Category Archives: General

Earlier I wrote about the value proposition for IT Leaders of SMBs to engage in a Prime Vendor Model to satisfy the diverse needs of their departments. (LINK) That article was based on the principles defined and implemented across many larger enterprises across the US and the world. Much debate and discussion has been had about this topic, with many asking “How can one vendor really meet all of my needs? And if I think there could be one, how do I know which one is the best fit for my firm?” In this article, I will address these two critical questions facing IT Leaders.

First of all, we have been speeding towards the Prime Vendor Model for a number of years when procurement departments started developing an echelon of “Preferred” vendors with whom they were expecting to spend more money year after year. The goal of the procurement department was simple: beat down the vendor’s price to insure the budget numbers were met. This is a way of being from the 20^th century, where someone has to win and someone else has to lose. Our firm, and really the avant-garde set of firms like us, is not interested in a 20^th century model. We embrace the 21^st century models of co-opetition, win/win business scenarios, and loyalty generated by consistently delivering value and exceeding expectations.

The Prime Vendor Model can be constructed a number of ways. The most simple (and thus easiest to implement) is a pre-determined cost sheet for products and services that are purchased year-over-year. The best example is laptops or server purchases. In a Prime Vendor model, the single vendor will provide the required hardware for the same price for a set period 12-24 months. The price should be low enough that the customer feels that the deal is pretty good (it doesn’t have to be the absolute lowest), and the vendor will take on the responsibility of delivering machines in the timeframes required and at the lowest cost the vendor can secure. This scenario requires a consistent purchase pattern and few changes on the product mix in order to operate seamlessly.

The next easiest model requires more transparency: The cost-plus or fixed-margin model. In this model, the vendor shows the customer actual costing numbers from orders and there is a pre-determined margin percentage determined for the duration of the contract. The margin number will obviously be impacted by the make-up of the annual purchases, but when a customer shows their annual spend, the vendor will be ready to have a guaranteed revenue stream for the coming year or two. This scenario allows for a bit more fluidity in purchases (type, number, frequency, etc.) because both sides will know exactly what they are getting.

One of the more advanced models is a SLA-based model. In this model, the vendor guarantees delivery of the services required by the customer and the price up-front, but it is the choice of the vendor how to deliver those services. More advanced contract techniques can be employed here as well, including bonuses and penalties based on SLA performance. This model requires the most trust between the customer and the Prime Vendor and can even be tied to metrics outside of the IT Organization to insure alignment.

Now that we’ve discussed how the business relationship of this model can look, how will an IT Organization know which of their vendors to promote to this “Prime Vendor” position? Remember, it’s not just a guaranteed spend amount, but it’s transparency in intimate business details and requires rigorous planning to provide the Prime Vendor the information necessary to support the business. And the level of involvement of your Prime Vendor in more business conversations will increase if you want the maximum value out of the relationship. Because of these increased expectations on all sides, the Prime Vendor could look very different from firm to firm. There really isn’t a set description for a Prime Vendor, but there is a good framework of expectations that you can use to assess your vendors to determine if any could fit this role, or which could fit the best.

When determining the best “fit” for a Prime Vendor, the critical areas to focus are:

Proven track-record – Measuring the relationship not only by the times the vendor achieved the expected service level, but also by the times when things went sideways (supplier shock, disaster, etc.)

Capabilities match needs of organization – Insure the skills the vendor has (or has access to) match the needs of the organization long-term. It’s better to get high-value skills at a discount with the power of large purchases. The vendor must also get you access to something your firm needs but hasn’t/cannot acquire.

Knowledge of the firm/industry – The Prime Vendor should know your organization very well based on length of time in the relationship or by industry expertise. While neither of these are absolutely required, having a vendor versed in your industry might also gain some contextual and comparative information during the arrangement.

Willingness to engage – Vendors not willing to do business in this manner might have more to hide than you think. And if vendors are not willing to help build new operating models with shared responsibilities, you might re-consider where to spend your firm’s resources.

Once you have chosen to go down the Prime Vendor path, you will also need to consider the impact to your own organization. For instance, the procurement department will not need to be as large if all the business terms are agreed-upon during the contract. Also, your internal planning meetings will need to include representatives from the Prime Vendor so they can get the inside scoop on what to expect for upcoming orders. Your Prime Vendor should also be providing you expertise in things like hardware selection, service delivery, and solution requirements/capabilities.

These are just a few of the things to consider when embracing a Prime Vendor model for your organization. The business case is there, and the benefits are significant for all involved, as long as you and your Prime Vendor are willing to do business in a more open, more transparent, more 21^st century way.

Karl Burns is the Chief Strategy Officer at VirtualQube. He can be reached at karl.burns@virtualqube.com.

In the IT space, as in all business areas, there is a constant need to do more with less every year. If you are only producing the same amount of revenue, while still requiring the same amount of resources to produce that revenue, you may not be long for this world. I know that sounds harsh, but in this accelerated day of contracted business model lifetimes, you have to keep speeding towards growth else you may be left in the wake by your competition. We had a fun saying: “You don’t have to be the fastest when running from a bear, you only have to be faster than one person.” In business, it’s more like a long distance run where you need stamina, ideas, and sharp elbows to keep tight competition from getting into your lane and taking over your place.

As businesses grow, their needs change. That’s true to support new products and services, to manage more diverse customers, and to constantly improve the internal mechanics of the organization. The old way of doing business looked something like this: A company buys infrastructure one year, but services for the next 5 to get the most out of that hardware. And it may also require new add-ons and additional services during the life of that hardware.

The company of the future will not get handcuffed to assets (depreciated or not) and will instead look for suppliers that can be as dynamic as the business itself. In the old model, companies needed multiple vendors to get the best price. GE was famous for this. They would offer an RFP, have 3-5 down-selected, then take the cheapest price, subtract 30%, and offer that price to the firm they thought could do the best work. It was a great strategy, for GE only, and is not one built for the long-term. But this is still how many SMBs operate, asking for multiple quotes and going for the cheapest. That may have worked in the past, but now with the value of Vendor Management Offices (VMO) and Procurement Departments chasing smaller and smaller margins, SMBs need to adopt the strategy of the larger enterprises and engage in a Prime Vendor Model.

The Prime Vendor Model ( source ) is one that puts the responsibility of the company’s IT spend on both the supplier and the buyer. Shared responsibility, shared benefits. The model is enabled by a service-oriented supplier and a client who wants to get out of the margin squeezing business (zero-sum game) and trust a specialist to deliver value, while sharing in the reward (positive-sum game). A Prime Vendor Model requires new styles of measurement too. Gone will be the days of looking at the cost of every contract/item, and instead will be the day of your supplier providing valuable service that the SMB can depend on, for a reasonable (agreed upon) margin, while lowering the costs (FTE efforts) to identify, spec, solicit RFPs, assess, and finally manage delivery.

When this model is put to the test, a SMB will experience better overall performance from their IT staff because of these key reasons:

1)      Reduced time (FTE) managing the RFP process (identify, spec, solicit RFPs, assess, manage and enforce)

2)      Reduced knowledge required to plan and execute complex services (time spent researching, debating,

3)      Reduced annual spend on IT

It’s the third one that will get the most attention, and may not occur every year, but will occur over the course of a contract. It has been around for larger firms which needed a blend of products services, and strategic advice. ( source ) When we implemented this model for a client, we understood that we would face significant competition on a number of purchases (hardware, contracts, etc.) and that many vendors would “drop their shorts” to try and gain entry into our client’s annual budget. It took a lot of patience and commitment to not be short-sighted, and to trust another organization to deliver on the promises made to each other. Luckily, we had the full backing from Leadership at both organizations, and the annual spend is being reduced. It doesn’t mean the client gets the lowest price point on every purchase, but year-over-year, we are seeing the downward trend. And that’s build a relationship between both organizations that will benefit all of us for years.

At the end of the day, do you want to do business the old way, constantly spending days and days or weeks to define what you think you need, hosting vendor bake-offs, and ultimately having vendors deliver their service to the “T” with little regard for your company after taking a haircut on every deal? Or do you want to do business the way of the future, with limitless skills available at the ready, and the entire stakeholder set committed to year-over-year improvement, and reduced headcount to justify? I choose the latter.

Karl Burns is the Chief Strategy Officer at VirtualQube. He can be reached at karl.burns@virtualqube.com.