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The Outsourcing Vendor ManagementProgram Ofce (VMPO): Art, science,and the power o perseverance
Never say never!
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2
Foreword 1
Executive summary 2
Research overview 3
Introduction 4
I. Evolution o VMPO requirements 7
II. VMPO maturity 10
III. VMPO operating models 19
IV. Understanding and managing risk through the VMPO 24
Conclusion 30
Contents
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Foreword
The outsourcing and oshoring market continues to not only grow, but also evolve with the addition o
new technologies (cloud computing) and geographies (China and Brazil, among others), as well as an
increasing ocus rom key stakeholders (regulators).
Outsourcing continues to deliver nancial benets, although labor arbitrage appears to be diminishing
in importance and is being replaced with a ocus on innovation and continuous improvement.
The Outsourcing Vendor Management Program Oce (VMPO): Art, science, and the power o perseverance is a 2011
Deloitte Consulting LLP report that ocuses on the challenges clients ace once they have executed their outsourcingtransactions and embark on journeys with single or multiple providers. In most instances, this journey begins with
transormational programs across multiple business units and/or multiple geographies, which need to be closely managed
and monitored to realize cost savings and transormational benets. This is an area rich with disappointment and unmet
expectations and peppered with stories o disastrous, ill-conceived, and poorly managed initiatives that proved to be
career-limiting or user and service provider executives alike. Our report aims to shed urther light on a critical underlying
cause o underperormance and oers practical, executable remedies that can make outsourcing more productive and
successul or the enterprises that outsource, the providers that service them, and the executives involved.
The ollowing discussion draws on the results o a survey on vendor management practices that polled 27 business and
inormation technology executives at global enterprises. We have also incorporated additional insights gained rom a
number o outsourcing and vendor management engagements that Deloitte has delivered across the world.
In general, we ound that a large number o companies are increasingly aware o and understand the importance ovendor management to realizing cost savings rom outsourcing and mitigating the applicable risks. However, vendor
management practices at the majority o clients remain relatively immature. There is considerable room or improvement,
not only in terms o investment in tools and people, but also in service provider relationships.
In addition to outlining clients vendor management experiences, this paper also oers our thoughts on leading practices,
which we hope you may be able to leverage and implement. We welcome your eedback and comments.
Yours truly,
Peter Lowes
Global Leader, Outsourcing and Shared Services Advisory Services
Deloitte Consulting LLP
New York, April 2011
As used in this document, Deloitte means Deloitte Consulting LLP, a subsidiary o Deloitte LLP. Please see www.deloitte.com/us/about or a
detailed description o the legal structure o Deloitte LLP and its subsidiaries. Certain services may not be available to attest clients under the rules
and regulations o public accounting.
The Outsourcing Vendor Management Program Oce (VMPO): Art, Science, and the Power o Perseverance 1
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2 The Outsourcing Vendor Management Program Oce (VMPO): Art, Science, and the Power o Perseverance 2
Executive summary
In 2008, a Deloitte outsourcing survey report, Why Settle
or Less?, addressed a number o questions regarding
the eectiveness o global corporations outsourcing
initiatives.1 This report sought to understand the extent to
which companies were realizing the nancial objectives o
their outsourcing programs, as well as the extent to which
companies were realizing additional, nonnancial benets.
The 2008 report did nd that a large number ooutsourcing companies had realized their nancial
objectives. However, it also ound a surprisingly high
number o instances o company-service provider
confict. Many companies expressed disappointment
with their service providers ability to provide continuous
improvement and technology improvements. The report
noted the importance o an eective vendor management
(VM) program that can provide the resources and
inormation to clients to not only get what they pay or,
but also realize value rom the outsourcing transaction.
A number o issues raised in the 2008 survey, including
ineective reporting, lack o transparency, and poorcommunication, continue to exist in the marketplace
today. These issues are the ocus o the current paper.
This paper reports the results o a survey o 27 senior
executives whose companies were engaged in major
outsourcing initiatives. We explored the extent to which
companies have understood the lessons learned rom the
2008 study. A major ocus o the study was to determine
what proportion o companies have established vendor
management program oces (VMPOs) to manage their
service providers: How likely are companies today to
have eective and mature VMPOs in place to manage
outsourcing transactions?
Below are some specic ndings rom this survey:
1. There is a growing awareness among companies that
in order to realize the benets o outsourcing, service
provider relationships have to be actively managed.
Sixty-seven percent o respondents to the current survey
reported that they had already established
dedicated VMPOs.
2. Even though companies are ocusing primarily on
traditional VM unctions (the majority o respondents
to this survey cited activities related to contract
management and service perormance management
as most important), many companies are showing an
increased interest in adopting a broad approach to
VM. This was evident rom the act that most o the
responding companies have adopted practices that
incorporate, in some ashion, Deloittes approach to 10
leading-practice VM unctions.
3. Despite adopting dedicated VMPOs that ocus onbroad VM unctions, the rate o eectiveness or
VMPOs was signicantly lower than our experience
working with clients would suggest: Only 57 percent
o the respondents rated their VMPOs as very eective
to eective.
The results o our survey, as well as our interactions with
clients across industries, indicate that companies still
continue to struggle with operating eective VMPOs
even though they understand the need or VMPOs and
invest in them. Hence, many companies continue to ace
challenges in managing outsourcing service providers. The
question is: Why? Do their struggles refect an issue o
ineective execution?
In our view, companies can no longer solely rely on
stringent contractual provisions to manage service
providers eectively. Instead, they need to adopt hybrid
models in which contracts are managed by eectively
operated VMPOs with the applicable investments in tools
and people.
We believe that i companies invest in the areas identied
in this report, they stand a better chance o eectively
managing their service providers and realizing theobjectives o their outsourcing initiatives. In addition, the
design, build, and implementation o fexible and scalable
tools and processes within a VMPO can urther improve a
companys ability to manage multiple service providers and
deal with the changing nature o regulatory requirements.
When it comes to reaping the benets o outsourcing:
Never say never! By adopting the leading practices
revealed in this report, large enterprises can take a major
step orward in achieving the ull benets o outsourcing
that they have long sought.
1 Why Settle For Less?
Deloitte Consulting 2008
Outsourcing Report, Deloitte
Development LLC, 2007.
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The Outsourcing Vendor Management Program Oce (VMPO): Art, Science, and the Power o Perseverance 3
Research overview
The survey research was supplemented by Deloittesrecognized experience in providing services to
organizations across various industries that are designing,
building, and implementing their VMPO initiatives.
Survey respondents included 27 senior executives rom
various mid-size and large companies headquartered in
the United States, Canada, United Kingdom, and other
countries (Exhibit 1). The companies were primarily
engaged in the outsourcing o inormation technology (IT)
and/or telecom services. Survey participants had signicant
exposure to the way the service providers in their
outsourcing programs were being managed. They were
asked a number o questions about how they managed
their service providers across their largest outsourcing
initiative. On average, the value o the outsourcing
programs being managed was approximately U.S. $400
million, with a total contract term o 6.8 years.
Exhibit 1a. Company respondent profile: Country
29%
11%
11%4%7%
4%
4%
30%
Canada
Switzerland
Italy
United Kingdom
United States
Japan
Mexico
Netherlands
22%
4%
33%
4%
4%
11%
11%
11%
Energy and utilities
Industrial products
Telecommunications
Manufacturing
Government
Banking, financialservices, insurance
Life sciences orhealthcareConsumer products
Exhibit 1b. Company respondent profile: Industry
11%
11%
10%
11%
8%
3%
11%
13%
6%
6%
10%
Application maintenance
Desktop support
Application development
Infrastructure services
Network architecture
Data security services
Telecom services
Other
Data center management
Help desk support
Call center operations
Exhibit 1c. Company respondent profile: IT functions/services
outsourced
Deloitte conducted a survey to test the hypothesis
that while companies are increasingly aware o,
and understand the need or, dedicated VMPOs
to manage their strategic outsourcing, oshoring,
and service delivery programs, the maturity o their
VM capabilities remains low.
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4 The Outsourcing Vendor Management Program Oce (VMPO): Art, Science, and the Power o Perseverance 4
Introduction
When asked how they approached VM within their
organizations, 67 percent o executives surveyed said they
had implemented dedicated VMPOs that covered leading-
practice VM unctions.2
The companies surveyed clearly recognized the need
or dedicated VMPOs. At rst glance, a review o the
statistics suggests that companies were actively investing
in establishing VMPOs in support o their outsourcing
programs, ocusing on what Deloitte views as the 10 core
VM unctional areas (as depicted in Exhibit 2).
IT unction operating model
Drive value delivery rom service providers to IT customers with
a ocus on the ollowing value objectives: Service quality, costeciency, risk management, and agility
Strategy and controlAlign IT strategy
and standards withbusiness strategy
and control IT valueand risk
Customermanagement
Match IT services tocustomer needs andmanage customer
satisaction
Product managementManage productinnovation andeconomics and
drive consistency instandards
Service deliverymanagement
Control and improvetimeliness, quality
and cost o IT servicedelivery
Security managementArchitectural standards
managementService delivery
oversight
Contract managementand compliance
Multi-service providerintegration
Transition and transormationproject management oce
(PMO) and oversight
Document management
Service requestmanagement
Service provider riskmanagement
Financial and commercialmanagement
Issue and disputemanagement
Service perormancemanagement
Governance
Customer relationshipmanagement
Strategy and programmanagement
Product liecyclemanagement
Solution advisoryDemand management
Audit and compliance
Business continuityand disaster recovery
planning
Service catalogmanagement
Internal IT servicedelivery
Vendor Management Program OfceMaintain value ocus through eective contract,
commercial, and relationship management
Operating model components
Controls
Skill and capabilities
Tools and technology
Communications
Service
providers
Customers
Leading-practice VMPO unctions
Contract management andcompliance
Financial and commercialmanagement
Issue and disputemanagement
Service perormancemanagement
Governance
Manageandtrackobligations, manage contractcompliance
Managecontractamendments
Verifyrateandvolumeinvoice charges, ARC/RRC3 commitments againstbaselines
Trackservicecredits
Trackandreportresolutiono issue and archive issues
Createandmanageissueescalation/managementprocess
Providedashboardreportingand MIS4
Developperformancemanagement ramework orSLAs5 and KPIs6
PerformSLAmonitoring,reporting, and trending
Establishandmanagegovernance process andorums
Undertakeassessmentagainst outsource objectives
Multi-service providerintegration
Transition andtransormation
PMO and oversight
Document management Service requestmanagements
Service provider riskmanagement
Developandmaintaincross-supplier standards andprocedures
Develop,negotiate,draft,and execute operating-levelagreements (OLAs)
Providetransitionandtransormation planning
Providetransitionandtransormation monitoringand reporting
Maintainrepositoryofcontractual artiacts
Performauditing,updating,and archiving o contractsand VM process documents
Manageend-to-endprocessor new service requests
Analyzenewservicesagainstthe contract
Determineriskanalysisapproach, tools, andmethodology
Recommendspecicriskindicators, requency, andmetrics to manage, track,and report
Exhibit 2. Deloittes view o leading-practice VMPO unctions placed within IT operating model
2 Leading-practice VMPO
unctions reerenced in thesurvey are dened by the
Deloitte IT operating model
set out in Exhibit 2.3 Additional resource
contribution/reduced
resource contribution4 Management inormation
systems5 Service-level agreements6 Key perormance indicators
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The Outsourcing Vendor Management Program Oce (VMPO): Art, Science, and the Power o Perseverance 5
The executives surveyed also indicated that the resources
perorming VM unctions were relatively highly skilled,
with 40 to 65 percent o respondents rating their VMPO
resources at an advanced or master skill level or many
VM unctions.
However, a review o the overall results ails to support
the initial impression that respondents are running mature
and eective VMPOs. Several contradictory results revealed
a confict between how executives view their VMPO
capabilities and the reality o their capabilities in terms
o leading-practice VM. For example, 67 percent o the
respondents said that they had established a dedicatedVMPO that perormed many VM unctions, yet the
percentage o VMPOs that were taking a lead role or
some traditional post-contract VM activities was low.
It is this contradiction that lends weight to the hypothesis
explored by the survey; that while organizations are
addressing specic VM unctional areas, they in act still
lack the maturity required to run ecient and eective
VMPOs that can help organizations to realize the objectives
o their outsourcing programs.
This report is Deloittes assessment o the survey results
on how companies view their VM capabilities. The results
are supplemented with Deloittes experiences and insights
regarding questions such as:
What does it take to build and implement an eective
VMPO?
What types o resources are required to operate an
eective VMPO?
What is an eective balance o cross-unctional skills
and experience needed to run an eective VMPO?
How can organizations build a fexible and scalable
VMPO and create an eective VM operating model
to address new and emerging VM practices, suchas supplier risk management and multi-service
provider integration?
The paper is divided into our sections. Section 1 discusses
the evolution o VMPO requirements in light o the
changing nature o the outsourcing market, changes in
buyer behavior, the shits in the economic climate over
the past ew years, changes in regulatory ocus, and the
increasing need to invest in skills and training to sta
VMPO unctions.
Section 2 covers our ndings and views regarding the
maturity o respondents VMPO unctions. This section
explores the extent to which the respondents had a
clear understanding o leading-practice VM and o the
requirements or establishing and successully operating
a VMPO.
Section 3 discusses the pros and cons o VMPO operating
models centralized or decentralized? Dedicated or
nondedicated? as well as VMPO maturity, approaches
to tools, recruiting, current VMPO practices, and Deloittes
view on leading VMPO practices. Section 3 also explores
some o the actors that have infuenced the need orbroad, fexible, and scalable VMPOs, including:
1. Companies have continued to adopt best o breed
approaches to outsourcing transactions. They are now
seeking to execute multisourcing transactions across a
number o service providers, each provider bringing its
own specic experience and knowledge to the table.
2. This means that companies need to pay greater
attention to how they integrate services across multiple
service providers and, in some instances, across
multiple geographies to keep service delivery intact
rom an end-to-end perspective.
3. In addition, governance and change management
mechanisms in transition and transormation programs
have also become more complex to manage, as several
dierent providers with multiple interdependencies are
typically involved.
4. An increase in M&A activity, as well as specic instances
o captive centers being divested to third parties,
has led to a correspondingly greater need to build
eective VMPOs to manage external third parties.
Previously, companies could rely on internal service-level
agreements (SLAs), typically with minimal governance
and penalty mechanisms. Now, they require more
ormal and commercially astute processes.
5. Advances in technology have seen the introduction o
new tools and platorms to manage not only service
providers contractual and commercial perormance, but
also their service delivery perormance. This, in turn, has
led to an increased ocus on skill set development and
talent retention. In addition, the continuing demand
or global outsourcing transactions across geographies,
which require companies and vendors to work across
multiple cultures, has led to an increased ocus on
relationship management.
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6
6. Changes in the economic climate have driven regulators
to increase their scrutiny o outsourcing and oshoring
transactions. Regulators may ocus on processes
adopted by companies to dene, manage, and evaluate
critical suppliers; inormation security assessments;
contingency plans; business plan continuity; roles and
responsibilities related to governance rameworks; and,
most importantly, data privacy issues.
Section 4 discusses the topic o understanding and
managing risk through a VMPO in light o changing
regulatory conditions as well as changes in buyer behavior.
It also provides our views on the multi-service provider
integration unction, which clients have historically
struggled to successully implement.
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The Outsourcing Vendor Management Program Oce (VMPO): Art, Science, and the Power o Perseverance 7
I. Evolution o VMPO requirements
Where has the market moved since 2008?
One o the conclusions o Deloittes 2008 outsourcing
report, Why Settle or Less?, was that certain problems
with service provider relationships existed despite the
act that outsourcing was an applicable solution or
many companies. Respondents to the 2008 survey were
challenged by issues such as inconsistent communication
between the company and its service provider, inadequate
reporting, absence o clear communication plans,lack o transparency, and poor-quality account
management (Exhibit 3).
Exhibit 3. Problems with communication and relationship
management
Dont know
None
Poor account management
Lack of transparency
Lack of communication plan
Reporting
Inconsistent communication 29%
24%
23%
20%
17%
51%
2%
Source: Why Settle For Less? Deloitte Consulting 2008 Outsourcing
Report, Deloitte Development LLC, 2007.
Note: Respondents were allowed to select multiple options.
Note: Respondents were allowed to select multiple options.
In addition, the report also concluded that there was
a growing awareness among companies that thecomplexities o managing outsourcing service providers
post deal execution were underestimated and poorly
managed. When asked what they would do dierently i
they could start their outsourcing initiative over again, 37
percent o the executives in the 2008 survey said that they
would do a better job o planning and stang or service
and contract management. This gure rose to 55 percent
among executives who were less than very satised with
their outsourcing initiatives.7
It is thereore unsurprising that, over the past ew years,
Deloitte has experienced a growing demand or services
that can help organizations ascertain the maturity o their
VM models and/or help them design, build, and implement
leading-practice VM models. Sixty-seven percent o the
respondents to the current survey reported that they had
already established dedicated VMPOs. Among respondents
that did not have a VMPO, 33 percent were currently in
the process o creating one. The rest o the respondentscited a lack o resources and experience as the main reason
or not establishing a VMPO (Exhibit 4).
Exhibit 4. Reasons for not establishing a dedicated VMPO
0% 10% 20% 30% 40% 50%
Not thought about VMPO
VMPO in implementationprocess
Maintain close proximitywith vendors
Lack of executive support
Geographical business spread
Lack of resources and expertise 44%
33%
33%
33%
11%
33%
As the survey shows, many companies today are
implementing dedicated VMPO unctions. In doing so,companies oten draw on the assistance o third parties
that can provide specialized unctional know-how and
the industry-leading operating practices, processes,
models, and tools necessary to create fexible, scalable VM
rameworks that can eectively and eciently manage
outsourcing relationships. This trend toward investing in
dedicated VMPOs has been ueled by a number o actors,
including the increased complexity o todays outsourcing
environment (including regulatory and compliance
issues) and the growing need to manage multiple service
providers that provide varying mixes o products and7 Why Settle or Less?, Deloitte
Development LLC, 2007.
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8
services across multiple geographies. The survey results
reinorce Deloittes experience that organizations are not
only recognizing that their traditional VM practices and
their VM practitioners related skills are no longer sucient
to meet current demands, but also are actively addressing
this concern by investing in tools and people.
Almost 70 percent o the surveys respondents invest
between 1 percent and 7 percent o the total outsourcedcontract value on implementing and operating VM
unctions, as shown in Exhibit 5. This gure is consistent
with Deloittes experience with organizations in
the marketplace.
Exhibit 5. Investment in VMPO functions (% contract valuespend on VM function)
1% - 3% 4% - 7% >7% Dont know
44%
25%
6%
25%
Our survey also suggests that VM is taking on a broader
range o activities than in the past, when VM dealt mostly
with basic contract management unctions and themanagement o commercial arrangements with the service
provider. Survey respondents indicated that organizations
are investing in setting up a variety o VM unctions,
including:
Contract management and compliance
Financial and commercial management
Issue and dispute management
Service perormance management
Governance
Transition and transormation project management oce
(PMO) and oversight
Document management systems
Service request management
Service provider risk management (an emerging area
o demand)
Multi-service provider integration (an emerging area
o demand)
How have traditional VM practices evolved?
The current activity in establishing dedicated VMPOs and
the increase in demand or leading-practice VM models
refects companies growing realization o the complexity
o todays outsourcing environment. Organizations are
being challenged, not only by the shit towards integrated
global service delivery models and the management o
multiple service providers across multiple geographies, but
also by the dynamics within their own organizations.
The increasing complexities o outsourcing and oshoring
transactions, as well as changes in the regulatoryenvironment, have led to a greater emphasis on
relationship management and new methods o working
between business units and internal support unctions such
as legal, tax, risk, and compliance. It has also led to a shit
in behavior rom a perorming culture to a managing
culture. For example, whereas client stakeholders would
produce both requirements and solutions in an in-house
service delivery model, a post-outsourcing environment
demands a ocus on dening requirements and allowing
the service provider to produce the solution. Contracts
need to be managed on a daily basis rather than being
monitored and periodically amended, and VM models
must also now be fexible and scalable to adapt tochanging business requirements and external pressures.
Eective relationship management is particularly critical
in an environment where regulatory and risk pressures
are continually increasing as a result o volatile economic
conditions. For example, in the nancial services industry,
regulatory bodies such as the United States Oce o
the Comptroller o the Currency (OCC) are placing an
increasing emphasis on scrutinizing the way organizations
track, measure, and report on risks associated with their
critical service providers. Regulators are examining the
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The Outsourcing Vendor Management Program Oce (VMPO): Art, Science, and the Power o Perseverance 9
way organizations assess these risks, how they dene
critical supplier, what internal governance controls and
mechanisms they maintain, and the way they manage
escalations. Regulators are also ocusing on service
providers nancial and operational viability, their ability to
ulll their contractual obligations, and the eectiveness o
their exit and contingency plans. Inormation security and
data privacy controls and processes are another growing
area o exposure. Regulators are also ocusing on howorganizations consolidate risk issues and report them at an
enterprise level; in some instances, this occurs through a
central reporting utility such as a VMPO that also manages
the day-to-day relationship with the service providers.
Regulators are examining the way organizations assess
these risks, their denition o what a critical supplier is,
their internal governance controls and mechanisms, and
the way they manage escalations. Regulators are also
ocusing on service providers nancial and operational
viability, their ability to ulll their contractual obligations,
and the eectiveness o their exit and contingency
plans. Inormation security and data privacy controlsand processes are another growing area o exposure.
Regulators are also ocusing on how organizations
consolidate risk issues and report them at an enterprise
level, in some instances through a central reporting
utility such as a VMPO that also manages the day-to-day
relationship with the service providers.
Service providers interest in increasing revenue rom
their current outsourcing arrangements must also be
careully managed. Failure to implement broad change
management and governance rameworks that closely
monitor and manage alterations to scope may lead to
unexpected costs and, ultimately, to value erosion.
Additionally, the growing complexity o todays
outsourcing environment demands new skills in
order to eectively manage an outsourcing program.
Traditionally, many VMPOs either resided largely within
the procurement or sourcing unction, or were operated
at a basic unctional level by business units that required
some orm o governance in order to eectively perorm
basic processes (such as managing service levels or
managing the delivery o a product). While theseunctions may have been eective at managing parts
o an outsourcing relationship, they have oten ailed
to successully manage entire outsourcing programs.
Eective management o an outsourcing program now
requires specic cross-unctional skills and experience,
specialized toolkits and disciplines, an enterprise view
o the outsourcing program, and the ability to manage
and integrate a large number o service providers (where
required) to deliver an enterprise service. Establishing a
dedicated VMPO can support companies eort to recruit,
retain, and develop the requisite cross-unctional skill sets
required to successully manage the complexity o todays
outsourcing programs.
The current survey clearly demonstrates that todays
executives have built upon the sentiments that executives
expressed in Deloittes 2008 outsourcing survey (as
summarized at the beginning o this section). In addition,
the current survey reinorces Deloittes experience that
companies are increasingly investing in broad tools,
systems, and processes or VM, as well as building VM
organizations that can provide the resources to more
eciently and eectively manage their service providers
and achieve their outsourcing objectives.
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10
II. VMPO maturity
Having established that many companies are now actively
investing in building VMPOs, we now turn to the question
o how they are building and implementing their VMPOs
and how eective those VMPOs are. The current survey
included a number o questions about which VM unctions
companies had implemented, how they had prioritized
these unctions, how eective respondents thought the
unctions were, how skilled the companys VM resources
were, and what operating models were employed or theVM unctions. The answers to these questions were core
to investigating the extent to which the respondents had
a clear understanding o leading-practice VM and o the
requirements or establishing and successully operating
a VMPO.
How are companies building and prioritizing their
VM activities?
In Deloittes view, leading-practice VMPOs incorporate the
10 unctional areas depicted in Exhibit 2. We asked survey
respondents to indicate which o these 10 areas they had
adopted or their current service provider engagements.
Each o the 10 areas was represented among ourrespondents; in act, all but two o the 10 unctional
areas (multi-service provider integration at 62 percent and
transition and transormation oversight at 76 percent) had
been adopted by over 80 percent o the respondents. The
results are displayed in Exhibit 6.
In our view, the most surprising nding was that 62
percent o the respondents were actively addressing
multi-service provider integration, and 95 percent o
the respondents were addressing service provider risk
management both o which are seen as new and
emerging areas o VM ocus. In Deloittes experience,
organizations have typically been slow to recognize the
need or investment in these two areas, and most are
relatively immature in the related controls and processes.
We also asked respondents to rate their VMPOs level o
Experience. In most o the VM unctions, between 40
percent and 65 percent o the respondents considered
their VMPO resources to be at an advanced or master
level (Exhibit 7).
Exhibit 6. Involvement in VMPO processes
0% 20% 40% 60% 80% 100%
Service providerrisk management
Service requestmanagement
Document management
Transition andtransformation oversight
Multi-serviceprovider integration
Governance
Service performancemanagement
Issue and disputemanagement
Financial and commercialmanagement
Contract management 95
95
95
100
100
62
76
85
81
95
19
10
19
5
5
5
38
5
5
5
Yes No Dont know
Exhibit 7. Resource skill levels in VMPO processes
0% 20% 40% 60% 80% 100%
Service providerrisk management
Service request
management
Document management
Transition andtransformation oversight
Multi-serviceprovider integration
Governance
Service performancemanagement
Issue and disputemanagement
Financial and commercialmanagement
Contract management 33 29 33
30 50 15
95 95 10
100 100
5 38 38 14 5
11
10
5
5
5
35 35 5
5
5
10
15
28
48
33
33
24
38
38
19
19
14
28 33
5
5
5 5
10
Beginner Intermediate Advanced Master N/A
Note: Numbers in Exhibit 6 are percentages.
Note: Numbers in Exhibit 7 are percentages.
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The Outsourcing Vendor Management Program Oce (VMPO): Art, Science, and the Power o Perseverance 11
Exhibit 8. Importance of VMPO objectives
Very important Important Neutral Unimportant
Very unimportant N/A
0% 20% 40% 60% 80% 100%
Others
Increase collaborationwith joint vendor forums
Mitigate conflict ofinterest across vendors
Performance improvementmeasures
Governance
Ensure timely transitionof services
SLA compliance
Perform financial planning
Process invoices and payments
Check on contractual obligations
Review and approvescope changes
Manage contract scope and costs
Increase operational efficiency 67
67
44
63
30
37
63
37
52
33
35
22
17 83
44 22
46
56
37
37
15
30
37 37
44 7
7
7
7
8 8
711
37
30
15
30
26 4 4
4
4
4 4
4
4 4
4
4
4
4
4
4
4
4
When respondents were asked to rate the importance
o each VM unction, activities related to contract
management and service perormance management
were seen as the most important elements o a VMPO
(Exhibit 8). Fity-two percent o the respondents thought
governance was very important, while the importance o
activities related to nance and commercial management,
transition and transormation oversight, continuous
improvement, and multi-service provider integration were
evenly distributed across the 30th percentile. A airly high
percentage o respondents were neutral on the importanceo reviewing and approving scope changes in a structured
manner, perorming nancial planning, supporting timely
transition and transormation, and increasing supplier
collaboration by establishing joint orums.
What does this tell us?
Given the growing complexity o managing todays
outsourcing service providers, as well as Deloittes
experience with companies VM eorts, it was surprising
to see that so many companies had established VMPOs
that covered a number o what Deloitte considers to be
leading-practice VM unctions. In our experience with
multiple clients, we have observed that companies are
struggling to understand how to build and manage
capability in this space. Given that the skills and experience
to manage these unctions are rare, one might question
the depth and breadth o the VM capabilities being
provided at our respondents organizations. Are companies
really using skilled, experienced resources to eectively
manage the leading-practice VM unctional areas? Orare they actually embracing these areas utilizing the
resources available to them, perorming these unctions
in a reactive, ad hoc manner without sucient substance
to operate eectively?
What is clear is that companies are choosing to move into
emerging areas o ocus or VM. They are also recognizing
the need or strong governance over their own internal
organizations as well as that o the service provider.
The results clearly indicate recognition o the need or
multi-service provider integration and risk management
(discussed later in Section 3 o this report). However,
the question remains: How eective are companies atmanaging these unctions?
Although organizations have made headway in identiying
and addressing leading-practice VM areas, responses to
the survey demonstrate that many companies are still
approaching service provider management in a traditional
manner, with the majority o respondents citing contract
management and service perormance management as
being the most important aspects o their VM unctions.
In our experience, service perormance management
has been a historical area o ocus in which processes
have oten been traditionally executed using standard
metrics and measurement techniques such as SLAs and
key perormance indicators (KPIs). Our work in assisting
organizations with their VM eorts suggests that
companies should now be considering additional
measures and techniques or managing their service
providers through multiple levels o governance
throughout the organization. This increases the probability
that company stakeholder interests will be met and that
the strategic value desired rom service providers will
remain intact. For example, some companies are starting to
Note: Numbers in Exhibit 8 are percentages.
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12
utilize executive perormance indicators (EPIs) to measure
and monitor the strategic aspects o their relationships
with service providers, rather than measuring only the
operational aspects o their partnerships (e.g., attrition
rates, volume o incorrect invoicing, and the volume o
incorrect change orders).
The act that companies are continuing to adopt and
deploy traditional approaches seems inconsistent withour respondents view o their involvement with VM
and the level o experience in their VM unctions. When
viewed in light o the continuing prominence o traditional
approaches to VM, cracks in the appearance o the
maturity o companies VMPO organizations begin
to appear.
It could be argued that the traditional areas o contract
management and service perormance management
should still be the highest priority, that organizations are
actively perorming many leading-practice VM unctions,
and that they are doing so at an advanced or master level.
Certainly, this is how organizations seem to be viewingthemselves and their VM capabilities.
However, Deloittes experience and understanding o
VM capabilities, o the market, and o organizations
requirements in this area challenge this belie. In our view,
while companies are making large inroads into identiying
what they require rom their VM capabilities, they have
not yet reached a sucient level o maturity to recognize
whether the substance o what they have built will provide
them with a sustainable, fexible, and scalable capability
that is eectively resourced to deal with changes in
business requirements and technology.
Recruiting or an eective VMPO
Understanding what is required to successully manage
complex outsourcing service provider arrangements is
not a straightorward and easy task. As the outsourcing
environment continues to increase in complexity, so
too do the skills, experience, and qualications needed
to manage it. Vendor managers must move away rom
traditional mindsets and develop dierent cross-unctional
skills, including relationship management skills, legal
skills, nancial/commercial skills, and planning and
project management skills. VMPO proessionals also
need to understand risk, contract management, service
management, and business development areas.
Deloittes 2008 outsourcing report indicated that nding
executives with a relevant set o skills or eective vendor
management was not easy. In act, nding resources withan applicable combination o skills at any level is oten a
challenge. Our experience has shown that organizations
oten retain existing employees to manage a new service
provider, believing that the people who previously
perormed the outsourced process are suitably qualied
to manage the service providers now delivering products
and services. In reality, such retained resources oten nd
the transition rom a service perormance culture to a
service management culture extremely dicult. Oten, the
retained resources tend to dictate solutions to the service
provider instead o buying a managed service and an end
result. Such behavior can prevent the service provider not
only rom realizing value rom existing obligations, butalso rom generating value rom additional opportunities.
It also creates additional management overhead and gives
the service provider the opportunity to disclaim liability or
poor service, on the grounds that the service provider was
not solely responsible or the outcome.
Similarly, our experience suggests that approaching service
provider management with a traditional procurement
mindset is also ineective. Oten, procurement
proessionals lack the applicable ocus, skills, and
experience to successully manage the complexities o
new outsourcing arrangements. Specically, procurement
proessionals ocus largely on negotiating the agreement
itsel; in their view, the agreement is where the deal is
made and where success is measured. Competent VM
proessionals, on the other hand, consider a deal successul
i service providers deliver on their contractual obligations
during the contract term and, at the end o the contract
term, the service provider has successully delivered against
the organizations objectives.
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The Outsourcing Vendor Management Program Oce (VMPO): Art, Science, and the Power o Perseverance 13
In a ast-paced environment involving complex outsourcing
agreements, recruiting and deploying resources with the
requisite cross-unctional skills can provide the knowledge
and experience to protect business-case savings, mitigate
risks, and provide visibility into progress through clear
communication and reporting, thereby supporting
executives in the achievement o their outsourcing
agreements objectives. It is this critical yet generally
unrecognized act that can make or break the successo a companys outsourcing program
How are companies stang their VMPOs? Exhibit 9 shows
the number o ull-time employees (FTEs) our respondents
employed on their VMPO teams.
Exhibit 9. Number of resources on VMPO team
23%
22%
11%
22%
22%
5-10 FTEs 21-25 FTEs
26-50 FTEs >50 FTEs
11-20 FTEs
Upon reviewing the activities being perormed by our
respondents VMPO resources, it becomes clear that
many are taking a lead role in both pre-contract and
post-contract execution activities (reer to Exhibits 11 and
12 below).They thereore have broader responsibilities
than leading-practice VM roles would recommend.
Considering the number o VM activities being perormed
and the number o resources perorming them, along
with the nding that only between 5 and 50 percent o
our respondents rated their VMPOs as very eective
in the various leading-practice areas (Exhibit 13), it
can be concluded that many companies are still not
eectively recruiting or dened VM unctions. This raises
the question o whether these resources are actually
procurement or service delivery resources undertaking
a variety o sourcing, operational, and VM roles. How
ecient are these VMPOs, given the size and sheer
number o activities that they are perorming in both lead
and supporting roles?
It appears that while many executives believe that they
have skilled resources or VM, there may in act be someconusion as to vendor managers applicable roles and
responsibilities, which points to conusion about the skills
and experience required to operate VMPOs eciently
and eectively.
Approaches to VM tools
In our experience, companies oten see VM tools as
a supplement to their core VM needs rather than as a
priority ocus area. However, this attitude is changing
as the management complexities o outsourcing deals
evolve and as executives increasingly look to decrease
management overhead and obtain real-time visibility into
the current state o their outsourcing programs.
The challenge acing both clients and service providers is
how to develop and implement a holistic enterprise VM
tool to eectively manage the service providers and the
services pertaining to a specic outsourcing program.
To date, the available sotware has ocused on discrete
unctions; it has not accommodated a ull suite o
unctionality or VMPO purposes that can adequately track,
measure, and report against the metrics associated with
each o the 10 VM leading-practice areas.
An interesting observation is that some o the more
traditional VM unctions, such as contract management
and issue and dispute management, continue to remain
lower priority or technological enablement. This can
potentially prevent companies rom realizing the ull
benets rom these traditional core unctions.
Which unctions are companies choosing to ocus on with
respect to implementing tools? We asked respondents
to identiy which o seven VM unctions were enabled
with sotware tools (Exhibit 10). Interestingly, yet not
surprisingly, the responses showed that companies were
using tools predominantly in traditional VM areas. Service
request workfows, nance and commercial systems,
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14
service perormance management, and document
management were the most common areas o sotware
investment. The results also suggest that companies are
becoming increasingly aware o the importance o issue
and dispute management: Although only 23 percent
o our respondents currently possessed tools to enable
issue and dispute management, an additional 14 percent
planned to implement tools in this area within the next
12 months.
An interesting observation is that some o the more
traditional VM unctions, such as contract management,
remain a lower priority or technological enablement. This
can potentially prevent companies rom realizing the ull
benets rom these traditional core unctions.
Exhibit 10. Process-level utilization of VMPO tools
0% 20% 40% 60% 80% 100%
Others
Governance
Service requestmanagement
Service performancemanagement
Document management
Issue and disputemanagement
Financial and commercialmanagement
Contract management 36
64
64
23
59
55
68
68
40 60
9 32
9 23
23
9
14 50 14
9 50
27
5
5
5
5
5
5 5
5
5
Yes No, but plan to inthe next 12 months
No, and nofuture plans
Dont know N/A
Deloittes view on leading-practice VM
Deloitte denes a VMPO as a highly skilled organization
whose purpose is to bring maturity and process discipline
to strategic outsourcing programs in order to reduce
costs, improve productivity and overall perormance,
preserve business-case savings, and mitigate risks. While
it is essential or VM proessionals to support pre-contract
execution activities, their lead role should be in post-
contract execution activities, ocusing on managing the
agreement in order to meet the outsourcing objectives.
Pre-contract execution activities should be led by sourcing
proessionals. This is not to minimize VMs important
supporting role in the sourcing process; in act, in
Deloittes experience, many companies are continuing
to make the mistake o bringing VM to the table too late.
VMs role is to assist the companys sourcing proessionals
in negotiating specic contract clauses to protect against
the risks that commonly arise ollowing execution o the
agreement. For example, a VM proessional can provideinormation on how to build eective governance
models, change controls, and reporting requirements
into the agreement.
Bringing a VM proessionals knowledge and experience
to bear on pre-execution contract activities can be critical
to the success o a companys outsourcing program. But
despite the importance o involving VM in pre-contract
execution activities, VM is still very much in a supporting
role. The VM proessionals assistance is delivered in
the same way that other subject-matter specialists are
engaged to dene the services and agree on terms within
the contract.
In contrast, post-contract execution is where the VMPOs
core competencies lie: VM proessionals take the lead role
in making the outsourcing program work. To put it another
way, the VMPOs job is to provide eective management
so the company can realize the desired value rom the
outsourcing program. The VMPO should ocus on the 10
leading-practice unctional areas o VM. It should design
the detailed governance model, including guidelines or
interactions with the service provider and the roles and
responsibilities o the parties involved in the management
o the agreement. And it should design and implement
processes, systems, and tools to manage the service
providers; conduct training; implement eective transition
and transormation oversight; and conduct negotiations
with service providers (e.g., or new services arising under
the agreement, amended services, or any extensions or
terminations o the agreement). A VMPOs success can be
measured by its ability to reduce cost, increase productivity,
achieve fexibility, improve quality, and mitigate risk.
Note: Numbers in Exhibit 10 are percentages.
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The Outsourcing Vendor Management Program Oce (VMPO): Art, Science, and the Power o Perseverance 15
The table below summarizes the potential benets o an eective and dedicated VMPO.
Success criteria What an eective VMPO can do Potential result without a VMPO
Reduced cost Trackresultsversusoriginalbusinesscase
Determinewhetherproductivitytargetsandobjectives
are being met
Negotiatechangesandmanagescopecreep
Difculttomeasuresavingsyearoveryear;initial
savings may not be realized
Contractsdonotstaystaticthroughtheterm,making
original cost savings even harder to track
Increased productivity Determineleadingmethodfortrackingproductivity
Establishbaselineandtrackprogressagainstcontract
terms
Translateproductivityimprovementsintobottom-line
savings or increased capacity
Three to 5 percent annual improvement i mandated;
0 percent improvement i not mandated
Dicult to measure/test
Flexibility Forecastdemandandreducevariance
Balanceexibilityagainstcostandutilization
Utilizecontractuallycommittedvolumeseffectively
Minimumcommitmentrequiredtoachieve
desired rates
Short-termrates30percenthigherr
Ineffectiveutilizationofdemandandcapacity
management models
Improved quality Encourageutilizationofserviceprovidersbeyondpure
sta augmentation
Track,report,andimproveservicelevels
Determinethatqualitygoalsarenotexcessive
Serviceprovidersusedasstaffaugmentation
Fewservicelevelcommitments
Norealopportunityforserviceproviderstoinnovate
Risk mitigation Deneandimplemententerprisemethodology
or assessing the progress o transition and
transormation programs
Denegovernancestructureforapproving
milestone payments, exceptions, and monitoringinterdependencies between programs
Inabilitytomeetcost-savingtargetsduetodelaysin
programs, scope creep, and escalation delays
Dissatisedinternalstakeholders;delaysinachieving
steady-state status
Companies current VM practices
How closely did the survey respondents VMPOs align
with Deloittes views on leading VM practices? The
results continued to build support or the hypothesis that
most companies VM maturity remains low. A majority
o respondents answered that VM took a lead role in
the pre-contract execution activities listed in Exhibit 11
(an average o 55 percent across all activities). Fewer
respondents reported that VM took a supporting role (an
average o 34 percent across all activities). Five percent o
the respondents VMPOs took no role at all in one o the
specic pre-contract execution activities one might expect
VM to be involved with designing the operating model
and governance structure. Clearly, these responses are at
odds with Deloittes view that VM is more eective in a
supporting role or pre-contract activities rather than in
a lead role, and suggest that many VMPOs are acting as
sourcing groups in addition to perorming VM activities.
Exhibit 11. Pre-contract execution
0% 20% 40% 60% 80% 100%
Service requestmanagement
Design targetoperating model andgovernance structure
Draft, negotiate,and execute contract
Conduct due diligenceand short-list vendors
Create the RFPand analyze responses
Create value propositionand business case
Lead role VM not involvedSupporting role Dont know
55
50 41
14
32
55
55
68
32
59 32
32
23
5
5
55
9
9
9
9
Note: Numbers in Exhibit 11 are percentages.
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16
With respect to post-contract execution activities, a
majority o respondents again indicated that the VMPO
took a lead role in nine out o the 16 post-contract
execution activities listed in Exhibit 12 (an average o 53
percent across all activities). Interestingly, 36 percent o
the respondents, on average, indicated that the VMPO
took a supporting role in post-contract execution activities.
In other words, where one might expect to see a large
discrepancy between VMs level o involvement in pre-and post-contract activities, the results instead showed
very little dierence at all.
At many companies, the VMPOs played a supporting role
in budgeting, orecasting, and tracking business case
savings. For activities such as perorming risk analyses on
the service provider, reviewing and reconciling invoices,
and developing and executing operating-level agreements
(OLAs) between service providers, there was only a 5
percent dierence between the percentage o companies
where VM played a lead role and the percentage o
companies where VM played a supporting role.
Exhibit 12. Post-contract execution
Lead role VM not involvedSupporting role Dont knowor N/A
0% 20% 40% 60% 80% 100%
Provide overall governance
Perform risk management analysis
Develop and maintaincontractual artifacts
Plan, monitor, and reporttransition activities
Consolidate end-to-end SLAand OLA reporting
Develop, negotiate,and execute OLAs
Develop and maintaincross-supplier standards
Manage, track, andreport adherence to SLAs
Report on actualvs. business case savings
Provide inputto budgeting and forecasting
Reconcile invoicesand facilitate approvals
Track, manage,and resolve disputes and issues
Negotiate newservice and scope changes
Track, manage, andreport on performance
Train on contract operating model
Design systems and tools 64
64
68
55
55
52
59
48
71
43
38
29
33
32
32
50
55
55
50
36
41
41
19
41
45
45
59 36
27
27
23
9
14
14
24
9
9
9
9
9
32 5
5
5
5
5
5
5
5 5
5 5
5
5
These results are inconsistent with how an eective VM
organization should operate. Clearly, although the majority
o our respondents said that they had a dedicated VMPO
that perormed all unctional activities, the high percentage
o VMPOs taking a supporting role in these activities would
suggest that VMPOs have been disenranchised in many
areas, operating as supporting unctions to other areas o
the business rather than holding primary responsibility or
driving service provider management.
A critical question, thereore, is: How eective are the
dedicated VMPOs that many o our respondents claim
cover all leading-practice VM unctions and more? How
eective can they be i they take a lead role in pre-contract
execution activities and play an almost equal measure o
lead and support roles in post-contract execution activities?
Exhibit 13 shows respondents ratings o the eectiveness
o their VM organizations in a variety o areas. The results
were not strongly avorable in any category. On average,
across all VM objectives, executives reported that:
57 percent o VMPOs were perorming very eectively oreectively
34 percent o VMPOs were somewhat eective
3 percent o VMPOs were not eective
These results can be interpreted in a number
o ways.
It could be argued that, because an average o only 3
percent o the executives elt that their VMPOs were not
eective, our hypothesis that VMPO maturity remains
low is invalid. This result might support the view that
the VMPOs that organizations are establishing are
in act leading-practice VMPOs with skilled andexperienced resources that work eectively to manage
outsourcing programs.
Note: Numbers in Exhibit 12 are percentages.
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The Outsourcing Vendor Management Program Oce (VMPO): Art, Science, and the Power o Perseverance 17
Exhibit 13. Effectiveness of VMPOs in achieving objectives
Very effective Effective Somewhat effective
Not effective N/A
0% 20% 40% 60% 80% 100%
Increase collaborationwith joint vendor forums
Mitigate conflictof interest across vendors
Perform continuousimprovement measures
Resolve issuesand provide governance
Ensure timelytransition of services
SLA compliance
Perform budgetingand forecasting
Process invoices andpayments accurately
Meet contractual obligations
Approve changes with astructured framework
Manage contract scopeand costs
Increase operational efficiency 23
23
23
23
23
36
32 32
32
32
32
32
50 27
27 27
18
18
18
45
41
41
41
41
43
41
32
27
27
27
5
5
5
5
9
9
9
9
99
5
5
5
5
23
24
14
14
14
14
14
55
5
However, i this were true, we would expect to see more
than an average o 57 percent o respondents rate their
VMPOs as eective to very eective. In our experience, at
least 90 percent o dedicated VMPOs with highly skilled
resources that employ leading-practice VM tools, systems,
processes, and procedures should be rated as eective to
very eective at governing outsourcing programs.
Are our respondents VMPO organizations being spread
too thinly across too many pre-contract and post-contract
execution activities? Do their VM resources have the right
skills to be perorming both pre-contract and post-contract
execution activities? Are we, in act, looking at a situation
in which organizations, in aggressively setting up VMPOs,
are doing so based on either traditional VM practices
or partially inormed emerging VM practices? Or do our
results simply refect the lack o objective criteria against
which companies can measure the eectiveness o their
VMPOs? Perhaps this interpretation would explain why
responses to the query on how executives would increase
the eectiveness o their VMPO organizations were not
high in any category (Exhibit 14).
Exhibit 14. Increase effectiveness of VMPOs
0% 20% 40% 60% 80%
Other
Increased level of executivesupport within the organization
Better delineated roles andresponsibilities for VM
Alignment of VM activities withoverall business objectives
Establishment of performance metrics
for the VM function
Performance of end-to-end VMactivities, pre and post-contract execution
Increased level of skill-set of VM resourcesthrough training and external recruiting
Standardized VMprocesses and tools
63%
59%
56%
48%
41%
33%
4%
59%
Note: Respondents were allowed to select multiple options.
What can be concluded about the efciency and
eectiveness o companies VMPOs?
Our survey results clearly show that executives believe
that their companies are operating ecient and eective
VMPOs and utilizing skilled resources to do so. A closer
look at the results, however, suggests that this belie may
be misplaced or the ollowing reasons:
a. The large number o resources on the respondents
VM teams, and the act that these resources tend to
lead both pre-contract and post-contract execution
activities, suggests that conusion may exist with
regard to VMPO roles and responsibilities and/or that
resources may be being leveraged rom across d ierent
organizational disciplines.
b. Respondents indicated that some emerging VM
unctions are being managed and staed with skilled
resources, which casts doubt on the respondents
understanding o leading practices in these areas.
c. While many respondents reported that they utilized
highly skilled resources, with between 40 percent
and 65 percent rating their resources at an advanced
Note: Numbers in Exhibit 13 are percentages.
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18
or master level, only 57 percent o respondents, on
average, rated their VMPOs as eective or very eective.
Based on our experience, the use o such highly
skilled resources should have yielded better ratings on
eectiveness. Moreover, respondents could not identiy
any denite means o improving eectiveness. This
set o ndings raises questions around respondents
understanding o the skill sets and disciplines required
o VMPO resources, the roles o these resources, andthe breadth o their activities. Our ndings also raise the
issue o whether there exists any established metrics by
which VMPO eectiveness is being measured.
d. While it was clear that companies are addressing
emerging VM ocus areas, such as supplier risk
management and multi-service provider integration,
their responses to questions on the priority o unctions
and their investment in tools show a traditional rather
than a leading-practice approach to VM.
It is clear, thereore, that the survey results support our
hypothesis that VMPO maturity remains low at many
companies, even though they have made great inroadsinto recognizing and actively establishing VMPOs and
believe that they have done so eectively.
Respondents also elt that they were getting a higher
return on their VMPO investments. The average cost
savings that could be directly attributed to the operation
o the VMPO was higher than the average investment
required, which would make the VMPO a valuable
contributor to a companys success. While cost should not
be the ultimate measure o a VMPOs success other
actors, such as risk mitigation and avoidance o potential
cost overruns, should also play into this evaluation itshould certainly be a actor in a VMPOs measurement.
We believe that by increasing the maturity o their
VMPOs, companies can close the gap between their
current operations and leading practices by establishing
eective operating models, engaging the right VM
unctions, and employing resources with the requisite skills
and experience. This can allow companies to increase
operational eciency and reduce overhead time.
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The Outsourcing Vendor Management Program Oce (VMPO): Art, Science, and the Power o Perseverance 19
III. VMPO operating models
Deloittes view on VMPO operating models
There are no generic models as to how a VM ramework
should be developed and applied within a company.
The questions o whether a VMPO should be retained
within an organization; whether some unctions should
be perormed onshore, oshore, or by a third party; and
whether the VMPO should operate in a centralized or
decentralized ashion will be infuenced by a range o
actors, including the geography o a companys services/activities, the service provider mix, the locations where
services are being perormed, tax structures, the
scope o service provider solutions, and the companys
strategic direction.
In order to determine what operating model would be
eective or its business requirements, a company should
ask specic questions such as:
Is the unction manual in nature, and would it be
compromised i it were removed rom the local site?
Is the unction responsible or making strategic business
decisions on a daily basis?
Can the work be delivered globally in a standardized
manner?
Does the unction require organizational decision making
or developing and implementing leading practices?
A number o challenges and benets are associated with
both a centralized and a decentralized model. Some o the
benets o a centralized model, or example, may include:
The ability to leverage the skills o global service
providers where skills do not exist at the regional level
Greater standardization, leading to greater eciency and
cost savingsEstablishing accountability or the agreement in one area
Aggregation o volume levels, resulting in a stronger
negotiating position and greater cost savings
These benets, however, may be balanced by challenges
such as:
A lack o buy-in and application o centralized systems
and processes by the regions
Increased complexity in managing the service provider
and the cost o delivery
Time zone, cultural, and language dierences
Changes in legal and regulatory requirements thatare dicult to incorporate into the model on an
ongoing basis
Decentralized operating models, in contrast, can realize
benets such as:
Tighter control regarding internal decision making,
leading to better alignment o choices with the
regional location
Tighter control around the service provider and thereore
around service delivery
Greater fexibility with regard to adopting changes in
response to legal or regulatory requirements
Clearer and aster communication and collaboration
However, a decentralized model can ace challenges
such as:
The inability to benet rom economies o scale and
the resulting price and service advantages rom global
agreements
The existence o multiple contracts with the same service
provider or the same services across regions, leading to
greater management overhead
Diculty in meeting global strategies when regions
agree on nonstandardized systems and processes,leading to greater ineciency and cost
Reer to Exhibit 15 or schematic representations o
decentralized and centralized rameworks or VM
operating models.
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20
Exhibit 15. Operating model structure
Decentralized
CFO
Oshore supplier
Business unit
control
Supplier
managementSupplier
management
Supplier
management
Supplier
management
Supplier
management
Statutory and
regulatory reporting
Product controlMI and decision
supportCentral unctions
Illustrative
Centralized
CFO
Business unit
control
Business unit
control
Supplier
management
Supplier
relationship
manager
Supplier
relationship
manager
Supplier
relationship
manager
Statutory and
regulatory reporting
Statutory and
regulatory reporting
Product control
Product
control
MI and decision
support
MI and decision
support
Central unctions
Illustrative
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The Outsourcing Vendor Management Program Oce (VMPO): Art, Science, and the Power o Perseverance 21
Other choices that need to be careully considered are
whether to retain a VMPO or to outsource some or all o
the unctions to a third party, as well as where to locate
the VMPO (onshore or oshore). Both these topics are
addressed later in this section.
In any event, the decision as to what operating model
would be eective or a company must be careully
considered and made with an appreciation o thedierent options benets and challenges. Perhaps most
importantly, it must be made with a clear understanding o
the risks o each option so these can be careully managed.
What VMPO operating models are companies
employing?
Our survey showed that 62 percent o the respondents
were operating their VMPOs under a centralized model.
Twenty-nine percent were operating their VMPOs under
a decentralized model, and 10 percent were unsure
(Exhibit 16).
Interestingly, the number o executives who rated theirVMPO as eective closely aligns with the number o
companies that had adopted a centralized operating
model. Traditionally, centralized operating models have
typically provided more control over the outsourced
environment. Thereore, it could be argued that our
respondents satisaction with the eectiveness o their
VMPO organizations is due in part to their centralized
Exhibit 16. Respondents VMPO operating model
62%
29%
9%
Centralized Dont knowDecentralized
operating models, which is in line with our experience.
Placing accountability or the management o service
providers in one area, as well as being able to dictate
the VMPOs processes, tools, procedures, templates, and
requirements or resources skills and experience, could
arguably result in a more controlled and broad VMPO. Had
the responses been the other way around (i.e., i most o
the respondents had adopted a decentralized rather than a
centralized model), would the satisaction o the executiveswith the eectiveness o their organizations have been
even lower?
Operating model considerations were oten a driving
actor behind whether to implement a dedicated versus a
nondedicated VMPO. Typically, we have ound that clients
tend to adopt decentralized models in circumstances
where 1) businesses are spread across geographies and 2)
service providers are in close proximity to client locations,
thereby providing ease o access. Indeed, each o these
actors was cited by 33 percent o respondents as a reason
or not establishing a dedicated VMPO (Exhibit 4).
According to Deloittes view on operating models,however, neither o these reasons should stand in the way
o the establishment o a dedicated VMPO. A dedicated
VMPO with leading-practice processes, procedures, tools,
and templates can deliver more benets to an organization
than would be gained with a nondedicated VMPO.
Choosing not to establish a dedicated VM unction or
the reasons cited by our respondents may only exacerbate
issues that typically arise in outsourcing programs, such as
inconsistent communication, poor or unreliable reporting,
and an underestimation o the complexities o managing
outsourced service providers.
Certainly, being close to and having easy access to
service providers can be benecial, since it can oer more
fexibility. This fexibility and ability to respond quickly
to change, however, may result in greater reliance on
relationships rather than on ormal agreements with
service providers, which may in turn lead to potential
disputes later as to the substance o an agreement. A
dedicated VMPO that acts as an organizations single point
o contact or service provider management i it is set
up with leading-practice models, systems, and processes
can achieve the same fexibility while also providing
additional benets around risk mitigation, cost protection,
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22
and operational eciencies. Similarly, a dedicated VM
unction that implements leading practices consistently
across a global organization can be o great benet to
the enterprise. A key to achieving success in this case is
to oster unity and understanding among the dierent
geographies, as well as to establish common intent and
understanding with regard to managing outsourced
service providers.
Approaches to outsourcing VM unctions
When asked whether their VM unctions were outsourced
or retained and whether they were perormed onshore or
oshore, 93 percent o executives, on average, reported
that they had retained their organizations internally. Only
5 to 9 percent o executives responded that the areas o
service perormance management, multi-service provider
integration, transition and transormation oversight,
document management, and service request management
were being perormed by a third party (Exhibit 17). O
these unctions, service perormance management, multi-
service provider integration, transition and transormation
oversight, and service request management were beingperormed oshore.
Exhibit 17. Operation of respondents VMPO processes
0% 20% 40% 60% 80% 100%
Contract management
Financial and commercialmanagement
Issue anddispute management
Service performancemanagement
Governance
Multi-serviceprovider integration
Transition andtransformation oversight
Document management
Service requestmanagement
Service providerrisk management
95
91
86
90
77 14
100
100
100
5
95 5
5
9
91 9
9
9
5 5
In-house Third party N/A
Our results show that the majority o executives who had
outsourced their VMPO unctions did so because they
wished to leverage the experience o a third party and/
or because they had identied a lack o the applicable
skill set within their organization to successully perorm
the unction themselves. Interestingly, the motivating
actors or outsourcing VMPO unctions dier rom those
commonly attributed to typical outsourcing initiatives.
Specically, none o the executives cited the need toreduce costs, obtain objectivity, or respond to an internal
ailure as reasons or outsourcing their VMPO unctions.
This is in line with Deloittes experience working with
organizations over the past two years.
While many executives who had not outsourced their
VMPO unctions said that they would not consider doing
so, 41 percent acknowledged that they would either
consider it or were unsure. This indicates a possible
emerging awareness that outsourcing the VM unction
may be an attractive option that can allow companies to
leverage specialized skills and knowledge.
What can be concluded rom the nature o the unctions
that organizations have chosen to outsource? Interestingly,
the unctions that respondents said they had already
outsourced were similar to the unctions that respondents
said they would choose to outsource i they were to
do so in the uture. Our conclusion, supported by our
experience, is that these unctions have increased in
management complexity with the advent o global multi-
vendor outsourcing programs. In addition, they are areas
o ocus or regulators (e.g., or regulations around risk
management). They are thereore attractive candidates or
transitioning to third parties that have demonstrated core
competencies in perorming these activities.
Organizations should nevertheless take care when making
the decision to outsource some o these unctions. Service
request management, or example, relies on the internal
client organization to dene its business requirements, and
it is central to a companies strategic direction. Thereore,
any eort to outsource this unction should be approached
with caution.Note: Numbers in Exhibit 17 are percentages.
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The Outsourcing Vendor Management Program Oce (VMPO): Art, Science, and the Power o Perseverance 23
Companies should be careul when choosing to outsource
or oshore VM unctions. They should embark on any
such program with a deep understanding o the risks
associated with this decision. Multi-service provider
integration, or example, is a unctional area where
organizations have struggled to adopt models regarding
how service providers will work with each other. Executing
OLAs and managing joint supplier governance orums are
not trivial tasks. In our experience, clients have typically notconsidered the complexities o relationships with internal
stakeholders and the proximity o service providers when
oshoring VM unctions to their captive centers.
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24
IV. Understanding and managing riskthrough the VMPO
Why is risk management so critical? A look at
supplier risk management and multi-service
provider integration
One o the specic benets o an eective VMPO is that it
can implement controls and tools that provide inormation
to track, measure, manage, and report the inherent risks o
outsourcing transactions in which services are transitioned
to a third party. VMPO risk management capabilities
have become more critical in light o recent economicconditions that have led to increased regulatory scrutiny,
compliance and governance issues, and an increasingly
complex outsourcing landscape.
How are companies approaching risk management with
their VMPOs? What programs are they implementing
to manage risk? How are they acing the challenge o
managing relationships with multiple suppliers that are
oten individually responsible or delivering separate
elements o an end-to-end service to their customers?
Risk management
Volatile economic conditions and increasing regulatorypressures are driving demand or broad supplier risk
management rameworks that provide the experience and
inormation to address the risk o nancial losses, business
disruptions, and regulatory interventions. Companies are
now asking questions such as:
How do we bring our supplier risk management (SRM)
capability in line with industry practices to enable
eective governance and meet regulatory requirements?
What are the specic risk drivers that can provide
inormation to gauge the level o risk associated with our
critical suppliers?
What preventative or mitigating actions can we take tomanage supplier risk?
How should we measure and report supplier risk, and
what data elements need to be captured?
In addition, regulators are asking related questions
such as:
How do companies dene who their critical service
providers are?
What are the individual components o risk that
determine i a supplier is critical?
Does the company have clearly dened and well-
understood supplier tiers?
Does the governance ramework have clearly dened
roles and responsibilities?
To what extent is reporting automated? What tools are
utilized?
How much business knowledge and core process
knowledge has been outsourced?
How eective are the companys inormation security
assessments?
How is the company addressing business plan
continuity?
Although our survey did not directly ask respondents about
their approaches to service provider risk management,
some insights into the maturity o this unction can be
gained rom their responses to other questions.
As indicated in Exhibit 18, 95 percent o respondents
conrmed that their VMPO perormed SRM, and 43
percent o these said that these resources possessed either
advanced or master level skills. These percentages seem
high, as SRM is an emerging discipline and the skills and
experience or leading-practice SRM are dicult to assess.
Exhibit 18. Respondent supplier risk management skill level
62%
62%
62%
29%
9%
Master Intermediate Beginner N/AAdvanced
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26
Additional areas o risk, set out in Exhibit 20, must be
managed using a stringent governance ramework with a
ocus on risk at the enterprise level, line-o-business level,
and individual supplier level. This can give a company a
holistic view o risks. It can also give lower levels o the
organization the inormation and resources to help them
make eective decisions on matters, such as reputational
risk and concentration risk, which may expose the
enterprise as a whole.
Reporting requirements should also be a specic ocus
area. Organizations should ocus not only on the quality
and accuracy o data, but also on reporting useul,
actionable data and metrics to senior stakeholders.
Perhaps most importantly, as the economic and regulatory
environment continues to change, companies must fex
and adapt to accommodate this change. As new risk
scenarios arise, companies should be vigilant in identiying
challenges and enhancing their regulatory risk denitions
in order to improve their supplier risk management
practices. For example, risk management processes shouldbe fexible and scalable enough to report metrics at a level
o detail in which metric measurements can dierentiate
between supplier A and supplier B, especially as there are
oten several dierent types o critical suppliers.
Deloittes experience indicates that by implementing an
eective supplier risk management model with applicable
processes, systems, tools, and templates, companies can
achieve the rigor and structure to eectively identiy,
manage, and mitigate supplier risk at the enterprise level
and address certain questions. Doing so can provide
inormation to companies to:
Meet regulatory requirements
Standardize and manage operational risk
Achieve a strategic and holistic view o risk within a
portolio o providers spread across various unctions,
services, and geographies
Utilize metrics and reports to assess supplier risk at the
enterprise, line-o-business, and supplier levels
Make applicable management inormation available
to support eect
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