduling and communication process. The vendor should submit proposed changes
for review in advance and provide a schedule of implementation dates to determine
conflicts with business events.

Changes to contract scope may arise from numerous sources, (requests for new projects,
need for additional resources, unanticipated project components, increases or decreases
of volume, etc.). The Vendor Manager would responsible for evaluating the need and
impact of these changes on the contract and whether they would require a new contract
or a contract change request.

Simple contract change requests that involve a scope change may be accomplished
within the existing terms and conditions of the contract (additional or reduced
resources and volumes for which there is unit pricing, etc.).

A Contract Addendum may be required if the terms and conditions of the contract
need to be altered or amended to accommodate an additional (or reduced) service
request; for example.

The vendor would be responsible for estimating the size, effort and cost of any
contract change. Since individual endorse have different methods for estimating,
the Vendor Manager should agree on the methods to be used to determine size, effort
and cost and document the agreed upon process in the Procedures Manual (see Transition
section below).

Transition Monitoring

The objective of the Transition period is to set up and implement the necessary
plans, communications, technical infrastructure, work processes, management procedures
and knowledge transfer that will be required for the vendor to perform the contract
services. Involved parties on each side are responsible for the success of the Transition.
It is recommended that the Vendor Manager generate a Contract Summary to be distributed
among all parties. This summary can be a basis for everyone to understand the scope
of the contract and the required deliverables/ deliverable dates.

The key document to track progress of the Transition would be a Transition Work
Plan. This may consist of a single work plan or a series of work plans for each
work sector, depending on the number and complexity of services required in the

The initial Work Plan should be an exhibit to the contract and should be finalized
as quickly as possible after the contract start date. Included in the Work Plan
would be key checkpoint dates and tasks to be performed during the Transition.

During contract negotiations, initial project risks should be identified and prioritized
and mitigation plans should be agreed to. Risks, plans and resolutions should be
tracked throughout the project.

Prior to beginning the transition, the vendor should submit information gathering
templates and forms and discuss these with the Vendor Manager in detail.

Another key deliverable for the Transition period is the Operational Procedures
Manual, which specifies, in detail, how the vendor will perform the contract services.
This would include all of the vendor’s operations plans; all standard and customized
processes and procedures related to the services; and touch points with company-internal
processes, procedures and service groups.


Managing vendors can be either a chaotic, ad hoc process or a well-defined, organized
process. Given the complexity of most sourcing arrangements, it is in the best interest
of both company and vendor to have clearly defined Vendor Management processes,
pre-defined agreements for managing and administering contract terms and quantifiable
measures for success. This white paper serves, as a framework from which a company
can begin to define their specific Vendor Management needs.

Companies often choose to capitalize on the expertise of strategic consulting firms
to partner with them in making critical organizational decisions. Technology & Business
Integrators, Inc. (TBI), a leading strategic consulting firm with over 48 years
of experience, has assisted many companies in identifying and implementing the appropriate
organizational structure, processes and procedures for successful Vendor Management.

Share Button