IT managers in the CEB CIO network have reported that the process of contracting vendors has become one of their biggest headaches.
Recent data from a survey of IT teams and their business partners also show that delays due to contracting problems can be a major stall point in IT’s day-to-day processes. CEB’s work with CIOs and their teams around the world shows there are three steps that will make IT contracts better, more convenient, and faster.
Reward disproportionately for exceptional performance: Many CIOs say that when IT negotiates vendor contracts (which IT performance benchmark data show happens 57% of the time), one of the biggest challenges is ensuring vendors have the right incentives. Tying vendor compensation to performance is a sure way to align the company’s goals with third-party ones.
One IT leader took this a step farther by establishing tiers of performance that disproportionately rewarded exceptional performance. As an illustrative example for a particular engagement: a vendor providing a service agreed to be compensated x per successful iteration of this service for the first 100 iterations of the service, 2x for each iteration thereafter up to 300 iterations, and 4x for each iteration over 300.
As this IT leader reported, this created incentive for the vendor to create an exceptional service that would hit high levels of end-user adoption. The leader acknowledged that the total cost of the relationship was marginally higher than it could have been, but the net gain from the value the service delivered to the enterprise far exceeded the cost.
Create a self-service contract playbook: It’s common for procurement functions to keep playbooks of different types of contracts for different types of third party relationships. Many IT leaders say that they now also have several go-to templates to help them create contracts quickly.
One IT function took this practice a step farther. An IT sourcing expert compiled different terms and language into a self-service tool, and designed an interface that creates a different contract output based on partners’ answers to a few key questions, such as ones about contract length, and type of data and number of users that would benefit from the service.
This greatly accelerated contracting processes, and built business partners’ appreciation for IT’s expertise as a trusted resource for technology vendor relationships.
Focus vendor management attention on new and unpredictable contracts: IT organizations on average have 6 FTEs (full-time employees or their equivalent) dedicated to vendor management, according to CEB IT budget benchmark data. Regardless of whether a firm has 50 or two resources staffing their vendor management office, an increasing number of fragmented vendor relationships has put greater demand on vendor managers’ time.
Many IT functions assign vendor management experts to manage the biggest or most important contracts, but one organization realized that vendor managers’ greatest comparative advantage was on dealing with troubled relationships, renegotiating troubled contracts, or ending troubled relationships before they got out of hand. This company managed its vendor management teams’ time by giving the team ownership of new or inconsistent relationships, and parcelling out ownership of tried-and-tested contracts to other parts of IT.
This approach ensured that the vendor management team was providing the greatest benefit to the organization, and made the most of their limited availability.