Struggling to see eye-to-eye: Procurement & Vendor Management

If you have worked with a mid-large sized enterprise with sizeable IT spend and are a supply side commercial professional you've most-likely experienced the tension. The mistrust and suspicion. The simmering turf war hidden behind masks of congeniality.

What am I talking about? The broken operating model between Procurement and Vendor Management (VM) teams.

What is bizarre (to me anyway), is that I've witnessed this friction in almost every single organisation I've worked or consulted with. Sometimes its a small issue, sometimes its a big one, but its not widely discussed or researched. Its an issue swept under the carpet, one where uneasy truces are formed in order to make-do.

I couldn't find any operating model design decision frameworks out there to help improve the situation for either Procurement or VM.... and so I thought... Ah ha.! A chance to create another 2x2 that could be added to the Procurement (and VM) pro's toolbag!

What is Strategic VM?

Lets take a brief detour to define strategic vendors and why Procurement and VM don't see eye-to-eye...The scope of VM is usually limited to 'Strategic Vendors'.

Most larger firms segment their supply base by criticality/ spend (or both) and determine the most critical/ important require a Vendor Manager. Strategic Suppliers typically benefit (or suffer!) from a greater level of governance and both strategic and operational interaction. This gives them the opportunity to build closer, more senior relationships across the buying organisation, to understand the client needs better and theoretically to have a greater opportunity to win more business and grow the account. The downside is typically greater exposure when things aren't working well and more administration in managing the account.

Strategic VM does not cover day-to-day order placement and issue resolution, purchase order placement and expediting. This is always going to require business ownership.

What is broken between Procurement & VM?

Despite having broadly the same overarching aims: to extract maximum value and protect their employers interests from the supply base- there is significant mistrust between both functions. The triangle diagram represents my hypothesis- that lack of alignment between Procurement & Vendor management models means the goal of innovation is ineffectively exploited and represents a missed opportunity cost for business.

When Vendor Management is business owned, then operational effectiveness takes priority over other factors. Procurement eyes this suspiciously, viewing vendor management as tactical, day-to-day operational gophers. Surely they are missing significant optimisation opportunities as they are not 'commercial enough; not able to driven to change and improve like us?

On the other hand when Procurement muscles in on VMs activities then the VM team eyes Procurement defensively. This Procurement crowd are willing to burn trust and relationships, burn bridges to save a dime. They don't appreciate that you can't RFP your way out of every situation and that there's give and take needed to make a contract work. And they don't understand the intricacies of the business requirements because they swoop in and out sporadically, creating explosions that need repaired.

Of course these are caricatures and I know there will be beautiful VM and Procurement relationships out there... I just haven't found them!

One interesting issue I observe is the high level of skills overlap between the two groups. Most VM leaders and teams I have met started life in Procurement. So naturally when a big commercial ask lands on a supplier they can feel well equipped to deal with it without procurement. That lack of skills separation will naturally lead to a 'treading on toes' situation, which can add to friction.

Closing the gap between Procurement & VM through effective op model decisions

Fixing the operating model is the best way to minimise conflict. I propose the following 2x2 model to support your decision making on which categories/ strategic suppliers should be managed where. the key dimensions are (a) the level of alignment of interests between supplier and buyer and (b) Focus of commercial activity: Cost-efficiency or value-based.

By mapping strategic supplier to this model there are 4 potential solution models for relationship aspects:

1. Strategic Partner: Here both parties are co-developing their businesses, innovating and developing offerings and aligned on creating value. An example would be a Banks relationship with partners like Travelex or Western Union if they don't want to build that service in-house. Ownership here is typically held within the business, with Procurement playing supporting role.
2. Strategic Supplier: Not requiring significant innovation but instead a job well done, large operational partners who service industry verticals would be examples of strategic suppliers. Proximity to the business in important but not as critical, so the determination of ownership in Procurement will depend on company specific factors, like individual staff know-how and relationship history.
3. Efficiency Supplier: Here there is strong mutual alignment but the emphasis is on removing waste from the supply chain to get things done most efficiently and safely. An example would be a 3/4PL logistics provider. Ownership here would be suited to Procurement leadership with support from the business.
4. Dependent Supplier: This scenario would typically include many of the big SaaS and cloud platforms. Few organisations will individually have the scale to align strategically with the giants but they are critical to business operations. Again, a case by case review is needed to determine where relationships will have most leverage. Typically, but not always with the CIO.

* Other factors may need considered, including the number of business lines or stakeholders that use the supplier and whether one is a dominant user. Also, the appetite/ willingness of the senior Executive responsible towards delegating strategic aspects of the relationship.

Closing the gap through 'patches'

Politically, if the fix of an operating model re-design is too daunting, here's 5 tips to patch up the ways of working for the buyers & VM:

1. Joint leadership and communications between VM and Procurement leaders: Have the CPO and VM Leaders share stages when communicating to their own teams and at supplier days.
2. Leverage 'top-to-top' relationships: Use C-suite to C-suite connections to engender commitment from all parties and build energy.
3. Clarity on RACI for all the VM involved activities: When Procurement should play in contract life, and how should be agreed and discussed. Do procurement join monthly reviews, QBRs or annual reviews? Who will be the point of escalation in the event of major incidents etc.
4. Team building between the 2 functions: With shared leadership visionaries, trust building and the operational level can be facilitated too.
5. Build strong communications loops on vendor performance and activities. Whomever ends up owning the VM activity, there needs to be created clear, regular engagement paths to identify the current and future status of vendor performance.

However the problem is addressed, I feel that it is a problem in many organisations.

And it deserves consideration from the profession as to what the fixes are. My own background is heavily biased toward Procurement rather than VM.. so I'd love the views and critique of my VM friends who may be able to challenge my assessment and add more balance to the article.

I am a Procurement and Sales Leader who writes long-form articles on both topics that very few people read. I do this because when an idea gets into my brain I feel compelled to evaluate and build out the concept, mostly for my own benefit but always in the hope it helps others.