We met with 30 Sourcing & Vendor Management Professionals during an action session at Forrester’s Sourcing & Vendor Management Forum in Chicago to discuss how to improve governance for large implementation projects. Clients were looking for help across the sourcing life cycle – from determining who manages the RFP process, to determining scope with internal stakeholders, to driving governance after the contract is signed.

What tactics are Sourcing & Vendor Management Professionals using to tackle these challenges?

1. Renegotiate rates with current players. Forrester’s recent survey found that 68% of organizations are renegotiating with their existing suppliers. One attendee said, “This has always been a priority, now we are bringing more efficiency and innovation to the process.”

2. Drive innovation from vendors. Everyone wants innovation from their suppliers but few receive it.  Attendees shared tips for how they overcome major hurdles to achieving this in their supplier relationships:

a. Define what you mean by innovation. Many struggle to get innovation from their providers because they haven’t defined what that means — are you looking for idea-sharing or process improvements? Determine which type of innovation you need and communicate that to your vendor.

b. Identify metrics. “It’s not just how you measure innovation; it’s how you measure successful innovation.” Clients shared a variety of metrics such as:

i. Requiring the vendor to submit continuous improvement ideas they agree are impactful to your organization

ii. Number of ideas submitted for approval

iii. Number approved

iv.  ROI of implemented idea

No, I’m not wasting Forrester’s blog space for yet more coverage of the royal engagement. I think Ariba’s proposed acquisition of Quadrem, that it announced today, is much more interesting. http://ht.ly/3bPei

Forrester has been predicting, and advocating, consolidation in the procure-to-pay market for a while:

“Once consolidation starts, the natural imperative of scale in the technology business will transform the market into one in which a few large, successful, interoperating networks enable buyers to reach all their suppliers, however small or physically remote.” Enterprises Should Push Supplier Networks To Deliver Interoperability, July 2009.

While I’m unqualified to comment on whose investors do better from the $150m purchase price for a company with about $50m revenue, I do believe the merger is good news for both sets of customers and suppliers. Firstly, Ariba reinforces its place as one of the four or five large supplier networks that will eventually dominate the market. Its customers now get access to a wider stable of suppliers. Quadrem originated as a marketplace for mining companies, so it is particularly strong in MRO categories and in natural-resource-rich regions such as Africa and Latin America where Ariba is under-represented.

Sourcing executives are winding down 2010 and gearing up for 2011. Most of the sourcing executives we have spoken with recently are bullish about the year ahead, despite some looming uncertainty about the economy, particularly in Europe. Spend is opening up again, and buyers are investing in more strategic initiatives. But sourcing groups still struggle to balance low cost and high value.

Many of the sourcing groups currently working with Forrester are asking about cloud as a viable alternative to traditional deployment models. Cloud promises rapid deployment, potentially significant cost savings, and variable pricing in line with how buyers want to pay in the current economy. And cloud offerings continue to mature in areas where buyers previously had concerns (vendor viability, security, architecture, location of data). Cloud adoption is already over 25% in North America, and continues to grow in Europe (led by UK, but also growing in areas like Germany, France, the Nordics).

Most sourcing strategies around cloud consist of five key phases:

1.       Understanding the evolving supplier landscape and market maturity across cloud offerings.

2.       Educating business (and potentially IT) about the advantages and disadvantages of cloud.

3.       Building decision frameworks to support cloud purchases.

4.       Creating a contract negotiation and pricing strategy for cloud; building contract templates.

5.       Working with business, vendor management, and IT to routinely evaluate ROI and decide whether to renew relationships or find alternatives (potentially cloud, hosted, on-premise, or hybrid).

I like sourcing and vendor management professionals for all of the reasons they drive others crazy.  Business and IT executives like to complain that SVM teams care only about getting the lowest cost (this complaint usually comes after said sourcing team tells the business user his vendor of choice isn’t the best option). Vendor sales people are taught to avoid SVM professionals whenever possible because they keep asking questions like “Why is your product worth this much money?” and “Show me how you bring value to my company.”

The SVM executives I deal with are a tough group (and don’t think I get off easy: Forrester is a vendor to these executives too, so I’m not immune to the same challenges as other vendors). They’re a practical group, and not inclined to be swayed by idealized visions of innovation, for example. They accept nothing at face value, they question everything in painstaking detail, and they resolve conflict instead of working around it.

So why is this pragmatic, sometimes cynical, group talking about emerging technologies, new services models and other innovations? Because in their pragmatism they know that they need to move their organizations forward to take advantage of opportunities presented by new technologies and services. And they know if they don’t, the business will do it without them – opening their firms to increased costs and higher vendor-related risks.

While I’m not claiming SVMs have abandoned their focus on reducing cost, the need to take advantage of new opportunities is critical. As a result, there are three key areas where Forrester sees SVM investing: