Know Your Supplier Relationships

Gartner: Strategic sourcing strategy must include plan for managing service providers

San Diego  May 1, 2002  Companies adopting strategic sourcing strategies must begin by understanding the nature of their relationships with their suppliers and how those relationships fit into their plans for sourcing, technology consultancy Gartner advised this week.

As companies begin to look for new ways to deliver resources and services, 80 percent of leading enterprises will adopt strategic sourcing as a core discipline by 2005, but few of these enterprises will have formal plans for managing the long-term relationships with their external service providers (ESPs), the consultancy reported this week.

Gartner's research shows that three broad types of strategic sourcing relationships exist between ESPs and buyers of outsourcing services. Utility relationships focus primarily on cost reduction, with the goal of maintaining consistency in the delivery of services. Enhancement relationships focus on productivity, and a transformational relationship is characterized by a partnership focused on innovation and new business, changing the very nature of how an enterprise competes.

"Understanding and choosing which relationship best fits an enterprise's business strategy, and the value it wants from the deal, lays the groundwork for all subsequent decisions on how the deal is managed," said Linda Cohen, managing vice president for Gartner. "Enterprises must take the lead in determining the sort of outsourcing relationship that best meets their business needs and how to assess the success of that relationship."

Gartner advised that the process of evaluating an existing relationship must start with the contracted benchmark or price evaluation clause of the contract. Vague concepts or definitions can require a negotiation of the process and actionable outcomes prior to beginning the measurement process. Some benchmark clauses are very specific in the response to the outcome, but fall short in defining the elements to be measured, the mode of resolution and the required pricing performance. At times, the review does not have any pricing resolutions defined, and the exercise is viewed as an element of understanding only.

"The key takeaways from evaluating an existing relationship should be a strong understanding of the workload delivered versus the workload contracted to deliver," said Christopher Campbell, managing vice president for Gartner Consulting. "This provides added insight into the extent the relationship will deliver to the business bottom line. The relationship should be structured so service provider and service receiver are aligned to deliver an enhanced capability with seamless execution. In most cases where we are brought into help save or restructure a deal, there was never a formal process in place to ensure alignment."

Added David Ackerman, senior director for Gartner Measurement, "As organizations and ESPs enter into agreements structured around changing business requirements, market demands, technological advances and service capabilities, organizations must understand the mix of factors and behaviors that constitutes a good deal for them and their suppliers."

Stamford, Conn.-based Gartner offered these findings at its Gartner Symposium/ITxpo 2002, being held this week in San Diego.