Optimal management of outside vendors

Mark J. Kovaleski, The Daily Record Newswire

In today’s competitive market, organizations of all types look for ways to get ahead of the competition. As the dollar gets squeezed from all sides, operations managers look for ways to perform their functions with the greatest effectiveness, and at the least cost. Often, management decides among performing a function in-house, outsourcing the entire function, co-sourcing, and, an option becoming increasingly popular, strategic utilization of outside vendors.

The utilization of vendors has continued to increase as businesses deal with tightening labor pools and increased usage of expensive technology. Not surprisingly, given the pressures on the bottom line, management is looking to the utilization of outside vendors as a way to capitalize on industry best practices in key functional areas, while at the same time, minimizing internal operating expenses.

The utilization of vendors runs the gamut but generally is focused on three major areas: billing and collections or revenue cycle enhancement, IT solutions, and general operational, financial or strategic consulting.

The current challenge

Utilizing even highly competent outside vendors may not be the clear-cut answer that management seems to think that it is. Time and time again, our accounting and consulting staff work with clients who engage numerous vendors to perform various functions within the organization.

However, when we inquire as to the performance of the vendor, the typical answer is ambiguous ("I don't know"). More to the point, it appears that when a vendor is engaged, often times those that have engaged the vendor view this as carte blanche to ignore the functional area and turn their attention elsewhere. This often leads to the vendor going unmanaged and less than optimal outcomes for the project and the relationship.

Some of the major issues that our professionals have observed with vendor situations include:

• The expectations and performance criteria have not been clearly identified and communicated (what type of results would create a successful outcome).

• The measurement criteria and reporting mechanisms have not been clearly agreed to (and may lead to interpretation issues).

• The communication protocols and follow-up have not been firmly established and thus are not adhered to by either side.

If an organization determines that using an outside vendor is the best solution to a specific operational/financial challenge, a systematic and meticulous approach should be employed if the vendor outcomes are to be optimal and meet the organization's expectations.

As such, the following questions should be asked with regard to the utilization of the vendor:

• Have we clearly identified what the function/task is to be performed by a vendor?

• Have we specifically determined that the function can be better performed utilizing outside resources, considering results, expenses, and employee sensitivities? (Has a make or buy decision been thoroughly analyzed?)

• Are we collectively clear on the objectives and the optimal outcomes?

• What has been the experience of other, similar organizations that have used the vendor for like projects?

Optimal vendor engagement and management

Once the above questions have been answered, the next step (and most important) is to draft a contract that meets the organization's needs. Critical to an effective contract are the following:

• A clearly articulated and expected deliverable (service level and performance standards).

• Timing, reporting and other key milestones.

• Project fees/payment methodology and specifically those related to contingency-type arrangements (for example, if a recovery project is going to be based on actual collections made by the vendor, ideally there should be no restrictions placed on the vendor's ability to perform recoveries such as pending contract negotiations).

• Clearly defined organization and vendor roles, responsibilities and accountabilities.

• Communication expectations and protocols (i.e. points of contact and methods).

• Well established reporting requirements and follow-up reconciliation guidelines.

Once the contract is signed, the engaging organization should not go to sleep and treat the vendor in a hands-off manner. In actuality, this is where the real work begins.
Vendor perspective

Vendors also must remain vigilant to avoid becoming victims of poor vendor management. Time and again, project expectations become unclear and less formalized when the client becomes complacent. It is best for vendors to always apply the tactic of communicating frequently and clearly. Also, it is in the best interest of the vendor to involve and engage the attention of their clients, especially for key milestones.

Inevitably, new management and vendors must be prepared to deal with the repercussions of being mismanaged, such as re-educating the clients on what historically transpired, or worse, termination of the account due to lack of understanding on the part of the client.

Conclusion


Make no mistake about it, when properly engaged, managed, communicated with and partnered with, the use of outside vendors can be a win-win situation for all involved. However, too many organizations see the use of a vendor as the answer to all of their problems, and thus can lead management to taking a hands-off approach. Unfortunately, this can and does often lead to project failure.

Effective management oversight of outside vendors can ensure an optimal project outcome and successful working relationship.

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Mark J. Kovaleski, CPA, is a partner with Mengel, Metzger, Barr & Co. LLP. He can be reached at Mkovaleski@mmb-co.com.