Zoom in on value: Vendor management office

From 30,000 feet

Few would argue that global outsourcing innovation is accelerating at an increasingly rapid pace. But what does outsourcing innovation really mean to business leaders, and what is it worth?

For executives, it turns out, there may not be a clear-cut answer. Deloitte’s 2016 Global Outsourcing Survey (GOS) reveals a challenge and opportunity for outsourcing innovation, with 65 percent of respondents indicating they do not currently measure the value delivered by outsourcers through innovation. While companies push service providers to bring innovative solutions to the table, only 28 percent of those surveyed feel that they have a mature vendor management office (VMO). Further, only one in five respondents considers innovation when developing their contracts, even though they depend upon innovation to improve quality, maintain their competitive edge, improve user experience, and drive profitability.

Clearly, we are at a crossroads, where the pace of innovation threatens to outstrip an organization’s ability to manage global outsourcing initiatives. To effectively realize the value from innovation, organizations must first understand both the opportunity and impact of innovation in the business and then evolve VMOs to manage these trends.

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Lens on innovation: Alignment

VMOs, though traditionally perceived as tactical execution support groups for managing vendor relationships, can play a key role in driving the innovation agenda and cross-collaboration within the service provider ecosystem. This is especially evident as the ecosystem continues to become more complex with the introduction of consortiums of service providers, joint ventures, and a growing number of alliances between service providers. Alignment across several dimensions can help VMOs effectively
drive an innovation agenda while managing transformation outcomes and ensuring seamless cross-service provider collaboration. From operating models to contractual constructs, stronger alignment helps solidify a foundation for innovation.

Vendor management operating model
To better harness and manage innovation, companies likely need flexible vendor management operating models that act as strategic enablers of innovation. This means that the processes, while well-defined, should be well-differentiated and able to change quickly to adapt to evolving business needs. It also means having the appropriate governance in place.

In some cases, it makes sense for a third party to perform select functions that are noncore to the organization so that the VMO can adapt a more flexible operating model. Overall, 30 percent- 35 percent of the companies surveyed are currently outsourcing or considering outsourcing vendor management functions to a third party. This percentage has remained fairly consistent over the last couple of years.

Vendor management tools
Identifying tools that can help automate operations, especially while performing such repetitive tasks as performance reporting and contract analytics, is important. Tool adoption not only helps streamline processes but can have a direct impact on talent that VMO’s should embrace because of the need for technical skills required to operate these tools. Close collaboration with service providers to develop and customize tools is an effective way to meet the innovation needs of the organization.

Vendor management skill sets
VMOs should develop training that lends transparency to the leading practices, business operating models, and the role of vendor management functions. Training can be performed by a third-party service provider with increased visibility into marketplace innovation. Training and skills should be tailored to drive engagement across the workforce.

According to Deloitte’s Human Capital 2016 Trends report, more than half of the workforce today is made up of millennials that value career growth and culture at almost twice the rate at which they value compensation and benefits. With such changing workforce demographics, VMOs should increase focus on improving engagement by providing value-added services, training, and a work culture that fosters cross-pollination of ideas
and innovation.

Contractual constructs
It’s important to demonstrate a commitment to innovation, transformation, and multi-service integration. This commitment should take the form of a contractual construct that includes a set of clearly defined expectations and RACI models, and also address any IP-related concerns with regard to innovation. This can establish a faster contracting process and enable faster innovation. The development of clear risk assessment guidelines and SLA review guidelines can minimize contract renegotiation and associated changes during contract execution. Custom, value-driven, and gain-share pricing models are appropriate for select initiatives and service providers. A move toward these custom models can help facilitate innovation, but they also require an increased focus on financial management.

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A look ahead

As companies continuously scan the ecosystem for new outsourcing trends, investments in VMO will likely remain a key component. By taking an elevated and strategic approach to innovation, VMOs can manage innovative forces across multiple service providers. This not only requires changes in how outsourcing deals are constructed, managed, and delivered, but also necessitates new tracking and measurement capabilities to demonstrate value. In the ongoing competition for talent, VMOs should focus on engagement, ensuring a clear career path forward and adequate learning opportunities for their talent to keep pace with the industry.​

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