1.
Drive Your Business
Best-in-Class Vendor
Management Office
Vendor Management Should be a Core
Competency of the IT Function
Strategy Brief | IT
1
Introduction
With the growing role of vendors
in the delivery of IT services
WGroup has long held that vendor
management should be considered a
core competency of the IT function,
as well across the entire organization.
This subsequently requires a
management process and staffing
commensurate with its importance.
WGroup uses the the straightforward
and well-established Star Model*
as a framework for organization
design and calls upon significant
experience in sourcing and IT service
delivery to identify and establish
vendor management capabilities.
This WGroup Strategy Brief will define
and explore the Vendor Management
Office (VMO) from a number of
perspectives including the foundation,
organization design, partnerships,
vendor and contract assessments,
processes and tools, performance
management, financial impact and
finally the implementation or roll-
out plan. This WGroup Strategy
Brief describes our recommended
considerations in each of these areas.
IT Strategy
Capabilities
People
(Rewards)
Partnership
Structure
Processes
Source: Kates, A., Galbraith, J. Designing Your Organization, 2007
Simplified Framework for Organization Design, Star Model
“With the role of key
vendors evolving and
with more vendors
being introduced into
the workplace, effective
vendor management has
become a critical capability
of any enterprise.”
Denis Desjardins
Principal, WGroup

2.
Before designing the structure of the
VMO and its operating processes
it is important to consider and
come to agreement on a number
of “foundation” elements.
Note: Initially, it is helpful to define
key terms that are often misused or
inconsistently used. Among these are
“Contract Management”, “Contract
Maintenance”, “Contract Administration”
and “Tier 1-3 Agreements”.
Once terms have been defined the
required capabilities of the VMO
can be identified. This involves an
assessment of the direction of the
business i.e. what business initiatives
are planned or contemplated and an
assessment of the IT strategy. The
IT strategy should clearly indicate
where new or enhanced relationships
with vendors will be required.
VMO Capabilities are expressed
as competencies the VMO must
possess in order to support the IT
function in execution of the strategy.
Next, VMO objectives are
defined. These reflect the VMO-
related requirements of the IT
strategy and evolve based on
the stage of development the
organization is in. Objectives
are oriented internally toward
VMO performance improvement
and externally toward vendor
rationalization and value realization.
Guiding Principles set the tone for how
the VMO will interact with vendors
and internally, with key stakeholders.
They are value statements and are
generally communicated internal to the
organization and adopted by the staff.
Before designing the organization it
is also important to define the key
organizational-level policies that will
govern the operation of the VMO and
establish its authority in the enterprise.
These policies are distinguished from
operational-level policies which are tied
to operating procedures. These policies
are communicated to key stakeholders
by senior management and are enforced
with senior management backing.
Keys to Success are a representation
of what management needs to
keep in mind when designing and
implementing the VMO. They take
into consideration the culture of
the organization, maturity level of
2 WGroup
VendorPortfolioManagement
Vendors
Tier 1-4
Stakeholders
IT, ADM, Sourcing, Legal
QualityandProcessImprovement
Contracts
SOWs, SLAs, T’sC’s
Service Levels
Demand Management, Quality
Processes
Policies, Procedures, Tools
Organization
People, Structure, Skills, Partnerships
Foundation
Governance, Risk Management,
Capabilities, Objectives, Guidling Principles, Policies,
Keys to Success
WGroup Vendor Management Framework
Source: WGroup

3.
3Best-in-Class Vendor Management Office
processes, skills of the staff under
consideration and the required
capabilities of the function.
The Foundation establishes the
operating parameters and aspirations
for the VMO. Once the Foundation
has been established the work
of designing the organization
and key processes can begin.
Organization Design
At the macro level one of the key
decisions needing to be made
involves the contracting function
and its position in relation to the
on-going vendor management
function. The contracting function
includes qualification of vendors,
conducting of RFx processes, and
facilitation of vendor selection
and negotiation of contracts. The
on-going management function
includes managing the portfolio of
vendor relationships, monitoring
performance, validating invoicing
and facilitating value realization.
Often, the contracting function can be
found within a procurement or sourcing
organization with minimal ties to the
IT function. In order to maximize
effectiveness contracting and on-going
management need to be brought
together if not formally, through an
organizational change, then informally
through the establishment of processes
that promote interaction. When the
contracting and on-going management
functions are closely linked an
operating environment will exist that
minimizes vendor-associated risk and
better enables leveraged interaction.
The contracting function is staffed
with individuals skilled in vendor
selection processes and contract
negotiations. Additionally, they
require project management skills (or
access to them) for management of
larger, more complex transactions.
Key responsibilities of the
contracting function include:
• Vendor identification and evaluation
• Vendor qualification
• RFx lifecycle management
• Vendor selection facilitation
• Negotiation and contracting
• Contract maintenance (amendments,
certain SOWs, etc.)
• Contract repository management
• Vendor on/off-boarding
• Vendor disengagement
The on-going management function
is staffed with individuals skilled in
vendor and operations interaction.
They need to understand contract
terms, performance management
and finance and be able to apply
that knowledge in an operational
environment. The contract managers
are often assisted by contract
administrators who use advanced
organizational skills to maintain
contract calendars, data repositories
and key documentation.
Key responsibilities of the on-going
management function include:
• Contract portfolio management
• Contract calendar monitoring
and maintenance
• Vendor performance tracking
• Financial performance tracking
• Invoice processing – licenses
and maintenance
• Invoice validation – all other
• Contract management support
It is important for the
VMO function to
develop strong working
relationships with key
functions across the
organization.

4.
4 WGroup
Often a VMO Business
Office is established with the
following responsibilities:
• Financial management and analysis
• Vendor assessment and analytics
• Quality management
• Process, forms and
template management
• Forms origination and processing
All functions within the VMO also
have a role in dispute resolution,
audit and compliance support
and continuous improvement.
Partnerships
It is important for the VMO
function to develop strong working
relationships with key functions
across the organization. The first
set of relationships is focused on
the client base (i.e. those whom the
VMO serves). Here the VMO needs
to be responsive to needs, proactive
in developing relationships with
vendors on behalf of the organization
and focused on performance.
The next set of relationships is with
the functions with which the VMO
interacts to perform its duties. These
include legal, procurement and risk
management. Here the VMO must
Third-Party Contract Classifications (Illustrative Example)
fulfill its obligations promptly and
assist the support organization where
required. Clear lines of responsibility
must be drawn and understood by
all parties to eliminate confusion
and promote efficient operations.
The final set of relationships is
with external support organizations
such as consulting firms used for
specific skill sets (generally used in
larger transactions) and external
counsel. The VMO must be able to
manage the service provider while
maintaining relationships with
internal partners and vendors.
Vendor And Contract
Assessment
Vendor profiles are created to serve
as a quick reference of key vendors
organization, capabilities, strengths,
weaknesses and management team.
Profiles consist of a two to three
page synopsis with information
derived from the Internet, various
research firms such as Gartner and
Forrester and the vendor’s web site.
A list of key contacts within the
vendor organization responsible for
managing the relationship as well
as more senior executives in the
reporting change is also helpful.
Tibco
Teradata
Microsoft
IBM
Juniper Aruba
ACS
ABC
Agilysys
Switch
Oracle
ATT
SAS
Epicore
TSI
Soft. Dev. Tech
DellMicrosoft
SW DD
HP
Igate
NRTLink Tech
Intersoft, Half
Niche
Monitor and Maintain
Contingency Plan
Strategic
Engage and
Manage
Low-Touch
Consolidate
and Reduce
Diversified
Control and
Rationalize
L HRelationship Complexity
LHVendorCriticality
L HRelationship Complexity
LHVendorCriticality Source: WGroup

5.
5Best-in-Class Vendor Management Office
The design (or redesign) of the VMO needs to be approached with a focus on
enlisting top skills, implementing effective processes and tools and establishing
an organization whose role is clearly defined in the enterprise.
Contracts are classified according to
criticality of the service/product to
the business, complexity of the vendor
relationship and amount of annual
spend (see bubble chart on Page 4).
For criticality and complexity a
subjective polling of key operational,
sourcing and vendor management
leadership is conducted to place each
contract on a 1-10 scale where 10
represents the most complexity or
greatest criticality. A bubble chart
(at the top of Page 4) depicts the
contracts in one of four quadrants
with the size of the bubble
representing total annual spend.
Generally the upper right quadrant
represents those vendors whose
contracts are the most complex and
critical. For these vendors a more
intense oversight model is required
such as would be found in an
outsourcing agreement. Vendors in
the upper left quadrant are generally
niche providers where it is imperative
on the organization to develop and
maintain contingencies for major
changes in their (vendor’s) business (e.g.
acquisition, merger, bankruptcy, etc.).
The lower right quadrant consists
of vendors where the relationship
complexity drives the VMO to
invest in controls while looking
to rationalize and simplify the
relationships. Finally, the lower left
quadrant consists of “commodity-
type” relationships where the focus
should be on consolidating services to
gain additional leverage and further
reducing the total number of vendors.
Processes
The VMO performs a number of
functions oriented toward ensuring
an optimal working environment
where vendors are involved and
maximizing the return on investment
in the relationships. These functions,
listed below, are fulfilled through the
application of key processes whose
execution must be carefully managed.
Functions performed include
market and vendor analysis, RFP
lifecycle management, contract
negotiations, transition oversight
and contract administration.
Governance processes are established
to develop and manage the
vendor strategy to be employed,
monitor and manage performance
of the organization and control
demand for VMO services.
Front-end processes include vendor
qualification, the RFP lifecycle, vendor
selection, contract negotiation and, at
the back-end, vendor disengagement.
On-going management processes
include those associated with managing
the relationship with the vendors as
well as the operations of the VMO.
Relationship management processes
focus on the contract calendar and
ensure deliverables and contract events
are anticipated and planned for as well
as oversight of vendor operational
performance. The operations of the
VMO are monitored and improved via
performance management and quality
assurance initiatives and programs.
Detailed RACI charts (Responsible,
Accountable, Consulted, and
Informed) are developed to define
responsibilities and accountabilities for
all processes at a more discrete level.

6.
6 WGroup
Tools
Tools within the VMO range from
simple spreadsheets used to track
total contract value by vendor and/or
contract calendar events to full contract
management and workflow tools.
While the contract value and calendar
tools can be used within the IT VMO,
it is important to leverage workflow
management tools across other
functional VMOs and procurement
organizations to ensure consistency
in the enterprise and maximize
leverage with those software vendors.
Contract repositories are critical and
need to be managed to ensure currency
of documentation and facilitate its
use. The number of repositories
should be limited (one repository
within the Legal function is optimal)
and within each repository the ability
to maintain (add, delete) should be
limited and carefully controlled. Read
access to contract documents within
the repository should be granted on a
need-to-know basis. The inclusion in
the repository of supporting documents
to the contract process (e.g. early
drafts of contracts, RFPs, project
plans, vendor evaluation documents,
etc.) should be discussed with Legal.
Performance Management
Performance management is performed
on two levels; externally directed at
vendors where their performance
against contract requirements is
monitored and managed, and;
internally where the performance of
the VMO is monitored and managed.
While the operational area directly
engaged with the vendor (e.g.
infrastructure management) is directly
responsible for the vendor’s meeting of
contractual SLA commitments and the
delivery of value, it is the responsibility
of the VMO to monitor the overall
performance of the vendor to ensure
contractual terms are being adhered-to
and interpreted correctly. The VMO
performs an integral role in assessing
service level failures and advising
operations management on recovery of
service credits (performance penalties).
The VMO also maintains an overall
perspective across vendor relationships
and monitors vendor interaction in an
effort to identify areas where vendors
may be working “against” each other or
impacting one another’s performance.
VMO performance is managed via
service level commitments made
to the business. Service levels are
oriented toward the front-end, or
contracting, process as well as the on-
going management process. Examples
of contracting service levels include
turnaround time for contracting
services, quality of contracting services
as measured by a transaction-based
survey and adherence to the RFP
lifecycle schedule. Examples of
on-going management service levels
include adherence to contract calendars,
quality of management services as
measured by a periodic (annual) survey,
incidence of compliance issues and
invoice adherence to contractual terms.
As with all new organizations, service
levels should be baselined for a period
(e.g. 90 days), adjusted to reflect
performance then communicated
to the stakeholder community.
The service levels should also be
reviewed annually and adjusted to
reflect improvements to processes,
tools and vendor relationships.

7.
7Best-in-Class Vendor Management Office
that all requests for contracting services
be submitted to a new group, it is
imperative that capacity be available
to meet demand. In other words
there needs to be enough people
available to handle the increased
workload so that service levels are
met and stakeholder satisfaction
does not start out in a deficit. Policy
roll-outs should coincide with the
ramp-up schedule for new resources.
Summary
With the role of key vendors
growing in importance and with
more vendors being introduced
into the workplace, effective vendor
management has become a critical
capability of any enterprise. The
design (or redesign) of the VMO
needs to be approached with a focus
on enlisting top skills, implementing
effective processes and tools and
establishing an organization whose role
is clearly defined in the enterprise.
The WGroup methodology discussed
in this paper incorporates best
practices derived from years of actual
experience working in multi-vendor
environments across a multitude of
industries. This methodology, when
executed diligently, will result in the
establishment of a top-performing
vendor management organization.
Please contact WGroup to learn
more about the WGroup VMO
methodology and case study examples.
Finally, a continuous improvement
program should be established to drive
process efficiency and quality. This
program can be a natural continuation
of the process design workshops
usually conducted during the design
phase of the project. These sessions
should be held at least monthly and
can include representatives of related
organizations such as procurement,
operations and accounts payable.
Financial Business Case
The financial business case should
include one-time expenditures for
hiring, tools, consulting services,
etc. and on-going costs for salaries
and benefits, tool maintenance and
facilities (if appropriate). In order to
minimize the impact of the VMO
implementation on current budgets it
is recommended that the organization
is phased-in in such a manner as
to ensure major expenditures can
be planned for, and included, in
the next budget planning cycle.
Implementation
As introduced in the preceding
Financial Business Case section,
implementation of the new or
revamped VMO should coincide with
the annual planning and budgeting
cycle in order to address major new
expenditures with minimal impact
on the business. Acute issues such
as problem contracts or vendors
should be prioritized and addressed
in a focused manner with appropriate
regard for costs and the benefits to
be realized from prompt resolution.
Another consideration in
implementation is the phasing-in
of certain policies impacting service
demand. In essence, when introducing
a new policy such as the requirement
“VMO’s are quickly becoming the most sought after capability in IT. The
impact opportunity is significant in driving expense reduction, lower
portfolio risk and improved performance for IT services.”
Phil Newmoyer
Principal, WGroup

8.
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• Confusion of vendor sourcing
responsibilities
• Material risk in lack of consistency
with key controls
• Gap in senior management
expectations for IT expense
management
• Processes not defined
• Organization of generalists without
required skills
• Contracts signed without due
diligence and governance
• No vendor strategies
• No single view of vendors spend
• Not aligned with IT Strategy
• Lack of credibility and relationships
with stakeholders
• Vendors leveraging the situation
with multiple price points and terms
across the enterprise
• Governance teams in place not
achieving results
• Ineffective and unenforced policies
• Designed and implemented a
comprehensive VMO with:
— Organization model with functional
specializations, metrics and
accountabilities
— Designed custom processes using
WGroup VMO methodologies
— Detailed job descriptions and RACI
charts mapping every critical
responsibility
— Emphasis on expense management
supported by analytics and high
caliber VMO leaders
• Designed and deployed a robust VMO
• Designed and deployed a VMO
governance model with multiple
operating and decision teams
• Deployed VMO operational models
integrating new process structure
• Established a renewed relationship
network with clients and stakeholders
• Added planning teams to manage IT
strategy and vendor alignment
• Drafted new policies to drive behavior
and discipline on VMO diligence
and adoption
• Highly effective VMO organization
deployed and fully embraced by IT
leaders across the enterprise
• New VMO governance and
operating teams covering all IT
vendor and sourcing processes,
with full management control,
vendor leverage, risk management
and value creation
• Significant reduction of IT run-rate
expenses, as well as portfolio cost
reduction, with sustainable
reduction processes in place
• Vendor strategies completed in full
alignment with IT strategies
• Clarity of responsibilities with
specialized expertise driving
consistency
• Significantly reduced contract
emergencies by deploying a VMO
demand management process—
reducing risk and dramatically
improving the ability to negotiate
• New culture of vendor diligence
and discipline across the
organization
Situation Actions Taken Results
WGroup Case Study: Vendor Management Office (VMO)