Vendor Procurement and Management

Family man, family problems....My wife and i have been working on finding a Nanny for our 3 year old for past few weeks....Let me say its not an easy task....you have to go through classifieds, talk to your network of friends, interview people for the position, negotiate terms, the whole nine yards...
This activity made me think about writing this article.

Working as an IT Manager, many a times we come across similar scenarios wherein the Client would want to go through a Vendor procurement Process.
For the sake of simplicity, we will refer to the Organization seeking Vendor Services as a "buyer".

Here are a few scenarios from my Insurance world, why a buyer would look for Vendor services,
1> Outsourcing Services
 - An Insurance company say. wants to focus its attention on the Insurance Business and does not want to be sidetracked with IT Issues. So it would naturally want to partner with one or more IT Firms to run its business applications, maintain hardware, do application modifications to maintain and Competitive edge in its business domain.

2> IT Consulting Services
- An Insurance company in business for years and decades would have lots of in-house and Third party applications and services communicating with each other. Thus if the company wants to overhaul and upgrade its infrastructure, hardware or software systems for better and reliable performance and scalability, it has to procure services from Vendors who have handled similar Business Transformation Initiatives.

3> Technology Solutions
- An Insurance Company wants to (say.) move away from its Legacy applications and march towards the latest and greatest state of the art application suite available in the market to better run its business.
 
These are some of the reasons why the procurement manager would want follow proper Vendor Procurement guidelines. Failure to do so, may lead to problems and issues in the whole venture and many a times may lead to scrapping the whole deal either midway or towards the end of the project.
Here are the top 3 reasons why Procurement process may fail,
 1> No clear requirement specifications and hence no clear understanding of the exact scope of work.

 2> Carelessness in terms of contract clauses negotiations. No clear review of Vendor Contract terms and conditions.

 3> Unrealistic targets and deadlines promised and accepted by both parties during the procurement process.

 A Vendor Procurement process just like any project life cycle has 4 distinct phases, They are,
 1> Requirement scope and Elaboration
 - The Buyer has to elaborate on the exact requirements that will be shared with the Vendors and clearly defines why you are seeking the vendor services. These requirements may be Technical, functional etc as the case demands.
There will be a team of Business analysts and Functional experts who will meet the necessary business users to gather the exact requirements and thus prepare the requirements specifications documentation.

 2> Vendor Selection
 - The requirements specifications created are used to prepare an RFI (Request for Information), RFP (Request for Proposal) or RFQ (Request for Quotation) etc as the case may be.
The buyer Organization prepares a selected Vendor list and sends RFIs/RFP to them. The set of vendors must meet a predefined selection criteria set by the buyer organization. These prospective vendors will be someone, who already do similar service for the buyer organization or are in similar business as the work scope demands.

 Before sending out the questionnairre to the Vendor make sure there is a confidentiality Non Disclosure agreement signed, as here the buyer may share some Business sensitive information with the potential vendors. It is necessary to safeguard the business information and Intellectual property from competition.

 After this, if the vendors have some technical questions or need any clarifications, the buyer may arrange for a common Q&A session or they may request the vendor questions via email.The buyer sets a deadline for the questions and queries so they can be reviewed and answered.
 The prospective Vendors have to be aware of the milestone dates and the formal processes like routing the questions through the procurement Manager etc.
 The Procurement Manager is responsible for responding to the questions. The same information should be shared with all vendors, so that no one gets any unfair advantage in this process and in turn will also help the vendors understand the requirements better.

 3> Contracting and Contract Administration
 After receiving responses from the Bidders or Vendors, the buyer has its own selection criteria to finalize the vendor for the job. This is usually based on some weightage program, Vendor rating system, Proposal evaluation technique or expert judgement etc.
 After the vendor selection is complete, then comes the contracting phase. In this phase, the contract agreement (this may also called as the Statement of work, Letter of Intent etc) that is sent by the vendor company has to be carefully read and scrutinized so that both parties agree to the terms and conditions in the contract and it is favorable to both parties. If there is any clarification, ambiguity in any of the points, seek clarification from the Vendor representative immediately.

Contract Administration is a very important phase for successful execution of the Contract. During execution, there may be some changes required to the Project scope, milestone and deadlines approval processes set.

The Contract should also be a project acceptance and completion criteria specified. e.g. For a new Policy System installation and enhancement project, the acceptance criteria specified should be in terms of service or scope delivery timeline (say 12 months) with (say) 2 Critical, 4 Medium and 6 low level bugs open.
 There should be software SLA specified in the contract.

 There should also be processes set for change controls. This includes tools, techniques and activities that help to monitor the change control process and control the project scope and timeline.

 These contracts are generally prepared and reviewed by the legal departments with definite help and inputs from the procurement manager who forms the main coordinator. So make sure the contract is well understood by you - the Procurement Manager. It is detailed and elaborate. The contract has to specify the penalties to be imposed on the vendor in case of missed deadlines like any pricing credits or additional resource guarantee etc
 
 4> Exit and Renewal criteria
 The contract also has to specify the exit criteria for extreme cases like either party wants to exit out. e.g. If the buyer wants to default on a contract, there will be a penalty of (say) $500,000 and 2 months notice period and the entire knowledge base will become the Intellectual property of the Vendor Organization.

 In case the buyer wants to extend the contract with the vendor, the renewal criteria also has to be specified.
e.g. Annual Maintenance contract for supporting Policy and Claims Administration system can be extended with IT vendor 'X' provided the application went live with max 2 open defects and specified timeline. This will have an elaborate pricing, resourcing and timelines specified.
 The service SLA for Annual Maintenance is response in 1 business day and solution within 2 business days for critical issues and 3 business days for regular issues.

Thus Vendor procurement and Contract Management is a very important process for organizations that do business with external vendors. So proper knowledge of the process is an absolute must for both the Buyer and Vendor Organizations.