What's The Difference Between Vendor Management and Strategic Sourcing

What's The Difference Between Vendor Management and Strategic Sourcing

The concept of Strategic Sourcing has existed from many years now. Vendor Management function is evolving from past few years and has now reached a stage where companies are now finding it hard to draw a line between the two. What does a strategic sourcing manager do that a vendor manager doesn’t? Are there any overlaps in responsibilities between the two? How to tell a Vendor Manager apart from a Sourcing Manager.? I have had these questions asked by multiple people within my organization who easily assume that I am a Sourcing Manager. I have to then wear my coaching hat educate them on the difference between the two. I don’t blame them as there is no standard way how every company structures the sourcing organization and uses the two functions. Few organizations have the roles more clearly defined than others. 

In order to define what Vendor Management Office (VMO)  does, I need to define on a very high level what Strategic Sourcing Group (SSG) does. 

What is Strategic Sourcing?

Strategic Sourcing Group in any organization can play an important role in the selection of vendors either through a tender process or single sourcing. SSG gathers business requirements, creates a selection criteria, negotiates a Master Services Agreement & initial pricing, onboards new vendors, completes internal contract storage to meet compliance requirements. There is a ton of other work that goes in the background to make that happen. SSG usually has Sourcing Managers and Contract Managers, and they usually work very closely with Lawyers. They are your contract experts in the organization. 

What is Vendor Management?

You’d think by now that the work ends with contract storage because the Line of Business can now work with the vendor, pay the invoice and live happily ever after. As much as everyone wants that happily ever after statement to be true, it sometimes doesn’t end up that way. The vendors product may not be what was promised or shown in the demo, the performance may be poor, too many tickets that may go unresolved with no-one to hear, the vendor may increase the price exorbitantly, vendor may not update the insurance requirements or have a SOC2 audit completed, or may degrade the DR in terms of RTO and RPO. There are many things that could go south and more rigorous work actually starts from there. The work to make sure vendor is satisfying all business and compliance requirements on an ongoing basis is done by Vendor Management. As the name itself suggests, a vendor management group would take over from where SSG left and manage the vendor on a day to day basis. This could include various Day 1 and Day 2 activities including Purchase of more products or services, vendor performance management, meeting compliance requirements including ISO27001, SOC 2, Insurance, BCP, DR etc. Vendor Management may still work with SSG again to renew contracts, onboard new products, make amendments to MSA with the existing  vendors, but SSG doesn’t usually own the day to day relationship with the vendors. Some organizations might also have a SSG VMO (vendor management office), who would basically do both jobs. I have seen SSG VMO roles in both large as well as medium to small organizations. It is because sometimes companies do not have the budget, and sometimes companies feel that this structure fits their needs better than having them as two separate functions. 

There certainly are overlaps in the two functions. Both groups can and usually interact with the vendors making it even more confusing for the vendor to understand who is the lead? It is important to make the vendor understands that SSG takes the lead when a contract or an amendment is negotiated while working closely with the  VMO, who would work with the LOB on matters related to business such as requirements gathering, agreeing on SLA, Pricing, Limitation of Liability, getting approvals from other control partners such as Privacy, Data Governance, etc. However the DAY 1 ownership lies with the VMO.

Both SSG and VMO can negotiate the price. There are times when SSG would ask me to stand down when it comes to negotiations, other times I’d lead them. I don’t see that as a problem as far as either one of them can help in cost reduction that is in the best interest of the organization. 

SSG and VMO are two important and separate functions within any organization and can play a pivotal role in your organization’s success by partnering with great reliable vendors that augment your  product and service standards and also by having a direct impact on your bottom line by reducing the spend. Money saved is money earned after all.  

In the upcoming blogs, I’d take a deep dive into how to effectively manage your high, medium and low risk vendors and touch upon other related extremely important topics. Stay tuned. 

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