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Take a Venture Capitalist Approach to Third Party Vendor Selection

One CIO in our networks has an interesting approach to third party vendor management.

New Global Workforce Insights for CompensationSixty-three percent of business leaders believe their company responds too slowly to new technology-enabled opportunities.

Looking at the causes of delay at almost 300 firms worldwide, the data showed that one of the top causes was selecting technology vendors and negotiating third party vendor agreements.

This should come as no surprise; almost 70% of IT organizations apply a rigid approach to supply management and sourcing that fails to cut some slack when a speedy decision is needed, when the risk is low, or when the vendors themselves aren’t big enough or mature enough to meet the same criteria as more established competitors.

This last point is particularly pertinent in recent times because line managers want to work with emerging vendors and startups that provide services their more established counterparts do not.

Changing the Third Party Vendor Agenda

The problem is IT struggles to bring these new providers onboard quickly. First, vendor evaluations typically rely on an analysis of past performance, which is a poor indicator of how well a vendor is able to support a new or emerging business need today.

Second, a one-size-fits-all evaluation process puts emerging vendors at a disadvantage as they cannot provide the examples of success and customer references that are the hallmark of their incumbent competitors.

One CIO at a software company in the CEB CIO network overcame both obstacles by evaluating vendors using the same criteria a venture capitalist would use to determine the strength of an investment opportunity. This approach provides two lessons.

  1. Look at non-financial measures: The vendor management team at this software company uses financial measures to assess a vendor’s growth prospects, but they also look further, relying heavily on qualitative measures that level the playing field for different types of vendors, irrespective of their size.

    These measures include the background of the management team, the quality of management, corporate governance practices, and so on.

  2. Assess innovation potential: Sourcing strategies typically emphasize consolidation for cost-savings and risk avoidance. This approach has become less effective as the increased use of vendors to gain competitive advantage means that vendors must stack up against measures of business opportunity creation and innovation, not just cost/risk avoidance.

    While these measures are notoriously hard to track, there also is no guarantee that vendors are willing to innovate even when they can. Instead of looking for past performance, the software company uses the qualitative measures outlined above to assess the climate at a vendor organization and how well the vendor will support emerging business needs.

    For instance, an analysis of the management team and their past experiences throws light on how open the vendor will be to collaboration and to new ways of working.

Evaluating vendors based on what they can accomplish, not their past performance, enables IT to diversify the sourcing portfolio in a principled way, without placing startups or emerging vendors at a disadvantage, and ultimately, support the organization in making effective sourcing decisions quickly.

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