How do you tier utility versus strategic suppliers? What non-financial incentives do you put in place?

I received this question the other day from a reader and thought I'd open it up to the wider blogosphere for comment. I've included some general guidance on the topic as a starting point but it would be especially interesting if a vendor would like to give their perspective. What does it means to be 'strategic' versus a 'utility' to a client? What types of value added services do you provide and what do you look for in return?

In terms of incentives, at the simplest level the vendors are looking for a committed volume of business over the longest contract possible with achievable payment milestones and an externally referenceable account. Sounds obvious, but it helps to have a starting point. You can bucket incentives across these different areas -- volume or spend level, contract length, risk/reward payment ratio, and referenceability.

For example, a strategic account incentive may be your approval to take reference calls while a standard (or what we call ‘utility’) player has yet to earn that benefit. Another example would be your openness to speak at the vendor’s event, talk to analysts like myself or even publish a case study or participate in a webinar showcasing the success. Don’t underestimate the power of this. For a recognized brand name to essentially endorse a vendor you can and should expect much in return -- like a certain number of consulting hours pro bono, no charge enhancements to a system, tickets to user conferences for your team, etc.

On the risk/reward ratio -- Here, there is an upside for the vendor if the project is successful but also a penalty if it’s not. Some vendors, like Deloitte, may be more open to this type of arrangement. The benefit to you is that by having the vendor put ‘skin in the game’ you can start to think of projects as results based versus just hitting milestones. The vendor becomes more strategic by the nature of this relationship.

When a vendor is preferred it means that they are the first company your buyers should look to when they need help. You have predetermined contracts and rates in place and the ability to provide high quality at the lowest cost in a repeatable way keeps the vendor in that position. Again, this is obvious but I bring it up because it’s just as important that vendors know that to stay in the preferred slot they will be continuously monitored and have to maintain a high standard. You, the customer, can raise that bar over time and expect more.

So how do you determine if a vendor is strategic? In my mind the biggest difference between a utility vendor and a strategic one is its ability to drive continuous improvement and innovation at your company. A strategic vendor has mastered the things like consistent and transparent billing, quality, delivery/execution, and most elements of service/support.

What types of questions would I ask to elevate a vendor from a utility to a preferred and strategic suppliers? Here are a few examples:

How proactive is the vendor in reaching out to better meet your needs?

  • Strategic = The vendor visits frequently, provides access to their subject-matter experts, and routinely keeps their promises.
  • Preferred = The vendor visits regularly and offers assistance when requested.
  • Utility = The vendor visits on occasion but provides access to their research and best practices on limited occasions. 

Does the provider drive innovation on the current project? Across the organization?

  • Strategic = Yes, the vendor offers thought-leadership and guidance to drive innovation across the entire company.
  • Preferred = The vendor meets expectations and provides services as outlined in the contract but not above and beyond the current project.
  • Utility = The vendor really only delivers on the tactical services contracted and does not innovate beyond that. 

How well does the vendor drive collaboration across your company to streamline processes and/or technology solutions?

  • Strategic = Exceeds expectations
  • Preferred = Meets expectations
  • Utility = Needs improvement 

Does the provider participate in strategic planning sessions?

  • Strategic = Yes, the vendor is extremely active in strategic planning sessions and makes innovative and actionable recommendations.
  • Preferred = Yes, the vendor is involved in strategic planning sessions and makes recommendations specific to the project but not enterprise-wide.
  • Utility = The vendor has not shown an interest to engage your company at a more strategic level and does not participate in planning sessions. 

How well does the vendor bring industry-specific expertise to bear to help drive innovation at your company?

  • Strategic = Exceeds expectatios
  • Preferred = Meets expectations
  • Utility = Needs improvement 

This is just a start but hopefully helpful to folks. Let us know how you tier vendors (other than by level of spend) and what incentives you put in place.

Patrick Connaughton | Senior Analyst - Sourcing and Vendor Management Forrester Research Phone: +1 617-613-6486 | Email: pconnaughton@forrester.com | 400 Technology Park | Cambridge, MA 02139 | www.forrester.com