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The Outsourcing Vendor Management Program Office (VMPO): Art, science, and the power of perseverance Never say

never!

Contents

Foreword 1 Executive summary Research overview 2 3

Introduction 4 I. Evolution of VMPO requirements II. VMPO maturity III. VMPO operating models IV. Understanding and managing risk through the VMPO 7 10 19 24

Conclusion 30

2

Foreword

The outsourcing and offshoring market continues to not only grow, but also evolve with the addition of new technologies (cloud computing) and geographies (China and Brazil, among others), as well as an increasing focus from key stakeholders (regulators). Outsourcing continues to deliver financial benefits, although labor arbitrage appears to be diminishing in importance and is being replaced with a focus on innovation and continuous improvement. ”The Outsourcing Vendor Management Program Office (VMPO): Art, science, and the power of perseverance” is a 2011 Deloitte Consulting LLP report that focuses on the challenges clients face once they have executed their outsourcing transactions and embark on journeys with single or multiple providers. In most instances, this journey begins with transformational programs across multiple business units and/or multiple geographies, which need to be closely managed and monitored to realize cost savings and transformational benefits. This is an area rich with disappointment and unmet expectations and peppered with stories of disastrous, ill-conceived, and poorly managed initiatives that proved to be career-limiting for user and service provider executives alike. Our report aims to shed further light on a critical underlying cause of underperformance and offers practical, executable remedies that can make outsourcing more productive and successful for the enterprises that outsource, the providers that service them, and the executives involved. The following discussion draws on the results of a survey on vendor management practices that polled 27 business and information technology executives at global enterprises. We have also incorporated additional insights gained from a number of outsourcing and vendor management engagements that Deloitte has delivered across the world. In general, we found that a large number of companies are increasingly aware of and understand the importance of vendor management to realizing cost savings from outsourcing and mitigating the applicable risks. However, vendor management practices at the majority of clients remain relatively immature. There is considerable room for improvement, not only in terms of investment in tools and people, but also in service provider relationships. In addition to outlining clients’ vendor management experiences, this paper also offers our thoughts on leading practices, which we hope you may be able to leverage and implement. We welcome your feedback 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 of Deloitte LLP. Please see www.deloitte.com/us/about for a detailed description of the legal structure of Deloitte LLP and its subsidiaries. Certain services may not be available to attest clients under the rules and regulations of public accounting.

The Outsourcing Vendor Management Program Office (VMPO): Art, Science, and the Power of Perseverance

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These issues are the focus of the current paper. and implementation of flexible and scalable tools and processes within a VMPO can further improve a company’s ability to manage multiple service providers and deal with the changing nature of regulatory requirements. The question is: Why? Do their struggles reflect an issue of ineffective execution? In our view.” Deloitte Development LLC. This was evident from the fact that most of the responding companies have adopted practices that incorporate. large enterprises can take a major step forward in achieving the full benefits of outsourcing that they have long sought. but also realize value from the outsourcing transaction. nonfinancial benefits. The results of our survey. When it comes to reaping the benefits of outsourcing: ”Never say never!” By adopting the leading practices revealed in this report. many companies are showing an increased interest in adopting a broad approach to VM. 2 The Outsourcing Vendor Management Program Office (VMPO): Art. companies can no longer solely rely on stringent contractual provisions to manage service providers effectively. Instead. they need to adopt hybrid models in which contracts are managed by effectively operated VMPOs with the applicable investments in tools and people. indicate that companies still continue to struggle with operating effective VMPOs — even though they understand the need for VMPOs and invest in them. We believe that if companies invest in the areas identified in this report. Hence. service provider relationships have to be actively managed. 1 “Why Settle For Less? Deloitte Consulting 2008 Outsourcing Report. addressed a number of questions regarding the effectiveness of global corporations’ outsourcing initiatives. lack of transparency.  Despite adopting dedicated VMPOs that focus on broad VM functions. a Deloitte outsourcing survey report. it also found a surprisingly high number of instances of company-service provider conflict. build. Sixty-seven percent of respondents to the current survey reported that they had already established dedicated VMPOs. 2007. as well as our interactions with clients across industries. and poor communication. “Why Settle for Less?”.  There is a growing awareness among companies that in order to realize the benefits of outsourcing. including ineffective reporting. many companies continue to face challenges in managing outsourcing service providers. A number of issues raised in the 2008 survey. In addition.  Even though companies are focusing primarily on traditional VM functions (the majority of respondents 2 to this survey cited activities related to contract management and service performance management as most important). However. they stand a better chance of effectively managing their service providers and realizing the objectives of their outsourcing initiatives. 2. The 2008 report did find that a large number of outsourcing companies had realized their financial objectives. A major focus of the study was to determine what proportion of companies have established vendor management program offices (VMPOs) to manage their service providers: How likely are companies today to have effective and mature VMPOs in place to manage outsourcing transactions? Below are some specific findings from this survey: 1. continue to exist in the marketplace today. the design.1 This report sought to understand the extent to which companies were realizing the financial objectives of their outsourcing programs. The report noted the importance of an effective vendor management (VM) program that can provide the resources and information to clients to not only get what they pay for. the rate of effectiveness for VMPOs was significantly lower than our experience working with clients would suggest: Only 57 percent of the respondents rated their VMPOs as very effective to effective. as well as the extent to which companies were realizing additional. This paper reports the results of a survey of 27 senior executives whose companies were engaged in major outsourcing initiatives. Science.Executive summary In 2008. in some fashion. Many companies expressed disappointment with their service providers’ ability to provide continuous improvement and technology improvements. and the Power of Perseverance . We explored the extent to which companies have understood the lessons learned from the 2008 study. 3. Deloitte’s approach to 10 leading-practice VM functions.

and other countries (Exhibit 1).8 years. United Kingdom. the maturity of their VM capabilities remains low.Research overview Deloitte conducted a survey to test the hypothesis that while companies are increasingly aware of. The companies were primarily engaged in the outsourcing of information technology (IT) and/or telecom services. Company respondent profile: IT functions/services outsourced 3% 10% 6% 11% 11% 6% 10% 30% 13% 11% 11% 8% Infrastructure services Network architecture Data security services Telecom services Other 29% 4% 4% 7% 4% Canada Italy Japan Mexico Netherlands Switzerland 11% 11% United Kingdom United States Application maintenance Application development Data center management Help desk support Call center operations Desktop support The Outsourcing Vendor Management Program Office (VMPO): Art. insurance Life sciences or healthcare Consumer products Industrial products Manufacturing Government Exhibit 1c. Company respondent profile: Industry 11% 22% 11% 4% The survey research was supplemented by Deloitte’s recognized experience in providing services to organizations across various industries that are designing. financial services. building. They were asked a number of questions about how they managed their service providers across their largest outsourcing initiative. dedicated VMPOs to manage their strategic outsourcing. and understand the need for. Company respondent profile: Country 11% 4% 4% 33% Energy and utilities Telecommunications Banking. Exhibit 1b.S. $400 million. On average. the value of the outsourcing programs being managed was approximately U. offshoring. Survey participants had significant exposure to the way the service providers in their outsourcing programs were being managed. Survey respondents included 27 senior executives from various mid-size and large companies headquartered in the United States. and the Power of Perseverance 3 . Exhibit 1a. and implementing their VMPO initiatives. Canada. Science. and service delivery programs. with a total contract term of 6.

Science. frequency.Introduction The companies surveyed clearly recognized the need for dedicated VMPOs. 3 Additional resource contribution/reduced resource contribution 4 Management information systems 5 Service-level agreements 6 Key performance indicators 2 4 The Outsourcing Vendor Management Program Office (VMPO): Art. and methodology • Recommend specific risk indicators. and the Power of Perseverance 4 . Deloitte’s view of leading-practice VMPO functions placed within IT operating model IT function operating model Drive value delivery from service providers to IT customers with a focus on the following value objectives: Service quality. When asked how they approached VM within their organizations. At first glance. 67 percent of executives surveyed said they had implemented dedicated VMPOs that covered leadingpractice VM functions.2 Exhibit 2. and report •  Maintain repository of contractual artifacts •  Perform auditing. quality and cost of IT service delivery Service delivery oversight Vendor Management Program Office Maintain value focus through effective contract. and metrics to manage. and agility Strategy and control Align IT strategy and standards with business strategy and control IT value and risk Security management Strategy and program management Business continuity and disaster recovery planning Audit and compliance Operating model components Controls Skill and capabilities Tools and technology Communications Leading-practice VMPO functions Contract management and compliance •  Manage and track obligations. manage contract compliance •  Manage contract amendments Financial and commercial management •  Verify rate and volume invoice charges. cost efficiency. commercial. track. updating. negotiate. and relationship management Contract management and compliance Multi-service provider integration Financial and commercial Transition and transformation project management office management (PMO) and oversight Issue and dispute management Service performance management Governance Document management Service request management Service provider risk management S e r v i c e p r o v i d e r s Product lifecycle management Service catalog management Solution advisory Internal IT service delivery Multi-service provider integration •  Develop and maintain cross-supplier standards and procedures •  Develop. and execute operating-level agreements (OLAs) Transition and transformation PMO and oversight •  Provide transition and transformation planning •  Provide transition and transformation monitoring and reporting Document management Service provider risk management •  Determine risk analysis approach. ARC/ RRC3 commitments against baselines • Track service credits Issue and dispute management •  Track and report resolution of issue and archive issues •  Create and manage issue escalation/management process Service performance management •  Provide dashboard reporting and MIS4 •  Develop performance management framework for SLAs5 and KPIs6 •  Perform SLA monitoring. a review of the statistics suggests that companies were actively investing in establishing VMPOs in support of their outsourcing programs. reporting. draft. risk management. and archiving of contracts and VM process documents  eading-practice VMPO L functions referenced in the survey are defined by the Deloitte IT operating model set out in Exhibit 2. tools. focusing on what Deloitte views as the 10 core VM functional areas (as depicted in Exhibit 2). and trending Service request managements •  Manage end-to-end process for new service requests •  Analyze new services against the contract Governance •  Establish and manage governance process and forums •  Undertake assessment against outsource objectives Customer management Match IT services to customer needs and manage customer satisfaction Customer relationship management Demand management Product management Manage product innovation and economics and drive consistency in standards Architectural standards management C u s t o m e r s Service delivery management Control and improve timeliness.

67 percent of the respondents said that they had established a dedicated VMPO that performed many VM functions. as several different providers with multiple interdependencies are typically involved. flexible. that while organizations are addressing specific VM functional areas. Now.The executives surveyed also indicated that the resources performing VM functions were relatively highly skilled. 4. 2. changes in regulatory focus. They are now seeking to execute multisourcing transactions across a number of service providers. Section 1 discusses the evolution of VMPO requirements in light of the changing nature of the outsourcing market. the continuing demand for global outsourcing transactions across geographies. but also their service delivery performance. typically with minimal governance and penalty mechanisms. Section 2 covers our findings and views regarding the maturity of respondents’ VMPO functions. each provider bringing its own specific experience and knowledge to the table. In addition. changes in buyer behavior. and scalable VMPOs. and Deloitte’s view on leading VMPO practices. 5.  An increase in M&A activity. Previously.  Advances in technology have seen the introduction of new tools and platforms to manage not only service providers’ contractual and commercial performance. across multiple geographies — to keep service delivery intact from an end-to-end perspective. a review of the overall results fails to support the initial impression that respondents are running mature and effective VMPOs. as well as specific instances of captive centers being divested to third parties. Science. approaches to tools. Section 3 also explores some of the factors that have influenced the need for broad. Several contradictory results revealed a conflict between how executives view their VMPO capabilities and the reality of their capabilities in terms of leading-practice VM. companies could rely on internal service-level agreements (SLAs). current VMPO practices. they require more formal and commercially astute processes. the shifts in the economic climate over the past few years.  Companies have continued to adopt “best of breed” approaches to outsourcing transactions. The Outsourcing Vendor Management Program Office (VMPO): Art. in turn.  This means that companies need to pay greater attention to how they integrate services across multiple service providers — and. and the Power of Perseverance 5 . and the increasing need to invest in skills and training to staff VMPO functions. has led to a correspondingly greater need to build effective VMPOs to manage external third parties. such as supplier risk management and multi-service provider integration? The paper is divided into four sections. It is this contradiction that lends weight to the hypothesis explored by the survey. This. 3. recruiting. they in fact still lack the maturity required to run efficient and effective VMPOs that can help organizations to realize the objectives of their outsourcing programs. in some instances. yet the percentage of VMPOs that were taking a lead role for some traditional post-contract VM activities was low. governance and change management mechanisms in transition and transformation programs have also become more complex to manage. The results are supplemented with Deloitte’s experiences and insights regarding questions such as: • What does it take to build and implement an effective VMPO? • What types of resources are required to operate an effective VMPO? • What is an effective balance of cross-functional skills and experience needed to run an effective VMPO? • How can organizations build a flexible and scalable VMPO and create an effective VM operating model to address new and emerging VM practices. has led to an increased focus on relationship management. However. This section explores the extent to which the respondents had a clear understanding of leading-practice VM and of the requirements for establishing and successfully operating a VMPO. This report is Deloitte’s assessment of the survey results on how companies view their VM capabilities. which require companies and vendors to work across multiple cultures. Section 3 discusses the pros and cons of VMPO operating models — centralized or decentralized? Dedicated or nondedicated? — as well as VMPO maturity. has led to an increased focus on skill set development and talent retention. with 40 to 65 percent of respondents rating their VMPO resources at an advanced or master skill level for many VM functions.  In addition. For example. including: 1.

 Changes in the economic climate have driven regulators to increase their scrutiny of outsourcing and offshoring transactions. 6 . It also provides our views on the multi-service provider integration function. and. Section 4 discusses the topic of understanding and managing risk through a VMPO in light of changing regulatory conditions as well as changes in buyer behavior. information security assessments.6. most importantly. Regulators may focus on processes adopted by companies to define. roles and responsibilities related to governance frameworks. and evaluate critical suppliers. manage. contingency plans. which clients have historically struggled to successfully implement. business plan continuity. data privacy issues.

Among respondents that did not have a VMPO. Sixty-seven percent of the respondents to the current survey reported that they had already established dedicated VMPOs. processes. Exhibit 4. In addition.7 7 “Why Settle for Less?”. many companies today are implementing dedicated VMPO functions. Deloitte has experienced a growing demand for services that can help organizations ascertain the maturity of their VM models and/or help them design. over the past few years. absence of clear communication plans. Problems with communication and relationship management It is therefore unsurprising that. “Why Settle for Less?”. 2007. scalable VM frameworks that can effectively and efficiently manage outsourcing relationships. Note: Respondents were allowed to select multiple options. companies often draw on the assistance of third parties that can provide specialized functional know-how and the industry-leading operating practices. Respondents to the 2008 survey were challenged by issues such as inconsistent communication between the company and its service provider. and the Power of Perseverance . When asked what they would do differently if they could start their outsourcing initiative over again. 33 percent were currently in the process of creating one.” Deloitte Development LLC. Science. was that certain problems with service provider relationships existed despite the fact that outsourcing was an applicable solution for many companies. This trend toward investing in dedicated VMPOs has been fueled by a number of factors. Reasons for not establishing a dedicated VMPO Inconsistent communication Reporting Lack of communication plan Lack of transparency Poor account management None Don’t know 0% 2% 20% 29% 24% 23% 20% 17% 51% Lack of resources and expertise 44% Geographical business spread 33% Lack of executive support Maintain close proximity with vendors VMPO in implementation process Not thought about VMPO 0% 40% 60% 11% 10% 20% 30% 33% 33% 33% 40% 50% Source: “Why Settle For Less? Deloitte Consulting 2008 Outsourcing Report. and tools necessary to create flexible. the report also concluded that there was a growing awareness among companies that the complexities of managing outsourcing service providers’ post deal execution were underestimated and poorly managed.I. Note: Respondents were allowed to select multiple options. inadequate reporting. including the increased complexity of today’s outsourcing environment (including regulatory and compliance issues) and the growing need to manage multiple service providers that provide varying mixes of products and 7 The Outsourcing Vendor Management Program Office (VMPO): Art. and poor-quality account management (Exhibit 3). and implement leading-practice VM models. Deloitte  Development LLC. Exhibit 3. This figure rose to 55 percent among executives who were less than very satisfied with their outsourcing initiatives. 37 percent of the executives in the 2008 survey said that they would do a better job of planning and staffing for service and contract management. As the survey shows. 2007. build. lack of transparency. models. The rest of the respondents cited a lack of resources and experience as the main reason for not establishing a VMPO (Exhibit 4). In doing so. Evolution of VMPO requirements Where has the market moved since 2008? One of the conclusions of Deloitte’s 2008 outsourcing report.

and report on risks associated with their critical service providers. The increasing complexities of outsourcing and offshoring transactions. have led to a greater emphasis on relationship management and new methods of working between business units and internal support functions such as legal. risk. in the financial services industry. tax. Organizations are being challenged. but also by the dynamics within their own organizations. Almost 70 percent of the survey’s respondents invest between 1 percent and 7 percent of the total outsourced contract value on implementing and operating VM functions.7% >7% Don’t know Our survey also suggests that VM is taking on a broader range of activities than in the past. and compliance. measure. whereas client stakeholders would produce both requirements and solutions in an in-house service delivery model. This figure is consistent with Deloitte’s experience with organizations in the marketplace. Regulators are examining the 25% 44% 6% 25% 1% . For example. For example. as well as changes in the regulatory environment.3% 4% .services across multiple geographies. Investment in VMPO functions (% contract value spend on VM function) • Transition and transformation project management office (PMO) and oversight • Document management systems • Service request management • Service provider risk management (an emerging area of demand) • Multi-service provider integration (an emerging area of demand) How have traditional VM practices evolved? The current activity in establishing dedicated VMPOs and the increase in demand for leading-practice VM models reflects companies’ growing realization of the complexity of today’s outsourcing environment. It has also led to a shift in behavior from a “performing” culture to a “managing” culture. a post-outsourcing environment demands a focus on defining requirements and allowing the service provider to produce the solution. including: • Contract management and compliance • Financial and commercial management • Issue and dispute management • Service performance management • Governance 8 . Contracts need to be managed on a daily basis rather than being monitored and periodically amended. Effective relationship management is particularly critical in an environment where regulatory and risk pressures are continually increasing as a result of volatile economic conditions. and VM models must also now be flexible and scalable to adapt to changing business requirements and external pressures. Exhibit 5. regulatory bodies such as the United States’ Office of the Comptroller of the Currency (OCC) are placing an increasing emphasis on scrutinizing the way organizations track. when VM dealt mostly with basic contract management functions and the management of commercial arrangements with the service provider. as shown in Exhibit 5. Survey respondents indicated that organizations are investing in setting up a variety of VM functions. but also are actively addressing this concern by investing in tools and people. The survey results reinforce Deloitte’s experience that organizations are not only recognizing that their traditional VM practices and their VM practitioners’ related skills are no longer sufficient to meet current demands. not only by the shift towards integrated global service delivery models and the management of multiple service providers across multiple geographies.

Information security and data privacy controls and processes are another growing area of exposure. their internal governance controls and mechanisms. the growing complexity of today’s outsourcing environment demands new skills in order to effectively manage an outsourcing program. and develop the requisite cross-functional skill sets required to successfully manage the complexity of today’s outsourcing programs. Regulators are also focusing on how organizations consolidate risk issues and report them at an enterprise level. Regulators are also focusing on service providers’ financial and operational viability. and the effectiveness of their exit and contingency plans. Establishing a dedicated VMPO can support companies’ effort to recruit. their ability to fulfill their contractual obligations. Service providers’ interest in increasing revenue from their current outsourcing arrangements must also be carefully managed. or were operated at a basic functional level by business units that required some form of governance in order to effectively perform basic processes (such as managing service levels or managing the delivery of a product). and the way they manage escalations. Failure to implement broad change management and governance frameworks that closely monitor and manage alterations to scope may lead to unexpected costs and. how they define “critical supplier.” what internal governance controls and mechanisms they maintain. Information security and data privacy controls and processes are another growing area of exposure. Effective management of an outsourcing program now requires specific cross-functional skills and experience. and the way they manage escalations. systems. Regulators are also focusing on service providers’ financial and operational viability. as well as building VM organizations that can provide the resources to more efficiently and effectively manage their service providers and achieve their outsourcing objectives. and processes for VM. and the Power of Perseverance 9 . and the ability to manage and integrate a large number of service providers (where required) to deliver an enterprise service. While these functions may have been effective at managing parts of an outsourcing relationship. their definition of what a “critical supplier” is. Regulators are examining the way organizations assess these risks. to value erosion. Additionally. The Outsourcing Vendor Management Program Office (VMPO): Art. many VMPOs either resided largely within the procurement or sourcing function. Traditionally. In addition. they have often failed to successfully manage entire outsourcing programs.way organizations assess these risks. ultimately. specialized toolkits and disciplines. in some instances through a central reporting utility such as a VMPO that also manages the day-to-day relationship with the service providers. Regulators are also focusing on how organizations consolidate risk issues and report them at an enterprise level. Science. retain. their ability to fulfill their contractual obligations. this occurs through a central reporting utility such as a VMPO that also manages the day-to-day relationship with the service providers. the current survey reinforces Deloitte’s experience that companies are increasingly investing in broad tools. in some instances. an enterprise view of the outsourcing program. and the effectiveness of their exit and contingency plans. The current survey clearly demonstrates that today’s executives have built upon the sentiments that executives expressed in Deloitte’s 2008 outsourcing survey (as summarized at the beginning of this section).

We asked survey respondents to indicate which of these 10 areas they had adopted for their current service provider engagements. all but two of the 10 functional areas (multi-service provider integration at 62 percent and transition and transformation oversight at 76 percent) had been adopted by over 80 percent of the respondents. Exhibit 6. Exhibit 7. we now turn to the question of how they are building and implementing their VMPOs and how effective those VMPOs are. Involvement in VMPO processes Contract management Financial and commercial management Issue and dispute management Service performance management Governance Multi-service provider integration Transition and transformation oversight Document management Service request management Service provider risk management 0% Yes No 62 76 95 95 95 100 100 38 19 5 5 5 5 85 81 95 20% 40% 60% 10 5 19 5 80% 100% Don’t know Note: Numbers in Exhibit 6 are percentages. between 40 percent and 65 percent of the respondents considered their VMPO resources to be at an advanced or master level (Exhibit 7). The results are displayed in Exhibit 6. Each of the 10 areas was represented among our respondents. VMPO maturity Having established that many companies are now actively investing in building VMPOs. and 95 percent of the respondents were addressing service provider risk management — both of which are seen as new and emerging areas of VM focus. Resource skill levels in VMPO processes Contract management Financial and commercial management Issue and dispute management Service performance management Governance 5 Multi-service 11 provider integration Transition and 10 transformation oversight Document management 5 Service request 5 management Service provider 5 risk management 0% Beginner Intermediate 33 30 95 100 38 28 35 48 33 38 20% 29 50 95 33 15 5 5 10 10 100 55 14 5 33 38 28 35 24 38 33 40% 60% Master 5 5 10 5 15 19 19 14 80% 100% N/A Advanced Note: Numbers in Exhibit 7 are percentages. how skilled the company’s VM resources were. how effective respondents thought the functions were. and most are relatively immature in the related controls and processes. organizations have typically been slow to recognize the need for investment in these two areas. 10 . leading-practice VMPOs incorporate the 10 functional areas depicted in Exhibit 2. In most of the VM functions.II. How are companies building and prioritizing their VM activities? In Deloitte’s view. The current survey included a number of questions about which VM functions companies had implemented. and what operating models were employed for the VM functions. In Deloitte’s experience. in fact. the most surprising finding was that 62 percent of the respondents were actively addressing multi-service provider integration. In our view. The answers to these questions were core to investigating the extent to which the respondents had a clear understanding of leading-practice VM and of the requirements for establishing and successfully operating a VMPO. how they had prioritized these functions. We also asked respondents to rate their VMPOs’ level of Experience.

Given that the skills and experience to manage these functions are rare. and the Power of Perseverance 11 . activities related to contract management and service performance management were seen as the most important elements of a VMPO (Exhibit 8). performing these functions in a reactive. In our experience with multiple clients. it was surprising to see that so many companies had established VMPOs that covered a number of what Deloitte considers to be The Outsourcing Vendor Management Program Office (VMPO): Art. However. the question remains: How effective are companies at managing these functions? Although organizations have made headway in identifying and addressing leading-practice VM areas. as well as Deloitte’s experience with companies’ VM efforts. They are also recognizing the need for strong governance over their own internal organizations as well as that of the service provider. For example. transition and transformation oversight. experienced resources to effectively manage the leading-practice VM functional areas? Or are they actually embracing these areas utilizing the resources available to them. one might question the depth and breadth of the VM capabilities being provided at our respondents’ organizations. Our work in assisting organizations with their VM efforts suggests that companies should now be considering additional measures and techniques for managing their service providers through multiple levels of governance throughout the organization. Fifty-two percent of the respondents thought governance was very important. and increasing supplier collaboration by establishing joint forums.Exhibit 8. ad hoc manner without sufficient substance to operate effectively? What is clear is that companies are choosing to move into emerging areas of focus for VM. continuous improvement. A fairly high percentage of respondents were neutral on the importance of reviewing and approving scope changes in a structured manner. In our experience. supporting timely transition and transformation. with the majority of respondents citing contract management and service performance management as being the most important aspects of their VM functions. Are companies really using skilled. This increases the probability that company stakeholder interests will be met and that the strategic value desired from service providers will remain intact. The results clearly indicate recognition of the need for multi-service provider integration and risk management (discussed later in Section 3 of this report). service performance management has been a historical area of focus in which processes have often been traditionally executed using standard metrics and measurement techniques such as SLAs and key performance indicators (KPIs). What does this tell us? Given the growing complexity of managing today’s outsourcing service providers. responses to the survey demonstrate that many companies are still approaching service provider management in a traditional manner. When respondents were asked to rate the importance of each VM function. performing financial planning. Importance of VMPO objectives Increase operational efficiency Manage contract scope and costs Review and approve scope changes Check on contractual obligations Process invoices and payments Perform financial planning SLA compliance Ensure timely transition of services Governance Performance improvement measures Mitigate conflict of interest across vendors Increase collaboration with joint vendor forums Others 0% 22 17 20% 40% 33 35 44 83 60% 80% 100% 37 52 56 46 22 30 37 63 37 37 44 63 44 37 30 15 67 67 37 30 7 26 30 15 44 4 4 44 11 7 37 44 44 47 4 44 7 4 8 4 8 4 7 leading-practice VM functions. Science. and multi-service provider integration were evenly distributed across the 30th percentile. while the importance of activities related to finance and commercial management. some companies are starting to Very important Very unimportant Important N/A Neutral Unimportant Note: Numbers in Exhibit 8 are percentages. we have observed that companies are struggling to understand how to build and manage capability in this space.

cracks in the appearance of the maturity of companies’ VMPO organizations begin to appear. the agreement is where the deal is made and where success is measured. In reality. they have not yet reached a sufficient level of maturity to recognize whether the substance of what they have built will provide them with a sustainable. in their view. In fact. so too do the skills. and business development areas. VMPO professionals also need to understand risk.. attrition rates. experience. but also from generating value from additional opportunities. financial/commercial skills. rather than measuring only the operational aspects of their partnerships (e. As the outsourcing environment continues to increase in complexity. at the end of the contract term. and that they are doing so at an advanced or master level. and planning and project management skills. consider a deal successful if service providers deliver on their contractual obligations during the contract term and. and experience to successfully manage the complexities of new outsourcing arrangements. such retained resources often find the transition from a service performance culture to a service management culture extremely difficult. procurement professionals focus largely on negotiating the agreement itself. while companies are making large inroads into identifying what they require from their VM capabilities. the service provider has successfully delivered against the organization’s objectives. service management. legal skills. believing that the people who previously performed the outsourced process are suitably qualified to manage the service providers now delivering products and services. volume of incorrect invoicing. of the market. Often.g. It could be argued that the traditional areas of contract management and service performance management should still be the highest priority. Deloitte’s 2008 outsourcing report indicated that finding executives with a relevant set of skills for effective vendor management was not easy. finding resources with an applicable combination of skills at any level is often a challenge. Specifically.utilize executive performance indicators (EPIs) to measure and monitor the strategic aspects of their relationships with service providers. and qualifications needed to manage it. It also creates additional management overhead and gives the service provider the opportunity to disclaim liability for poor service. flexible. this is how organizations seem to be viewing themselves and their VM capabilities. Such behavior can prevent the service provider not only from realizing value from existing obligations. Competent VM professionals. our experience suggests that approaching service provider management with a traditional procurement mindset is also ineffective. Certainly. including relationship management skills. In our view. Vendor managers must move away from traditional mindsets and develop different cross-functional skills. Our experience has shown that organizations often retain existing employees to manage a new service provider. and scalable capability that is effectively resourced to deal with changes in business requirements and technology. Deloitte’s experience and understanding of VM capabilities. on the grounds that the service provider was not solely responsible for the outcome. The fact that companies are continuing to adopt and deploy traditional approaches seems inconsistent with our respondents’ view of their involvement with VM and the level of experience in their VM functions. that organizations are actively performing many leading-practice VM functions. and the volume of incorrect change orders). and of organizations’ requirements in this area challenge this belief. However. When viewed in light of the continuing prominence of traditional approaches to VM. Similarly. procurement professionals lack the applicable focus. on the other hand. Recruiting for an effective VMPO Understanding what is required to successfully manage complex outsourcing service provider arrangements is not a straightforward and easy task. Often. contract management. the retained resources tend to dictate solutions to the service provider instead of buying a managed service and an end result. 12 . skills.

The challenge facing both clients and service providers is how to develop and implement a holistic enterprise VM tool to effectively manage the service providers and the services pertaining to a specific outsourcing program. which points to confusion about the skills and experience required to operate VMPOs efficiently and effectively. and VM roles. given the size and sheer number of activities that they are performing in both lead and supporting roles? It appears that while many executives believe that they have skilled resources for VM. Approaches to VM tools In our experience. companies often see VM tools as a supplement to their core VM needs rather than as a priority focus area. An interesting observation is that some of the more traditional VM functions. the responses showed that companies were using tools predominantly in traditional VM areas. and provide visibility into progress through clear communication and reporting. yet not surprisingly. it has not accommodated a full suite of functionality for VMPO purposes that can adequately track. Exhibit 9. this attitude is changing as the management complexities of outsourcing deals evolve and as executives increasingly look to decrease management overhead and obtain real-time visibility into the current state of their outsourcing programs. Which functions are companies choosing to focus on with respect to implementing tools? We asked respondents to identify which of seven VM functions were enabled with software tools (Exhibit 10).In a fast-paced environment involving complex outsourcing agreements. This can potentially prevent companies from realizing the full benefits from these traditional core functions. continue to remain lower priority for technological enablement. Science. It is this critical yet generally unrecognized fact that can make or break the success of a company’s outsourcing program How are companies staffing their VMPOs? Exhibit 9 shows the number of full-time employees (FTEs) our respondents employed on their VMPO teams. such as contract management and issue and dispute management. the available software has focused on discrete functions. To date. finance and commercial systems. and report against the metrics associated with each of the 10 VM leading-practice areas. However. Service request workflows. recruiting and deploying resources with the requisite cross-functional skills can provide the knowledge and experience to protect business-case savings. 13 22% 23% 22% 22% 11% 5-10 FTEs 26-50 FTEs 11-20 FTEs >50 FTEs 21-25 FTEs Upon reviewing the activities being performed by our respondents’ VMPO resources. Considering the number of VM activities being performed and the number of resources performing them. and the Power of Perseverance . This raises The Outsourcing Vendor Management Program Office (VMPO): Art. measure. along with the finding that only between 5 and 50 percent of our respondents rated their VMPOs as “very effective” in the various leading-practice areas (Exhibit 13). Interestingly. there may in fact be some confusion as to vendor managers’ applicable roles and responsibilities. Number of resources on VMPO team the question of whether these resources are actually procurement or service delivery resources undertaking a variety of sourcing. thereby supporting executives in the achievement of their outsourcing agreements’ objectives. it becomes clear that many are taking a lead role in both pre-contract and post-contract execution activities (refer to Exhibits 11 and 12 below).They therefore have broader responsibilities than leading-practice VM roles would recommend. mitigate risks. operational. it can be concluded that many companies are still not effectively recruiting for defined VM functions. How efficient are these VMPOs.

for new services arising under the agreement. in Deloitte’s experience. their lead role should be in postcontract execution activities. But despite the importance of involving VM in pre-contract execution activities. Exhibit 10. Deloitte’s view on leading-practice VM Deloitte defines 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. an additional 14 percent planned to implement tools in this area within the next 12 months. and tools to manage the service providers. conduct training. or any extensions or terminations of the agreement). many companies are continuing to make the mistake of bringing VM to the table too late. VM’s role is to assist the company’s sourcing professionals in negotiating specific contract clauses to protect against the risks that commonly arise following execution of the agreement. And it should design and implement processes. While it is essential for VM professionals to support pre-contract execution activities. systems. post-contract execution is where the VMPO’s core competencies lie: VM professionals take the lead role in making the outsourcing program work. and reporting requirements into the agreement. preserve business-case savings. It should design the detailed governance model. amended services. achieve flexibility. A VMPO’s success can be measured by its ability to reduce cost. change controls. This can potentially prevent companies from realizing the full benefits from these traditional core functions. To put it another way. a VM professional can provide information on how to build effective governance models. such as contract management. The VMPO should focus on the 10 leading-practice functional areas of VM. and mitigate risks.service performance management. For example. increase productivity. and conduct negotiations with service providers (e. improve productivity and overall performance.g. The results also suggest that companies are becoming increasingly aware of the importance of issue and dispute management: Although only 23 percent of our respondents currently possessed tools to enable issue and dispute management. Process-level utilization of VMPO tools 50 5 50 9 9 68 68 40 20% 40% 60% 5 64 60 80% 100% N/A 5 23 32 23 27 Pre-contract execution activities should be led by sourcing professionals. but plan to in the next 12 months 23 36 64 14 59 55 9 5 5 14 9 5 5 55 No.. focusing on managing the agreement in order to meet the outsourcing objectives. remain a lower priority for technological enablement. including guidelines for interactions with the service provider and the roles and responsibilities of the parties involved in the management of the agreement. and document management were the most common areas of software investment. Contract management Financial and commercial management Issue and dispute management Document management Service performance management Service request management Governance Others 0% Yes No. the VMPO’s job is to provide effective management so the company can realize the desired value from the outsourcing program. in fact. improve quality. An interesting observation is that some of the more traditional VM functions. and mitigate risk. In contrast. and no future plans Don’t know Note: Numbers in Exhibit 10 are percentages. The VM professional’s assistance is delivered in the same way that other subject-matter specialists are engaged to define the services and agree on terms within the contract. VM is still very much in a supporting role. implement effective transition and transformation oversight. This is not to minimize VM’s important supporting role in the sourcing process. Bringing a VM professional’s knowledge and experience to bear on pre-execution contract activities can be critical to the success of a company’s outsourcing program. 14 .

and monitoring interdependencies between programs Risk mitigation Companies’ current VM practices How closely did the survey respondents’ VMPOs align with Deloitte’s views on leading VM practices? The results continued to build support for the hypothesis that most companies’ VM maturity remains low. Exhibit 11. Pre-contract execution Create value proposition and business case Create the RFP and analyze responses Conduct due diligence and short-list vendors Draft. Science. The Outsourcing Vendor Management Program Office (VMPO): Art. these responses are at odds with Deloitte’s view that VM is more effective in a supporting role for pre-contract activities rather than in a lead role. negotiate. and suggest that many VMPOs are acting as sourcing groups in addition to performing VM activities. report. making original cost savings even harder to track • Three to 5 percent annual improvement if mandated. Clearly. 0 percent improvement if not mandated • Difficult to measure/test Increased productivity Flexibility •  Minimum commitment required to achieve desired rates • Short-term rates 30 percent higher r •  Ineffective utilization of demand and capacity management models • Service providers used as staff augmentation • Few service level commitments •  No real opportunity for service providers to innovate •  Inability to meet cost-saving targets due to delays in programs. exceptions.The table below summarizes the potential benefits of an effective and dedicated VMPO. delays in achieving steady-state status Improved quality •  Encourage utilization of service providers beyond pure staff augmentation • Track. and improve service levels •  Determine that quality goals are not excessive •  Define and implement enterprise methodology for assessing the progress of transition and transformation programs •  Define governance structure for approving milestone payments. Fewer respondents reported that VM took a supporting role (an average of 34 percent across all activities). Success criteria Reduced cost What an effective VMPO can do • Track results versus original business case •  Determine whether productivity targets and objectives are being met •  Negotiate changes and manage scope creep •  Determine leading method for tracking productivity •  Establish baseline and track progress against contract terms •  Translate productivity improvements into bottom-line savings or increased capacity •  Forecast demand and reduce variance •  Balance flexibility against cost and utilization •  Utilize contractually committed volumes effectively Potential result without a VMPO •  Difficult to measure savings year over year. scope creep. Five percent of the respondents’ VMPOs took no role at all in one of the specific pre-contract execution activities one might expect VM to be involved with — designing the operating model and governance structure. and escalation delays •  Dissatisfied internal stakeholders. initial savings may not be realized •  Contracts do not stay static through the term. and execute contract Design target operating model and governance structure Service request management 0% Lead role 55 50 55 59 55 68 20% 40% 60% 32 41 32 32 32 5 23 5 9 9 14 9 5 9 5 80% 100% Don’t know Supporting role VM not involved Note: Numbers in Exhibit 11 are percentages. and the Power of Perseverance 15 . A majority of respondents answered that VM took a lead role in the pre-contract execution activities listed in Exhibit 11 (an average of 55 percent across all activities).

manage. Exhibit 12. It could be argued that. track. and developing and executing operating-level agreements (OLAs) between service providers. negotiate. reviewing and reconciling invoices. a majority of respondents again indicated that the VMPO took a lead role in nine out of the 16 post-contract execution activities listed in Exhibit 12 (an average of 53 percent across all activities). where one might expect to see a large discrepancy between VM’s level of involvement in preand post-contract activities. the high percentage of VMPOs taking a supporting role in these activities would suggest that VMPOs have been disenfranchised in many areas. 16 . and execute OLAs Consolidate end-to-end SLA and OLA reporting Plan. This result might support the view that the VMPOs that organizations are establishing are in fact leading-practice VMPOs with skilled and experienced resources that work effectively to manage outsourcing programs. On average. the results instead showed very little difference at all. In other words. and tracking business case savings. 5 5 5 5 9 5 14 24 14 41 32 9 5 9 55 19 80% 55 100% Lead role Supporting role VM not involved Don’t know or N/A Note: Numbers in Exhibit 12 are percentages. executives reported that: • 57 percent of VMPOs were performing very effectively or effectively Design systems and tools Train on contract operating model Track. and resolve disputes and issues Reconcile invoices and facilitate approvals Provide input to budgeting and forecasting Report on actual vs. forecasting. because an average of only 3 percent of the executives felt that their VMPOs were not effective. monitor.With respect to post-contract execution activities. on average. our hypothesis that VMPO maturity remains low is invalid. and report on performance Negotiate new service and scope changes Track. and report transition activities Develop and maintain contractual artifacts Perform risk management analysis Provide overall governance 0% 20% 64 55 59 64 68 50 36 41 50 52 38 45 55 59 48 71 40% 60% 43 33 32 55 55 41 29 5 45 27 32 9 36 23 27 9 5 9 5 • 34 percent of VMPOs were somewhat effective • 3 percent of VMPOs were not effective These results can be interpreted in a number of ways. and report adherence to SLAs Develop and maintain cross-supplier standards Develop. therefore. For activities such as performing risk analyses on the service provider. Post-contract execution These results are inconsistent with how an effective VM organization should operate. operating as supporting functions to other areas of the business rather than holding primary responsibility for driving service provider management. is: How effective are the dedicated VMPOs that many of our respondents claim cover all leading-practice VM functions and more? How effective can they be if they take a lead role in pre-contract execution activities and play an almost equal measure of lead and support roles in post-contract execution activities? Exhibit 13 shows respondents’ ratings of the effectiveness of their VM organizations in a variety of areas. 36 percent of the respondents. across all VM objectives. manage. At many companies. indicated that the VMPO took a supporting role in post-contract execution activities. there was only a 5 percent difference between the percentage of companies where VM played a lead role and the percentage of companies where VM played a supporting role. A critical question. Interestingly. The results were not strongly favorable in any category. the VMPOs played a supporting role in budgeting. business case savings Manage. although the majority of our respondents said that they had a dedicated VMPO that performed all functional activities. Clearly.

in aggressively setting up VMPOs. systems. we would expect to see more than an average of 57 percent of respondents rate their VMPOs as effective to very effective. 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 performing both pre-contract and post-contract execution activities? Are we. if this were true.  While many respondents reported that they utilized highly skilled resources. Science. Increase effectiveness of VMPOs Increase operational efficiency Manage contract scope and costs Approve changes with a structured framework Meet contractual obligations Process invoices and payments accurately Perform budgeting and forecasting SLA compliance 23 50 23 32 23 23 27 32 45 27 41 32 27 27 18 32 32 5 5 5 5 Standardized VM processes and tools Increased level of skill-set of VM resources through training and external recruiting Performance of end-to-end VM activities. In our experience. with between 40 percent and 65 percent rating their resources at an advanced The Outsourcing Vendor Management Program Office (VMPO): Art. looking at a situation in which organizations. and procedures should be rated as effective to very effective at governing outsourcing programs.Exhibit 13. are doing so based on either traditional VM practices or partially informed emerging VM practices? Or do our results simply reflect the lack of objective criteria against which companies can measure the effectiveness of their VMPOs? Perhaps this interpretation would explain why responses to the query on how executives would increase the effectiveness of their VMPO organizations were not high in any category (Exhibit 14).  The large number of resources on the respondents’ VM teams. suggests that this belief may be misplaced for the following reasons: a. Note: Numbers in Exhibit 13 are percentages. and the fact that these resources tend to lead both pre-contract and post-contract execution activities. b. However. and the Power of Perseverance 17 . Effectiveness of VMPOs in achieving objectives Exhibit 14.  Respondents indicated that some emerging VM functions are being managed and staffed with skilled resources. A closer look at the results. What can be concluded about the efficiency and effectiveness of companies’ VMPOs? Our survey results clearly show that executives believe that their companies are operating efficient and effective VMPOs and utilizing skilled resources to do so. suggests that confusion may exist with regard to VMPO roles and responsibilities and/or that resources may be being leveraged from across different organizational disciplines. in fact. however. c. pre and post-contract execution Establishment of performance metrics for the VM function Alignment of VM activities with overall business objectives Better delineated roles and responsibilities for VM Increased level of executive support within the organization Other 0% 4% 20% 40% 63% 59% 59% 5 14 41 5 9 56% 32 41 23 48% Ensure timely 14 18 5 9 55 transition of services Resolve issues 9 36 27 27 and provide governance Perform continuous 14 9 5 41 32 improvement measures Mitigate conflict 9 18 9 23 41 of interest across vendors Increase collaboration 5 14 14 43 24 with joint vendor forums 0% 20% 40% 60% 80% 100% Very effective Not effective Effective N/A Somewhat effective 41% 33% 60% 80% Note: Respondents were allowed to select multiple options. at least 90 percent of dedicated VMPOs with highly skilled resources that employ leading-practice VM tools. which casts doubt on the respondents’ understanding of leading practices in these areas. processes.

companies can close the gap between their current operations and leading practices by establishing effective operating models. such as supplier risk management and multi-service provider integration. It is clear. such as risk mitigation and avoidance of potential cost overruns. which would make the VMPO a valuable contributor to a company’s success. even though they have made great inroads into recognizing and actively establishing VMPOs and believe that they have done so effectively. This set of findings raises questions around respondents’ understanding of the skill sets and disciplines required of VMPO resources. engaging the right VM functions. respondents could not identify any definite means of improving effectiveness. This can allow companies to increase operational efficiency and reduce overhead time. and employing resources with the requisite skills and experience. the use of such highly skilled resources should have yielded better ratings on effectiveness. their responses to questions on the priority of functions and their investment in tools show a traditional rather than a leading-practice approach to VM. the roles of these resources. Moreover. only 57 percent of respondents. We believe that by increasing the maturity of their VMPOs. d. therefore. should also play into this evaluation — it should certainly be a factor in a VMPO’s measurement.or master level. While cost should not be the ultimate measure of a VMPO’s success — other factors. Respondents also felt that they were getting a higher return on their VMPO investments. rated their VMPOs as effective or very effective. and the breadth of their activities. The average cost savings that could be directly attributed to the operation of the VMPO was higher than the average investment required. 18 .  While it was clear that companies are addressing emerging VM focus areas. that the survey results support our hypothesis that VMPO maturity remains low at many companies. Based on our experience. Our findings also raise the issue of whether there exists any established metrics by which VMPO effectiveness is being measured. on average.

in contrast. and whether the VMPO should operate in a centralized or decentralized fashion will be influenced by a range of factors. the scope of service provider solutions. may include: • The ability to leverage the skills of global service providers where skills do not exist at the regional level • Greater standardization. for example. a company should ask specific questions such as: • Is the function manual in nature. and the company’s strategic direction. leading to greater efficiency and cost savings • Establishing accountability for the agreement in one area • Aggregation of volume levels. however. The questions of whether a VMPO should be retained within an organization. and the Power of Perseverance 19 . leading to greater inefficiency and cost Refer to Exhibit 15 for schematic representations of decentralized and centralized frameworks for VM operating models. and would it be compromised if it were removed from the local site? • Is the function responsible for making strategic business decisions on a daily basis? • Can the work be delivered globally in a standardized manner? • Does the function require organizational decision making for developing and implementing leading practices? A number of challenges and benefits are associated with both a centralized and a decentralized model. tax structures. a decentralized model can face challenges such as: • The inability to benefit from economies of scale and the resulting price and service advantages from global agreements • The existence of multiple contracts with the same service provider for the same services across regions. cultural. whether some functions should be performed onshore.III. the locations where services are being performed. leading to greater management overhead • Difficulty in meeting global strategies when regions agree on nonstandardized systems and processes. or by a third party. leading to better alignment of choices with the regional location • Tighter control around the service provider and therefore around service delivery • Greater flexibility with regard to adopting changes in response to legal or regulatory requirements • Clearer and faster communication and collaboration However. Some of the benefits of a centralized model. the service provider mix. In order to determine what operating model would be effective for its business requirements. may be balanced by challenges such as: • A lack of buy-in and application of centralized systems and processes by the regions • Increased complexity in managing the service provider and the cost of delivery • Time zone. and language differences • Changes in legal and regulatory requirements that are difficult to incorporate into the model on an ongoing basis Decentralized operating models. including the geography of a company’s services/ activities. resulting in a stronger negotiating position and greater cost savings These benefits. offshore. can realize benefits such as: • Tighter control regarding internal decision making. VMPO operating models Deloitte’s view on VMPO operating models There are no generic models as to how a VM framework should be developed and applied within a company. The Outsourcing Vendor Management Program Office (VMPO): Art. Science.

Exhibit 15. Operating model structure Decentralized CFO Illustrative Business unit control Statutory and regulatory reporting Product control MI and decision support Central functions Supplier management Supplier management Supplier management Supplier management Supplier management Offshore supplier Centralized CFO Illustrative Business unit control Statutory and regulatory reporting Central functions Product control MI and decision support Supplier management Supplier relationship manager Supplier relationship manager Supplier relationship manager Business unit control Statutory and regulatory reporting Product control MI and decision support 20 .

and an underestimation of the complexities of managing outsourced service providers. each of these factors was cited by 33 percent of respondents as a reason for not establishing a dedicated VMPO (Exhibit 4). 21 29% 62% Centralized Decentralized Don’t know The Outsourcing Vendor Management Program Office (VMPO): Art. tools. and 10 percent were unsure (Exhibit 16). such as inconsistent communication. and templates can deliver more benefits to an organization than would be gained with a nondedicated VMPO. which may in turn lead to potential disputes later as to the substance of an agreement. being close to and having easy access to service providers can be beneficial. Had the responses been the other way around (i.. tools. Certainly. it could be argued that our respondents’ satisfaction with the effectiveness of their VMPO organizations is due in part to their centralized Exhibit 16. it must be made with a clear understanding of the risks of each option so these can be carefully managed. cost protection. we have found 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. centralized operating models have typically provided more control over the outsourced environment. A dedicated VMPO that acts as an organization’s single point of contact for service provider management — if it is set up with leading-practice models. Interestingly. would the satisfaction of the executives with the effectiveness of their organizations have been even lower? Operating model considerations were often a driving factor behind whether to implement a dedicated versus a nondedicated VMPO.Other choices that need to be carefully considered are whether to retain a VMPO or to outsource some or all of the functions to a third party. however. Indeed. templates. What VMPO operating models are companies employing? Our survey showed that 62 percent of the respondents were operating their VMPOs under a centralized model. Both these topics are addressed later in this section. procedures. Twenty-nine percent were operating their VMPOs under a decentralized model. thereby providing ease of access.e. Respondents’ VMPO operating model 9% operating models. Typically. and processes — can achieve the same flexibility while also providing additional benefits around risk mitigation. since it can offer more flexibility. In any event. According to Deloitte’s view on operating models. however. could arguably result in a more controlled and broad VMPO. as well as being able to dictate the VMPO’s processes. as well as where to locate the VMPO (onshore or offshore). A dedicated VMPO with leading-practice processes. the number of executives who rated their VMPO as effective closely aligns with the number of companies that had adopted a centralized operating model. neither of these reasons should stand in the way of the establishment of a dedicated VMPO. Therefore. systems. the decision as to what operating model would be effective for a company must be carefully considered and made with an appreciation of the different options’ benefits and challenges. procedures. poor or unreliable reporting. and requirements for resources’ skills and experience. Traditionally. may result in greater reliance on relationships rather than on formal agreements with service providers. which is in line with our experience. Perhaps most importantly. and the Power of Perseverance . Placing accountability for the management of service providers in one area. Choosing not to establish a dedicated VM function for the reasons cited by our respondents may only exacerbate issues that typically arise in outsourcing programs. if most of the respondents had adopted a decentralized rather than a centralized model). Science. This flexibility and ability to respond quickly to change.

for regulations around risk management). and service request management were being performed offshore. Organizations should nevertheless take care when making the decision to outsource some of these functions. This indicates a possible emerging awareness that outsourcing the VM function may be an attractive option that can allow companies to leverage specialized skills and knowledge. Therefore. Similarly. 95 91 86 90 77 100 95 91 100 100 60% 80% 9 5 9 5 9 55 14 5 9 100% Note: Numbers in Exhibit 17 are percentages. relies on the internal client organization to define its business requirements. While many executives who had not outsourced their VMPO functions said that they would not consider doing so. Our conclusion. and service request management were being performed by a third party (Exhibit 17).and operational efficiencies. reported that they had retained their organizations internally.g. as well as to establish common intent and understanding with regard to managing outsourced service providers. This is in line with Deloitte’s experience working with organizations over the past two years. a dedicated VM function that implements leading practices consistently across a global organization can be of great benefit to the enterprise. none of the executives cited the need to reduce costs. Approaches to outsourcing VM functions When asked whether their VM functions were outsourced or retained and whether they were performed onshore or offshore. Exhibit 17. any effort to outsource this function should be approached with caution. 93 percent of executives. 41 percent acknowledged that they would either consider it or were unsure. supported by our experience. transition and transformation oversight. Of these functions. obtain objectivity. the motivating factors for outsourcing VMPO functions differ from those commonly attributed to typical outsourcing initiatives. A key to achieving success in this case is to foster unity and understanding among the different geographies. multi-service provider integration. for example. or respond to an internal failure as reasons for outsourcing their VMPO functions. service performance management. What can be concluded from the nature of the functions that organizations have chosen to outsource? Interestingly. 22 . and it is central to a companies’ strategic direction. multiservice provider integration. Specifically. is that these functions have increased in management complexity with the advent of global multivendor outsourcing programs. on average. Operation of respondents’ VMPO processes Service provider risk management Service request management Document management Transition and transformation oversight Multi-service provider integration Governance Service performance management Issue and dispute management Financial and commercial management Contract management 0% In-house Third party 20% N/A 40% Our results show that the majority of executives who had outsourced their VMPO functions did so because they wished to leverage the experience of a third party and/ or because they had identified a lack of the applicable skill set within their organization to successfully perform the function themselves. Service request management. In addition. Interestingly. the functions that respondents said they had already outsourced were similar to the functions that respondents said they would choose to outsource if they were to do so in the future. they are areas of focus for regulators (e. They are therefore attractive candidates for transitioning to third parties that have demonstrated core competencies in performing these activities. transition and transformation oversight. document management.. Only 5 to 9 percent of executives responded that the areas of service performance management.

Science. clients have typically not considered the complexities of relationships with internal stakeholders and the proximity of service providers when offshoring VM functions to their captive centers. and the Power of Perseverance 23 . They should embark on any such program with a deep understanding of the risks associated with this decision.Companies should be careful when choosing to outsource or offshore VM functions. is a functional area where organizations have struggled to adopt models regarding how service providers will work with each other. In our experience. The Outsourcing Vendor Management Program Office (VMPO): Art. for example. Executing OLAs and managing joint supplier governance forums are not trivial tasks. Multi-service provider integration.

VMPO risk management capabilities have become more critical in light of recent economic conditions that have led to increased regulatory scrutiny. Companies are now asking questions such as: • How do we bring our supplier risk management (SRM) capability in line with industry practices to enable effective governance and meet regulatory requirements? • What are the specific risk drivers that can provide information to gauge the level of risk associated with our critical suppliers? • What preventative or mitigating actions can we take to manage supplier risk? • How should we measure and report supplier risk. Respondent supplier risk management skill level 62% 9% 29% 62% 62% Master Advanced Intermediate Beginner N/A 24 . How are companies approaching risk management with their VMPOs? What programs are they implementing to manage risk? How are they facing the challenge of managing relationships with multiple suppliers that are often individually responsible for delivering separate elements of an end-to-end service to their customers? Risk management Volatile economic conditions and increasing regulatory pressures are driving demand for broad supplier risk management frameworks that provide the experience and information to address the risk of financial losses. and regulatory interventions. as SRM is an emerging discipline and the skills and experience for leading-practice SRM are difficult to assess. manage. 95 percent of respondents confirmed that their VMPO performed SRM.IV. and 43 percent of these said that these resources possessed either advanced or master level skills. As indicated in Exhibit 18. Understanding and managing risk through the VMPO Why is risk management so critical? A look at supplier risk management and multi-service provider integration One of the specific benefits of an effective VMPO is that it can implement controls and tools that provide information to track. compliance and governance issues. and what data elements need to be captured? In addition. Exhibit 18. regulators are asking related questions such as: • How do companies define who their critical service providers are? • What are the individual components of risk that determine if a supplier is critical? • Does the company have clearly defined and wellunderstood supplier tiers? • Does the governance framework have clearly defined 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 effective are the company’s information 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. These percentages seem high. measure. some insights into the maturity of this function can be gained from their responses to other questions. and report the inherent risks of outsourcing transactions in which services are transitioned to a third party. and an increasingly complex outsourcing landscape. business disruptions.

Deloitte’s view on the supplier risk management function Companies are increasingly coming to realize that their supplier risk management frameworks are not broad enough to meet current economic and regulatory pressures. Understanding supplier risk at the enterprise level can enable effective management of suppliers across the company as a whole. while the impact on operational efficiency is high. Deloitte’s experience suggests that many companies’ approach to risk within their own organization is immature. although 95 percent of respondents had a supplier risk management function in place. on average. Exhibit 19. The responses indicated that companies varied in their utilization of legal resources in VM activities. In addition. they are actively seeking information about how to address this weakness to establish flexible. or never involved legal in matters that are generally considered to be high risk. To do this. which companies should be assessing prior to executing transactions. A clear definition of supplier risk tiers is necessary to understand the types of risks. performing activities traditionally considered to be within the legal realm with little or no legal support (Exhibit 19). These include terminating the agreement (entirely or in part). In summary. On average. negotiating new services or scope changes to existing services. On the other hand. In the survey. not just on a supplier-by-supplier basis. 24 percent of respondents’ VMPOs often engaged the legal function in activities that. Others took on much more risk. VMPOs should have the competency to manage themselves. While legal involvement in these activities is understandable. 16 percent of respondents. The Outsourcing Vendor Management Program Office (VMPO): Art. The risk to the company of not engaging the legal team in these matters is low. As a result. and reviewing contractual termination rights. leading-practice supplier risk management programs. such as information security and business plan continuity. These activities included providing information on contract interpretation. Managing at the enterprise level can allow companies to understand where risks can overlap and become concentrated. VMPOs’ engagement of the legal function is not aligned with the magnitude of the potential risk. in many cases. and drafting formal correspondence. Legal involvement in VMPO processes Support contractual dispute resolution Terminate entire or part of the contract Review contractual termination rights Invoke contractual remedies Negotiate new scope or changes to existing contract Draft formal correspondence Provide advice on contractual issues and assist in contract interpretation 0% 22 30 37 15 19 26 37 20% 19 11 11 30 22 26 15 40% 22 19 22 26 7 22 19 26 60% 22 22 15 19 15 19 57 4 11 7 7 7 4 7 15 4 7 11 100% 11 80% Always Often Performed by VM Sometimes Rarely Never Don’t know / NA Note: Numbers in Exhibit 19 are percentages. only sometimes. we asked respondents to indicate how often and when they engaged the legal team in performing VM activities. according to leading practice and in our experience. They may also lack clearly defined roles and responsibilities or processes for engaging legal. VM resources should have the skills and experience to manage these activities independently. clarifying how individual suppliers can impact more than their respective lines of business. our results suggest that.Interestingly. and the Power of Perseverance 25 . scalable. regulators are also focusing on the types of data — not just the volume of data — in the hands of third parties that execute transactions on behalf of a client. supporting contractual dispute resolution. rarely. This percentage is higher than what we have seen with our clients across industry verticals. One way to interpret these results is that companies underestimate or do not understand the risks of failing to engage legal in such activities. we tried to assess companies’ appetite for taking and managing supplier risk. Some respondents took very little risk and engaged legal resources frequently. Science.

26 Contractual Risk areas Reputation Strategic Credit . onshore. such as reputational risk and concentration risk. Organizations should focus not only on the quality and accuracy of data. manage. and supplier levels • Make applicable management information available to support effective governance. services. control points. Aspects of this complexity include: • The increasing focus on creating healthy competition between service providers may lead to disruptive service delivery environments where elements of end-to-end processes are outsourced to several providers. and individual supplier level. actionable data and metrics to senior stakeholders. as well as the combined use of captive. must be managed using a stringent governance framework with a focus on risk at the enterprise level. tools. This can give a company a holistic view of risks. Reporting requirements should also be a specific focus area. This move towards multi-service provider programs that deliver multiple mixes of products and services in multiple geographies. Doing so can provide information to companies to: • Meet regulatory requirements • Standardize and manage operational risk • Achieve a strategic and holistic view of risk within a portfolio of providers spread across various functions. set out in Exhibit 20. • Multiple hand-offs between service providers have led to increased exposures. which may expose the enterprise as a whole. It can also give lower levels of the organization the information and resources to help them make effective decisions on matters. Different risk areas in SRM Enterprise level Line-of-business level Supplier level Confidentiality of information Transaction/Operational Business continuity Compliance/Legal Financial stability Data integrity Perhaps most importantly.Additional areas of risk. Deloitte’s experience indicates that by implementing an effective supplier risk management model with applicable processes. Multi-service provider integration — another risk? As the market evolves towards cross-functional service delivery models (Exhibit 21). Often. but also on reporting useful. companies are leveraging multisourcing environments for a variety of reasons. companies should be vigilant in identifying challenges and enhancing their regulatory risk definitions in order to improve their supplier risk management practices. Exhibit 20. For example. companies can achieve the rigor and structure to effectively identify. especially as there are often several different types of critical suppliers. • Evolving regulatory requirements and a focus on third-party relationships has increased companies’ risk exposure. there is no single point of control with accountability for the end service. line-of-business level. companies must flex and adapt to accommodate this change. is leading to an increasingly complex service provider environment. and decision making. as the economic and regulatory environment continues to change. and mitigate supplier risk at the enterprise level and address certain questions. As new risk scenarios arise. offshore. risk management processes should be flexible and scalable enough to report metrics at a level of detail in which metric measurements can differentiate between supplier A and supplier B. and templates. and near-shore models. line-of-business. systems. and geographies • Utilize metrics and reports to assess supplier risk at the enterprise.

executives are seeking to achieve: • Designated accountability for delivery • Increased operational efficiency • Alignment between their business units and the outsourced functions • Successful execution of programs of work • Increased risk visibility • Increased resource utilization • A focus on innovation and continuous improvement • Effective end-to-end service delivery from many of the providers in its service chain Deloitte’s view on the service integration function A service integration function should effectively establish a common platform that allows an organization to integrate and execute multi-service provider programs while focusing on service delivery and value generation. has been driving inefficiencies. Science. and establish cross-supplier operational level agreements across programs.” • A lack of alignment between service providers. By establishing such a function. • Execution gaps have appeared between service providers.Exhibit 21. As a result. executives are focusing on increased governance over their service providers. and the Power of Perseverance 27 . The Outsourcing Vendor Management Program Office (VMPO): Art. Outsourcing market maturity Staff augmentation Siloed functional sourcing Multisourcing (multi-vendor) Business transformation 80% 70% 60% 50% 40% 30% 20% 10% 0% 76% 48% 34% 34% 3% No single vendor can meet all requirements To mitigate risk Existing relationship with some of the vendors Existing relationship with incumbent vendor(s) Location 5% Other Source: “Why Settle For Less? Deloitte Consulting 2008 Outsourcing Report. As shown in Exhibit 22. 2007. multi-service provider management has become an emerging area of focus. as well as the inherently siloed nature of multi-service provider environment in the absence of a service integrator role. What are companies looking to achieve from multi-service provider integration? Essentially. and failing to achieve innovation on an enterprise scale. These challenges are now driving companies to seek new methods of managing their service providers. integrate service delivery across both insourced and outsourced entities.” Deloitte Development LLC. seeking to establish a centralized function to coordinate and manage its service providers in the outsourcing chain. service integration functions should provide end-to-end governance. as poor governance and communication can lead to deliverables “slipping through the cracks. eroding cost savings.

and security requirements To map end-to-end service levels. .Exhibit 22. an Inn ov Qu ali ty an dc om pli an ce 28 D To define quality objectives and adherence to standards. define OLAs/SLAs. and accountabilities. While the demand for a solution for managing multiple service providers is becoming a hot topic in the market. many companies do not fully understand how to achieve effective multi-service provider integration. fewer respondents’ VM functions performed multi-service provider integration than any other of the 10 leadingpractice VM areas (Exhibit 6). Perhaps most importantly. and manage quality assurance for end-to-end IT service portfolio To drive holistic innovation across service providers and derive value from outsourced initiatives E •  Innovation and continuous improvement effective service integration function can identify service delivery risks where several providers are involved in an end-to-end process. responsibilities. monitor crosssupplier performance. An effective service integration function can also enable companies to more efficiently adopt and integrate various industry-leading practices and frameworks. Service integration functions Service integration function (SIF) building blocks SIF functions Description A To align project portfolio and services to enterprise strategy. and manage transition en • Portfolio management • Security and risk management • Service delivery • Performance management •  Transition and transformation management • Governance • Strategy and architecture •  Process development and monitoring •  Quality and compliance management t Se em ag B rvi ce an m m A B an ra m ag em Pr og en C Governance C t To provide governance. as well as a strong measurement and reporting capability across the outsourcing program life cycle. While 77 percent of our respondents had more than two service providers involved in their outsourcing program (refer to Exhibit 23). How are companies approaching multi-service provider integration? The survey results reinforce Deloitte’s experience of how companies are approaching multi-service provider integration. and many may not appreciate the risks associated with lacking a service integrator function. and develop cross-supplier processes ion m an D E ag em en t at The core elements of a service integration function are: • Program management • Service management • Quality and compliance • Innovation management • Governance Effective execution of these capabilities can enable an effective service delivery environment with clear roles. risk. This may be because service integration was the activity most likely to sit outside of VM. test alignment to IT strategy.

We view it as a positive sign that VMPOs are managing service integration at all. many executives felt that their VM organizations were only “somewhat effective” in service integration. service integration was the only function for which none of our respondents felt they had master-level resources. The Outsourcing Vendor Management Program Office (VMPO): Art. and the Power of Perseverance 29 . operational-level agreements. However. in order to successfully deliver an outsourcing program and mitigate the risks inherent in a situation where each service provider works independently against their respective agreements. companies must place the multi-service provider integration function wholly within one area and agree on roles and responsibilities. Doing this can provide the information to the service integration function support end-to-end service without the need for significant executive management overhead. Science. Indeed. Number of service providers involved in the outsourcing program 23% 23% 16% 19% 19% 1 2 to 3 4 to 5 6 to 10 >10 Interestingly.Exhibit 23. and joint performance metrics.

“Never say never!” Despite the challenges. The complexities of executing outsourcing and offshoring transactions are continuing to be offset by a number of leading-practice standards in terms of contracting vehicles and language. They continue to evolve and becoming more challenging as new services appear and additional geographies begin to supply services.com 30 . this report would not have been possible. The financial and nonfinancial benefits of outsourcing remain. outstanding business performance improvement through outsourcing can be achieved. Ajay Bolina Senior Manager Outsourcing Advisory Services Deloitte Consulting LLP Office: +1 973 602 5635 abolina@deloitte. We remain optimistic. However. Clients would do well to appreciate and understand that investing in tools and people and building an effective vendor management function now can allow them to not only manage the risks of today but can also suitably equip them with a platform to more effectively manage emerging risks. Such investments should also include flexible and scalable operating models that can allow changes in business demand to be more efficiently executed. Without them. and his dedicated team around the world.Conclusion Changes in both buyer behavior and supplier solutions will continue to evolve in the coming years due not only to technological innovations but also to the changing balance between risk appetite and increasing demand for shareholder returns. clients must also realize that the corresponding risks of outsourcing remain. and we hope this report provides both inspiration and guidance to those who are passionate about making outsourcing work within their enterprises. the principal investigator who led the development and publication of this report. However. As we stated up front. the question also remains as to whether clients are suitably equipped to realize these benefits through a vendor management program office. Acknowledgement Deloitte would like to acknowledge the work of Ajay Bolina.

Switzerland and the Netherlands) Neville Howard Partner Deloitte MCS Ltd.com Asia/Pacific and Australasia (Other than Japan) Peter Barta Principal Deloitte Services Pty Ltd Melbourne. +44 0 20 7303 7252 nhoward@deloitte.com.ca Mexico Jorge Gutiérrez Director Deloitte Mexico Aguascalientes . Japan +81 3 4218 7142 kmiwa@tohmatsu..V. Ltd. please contact: United States and Latin America (other than Mexico) Peter Lowes Principal Outsourcing Advisory Services Leader Deloitte Consulting LLP New York. Toronto.com Canada Colleen Gordon Associate Partner Outsourcing Advisory Services Deloitte Inc. ON +1 416 601 6739 cogordon@deloitte.K. London. NY +1 212 618 4380 plowes@deloitte.nl The Outsourcing Vendor Management Program Office (VMPO): Art. Milano.au Japan Koji Miwa Partner Deloitte Tohmatsu Consulting Co. Italy +39 0283323428 matomasi@deloitte. Mexico +52 449 910 8656 jogutierrez@deloittemx. Tokyo.Contacts For further information.A.co.uk Switzerland Fabrizio Napolitano Director Deloitte Consulting AG Zurich Switzerland +41 44 421 6766 fnapolitano@deloitte.P. Netherlands +31 65 2048996 soud@deloitte. Eindhoven. and the Power of Perseverance 31 .it Netherlands Stef Oud Partner Deloitte Consulting B. Science.jp United Kingdom and EMEA (Other than Italy.ch Italy Massimo Tomasi Partner Deloitte Consulting S. U. Australia +61 3 9671 6699 pbarta@deloitte.co.

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