The right way to do Vendor Management – part 2

Nov 21, 2019

Part 2 Choosing the right vendor.

This is part two of four of the Right Way to Do Vendor Management. In the first article, we overviewed vendor management as a system with three parts: choosing the right vendor, contracting well, and measuring and monitoring vendors. This article is about the first, choosing the right vendor.

First, it’s important to know how we buy. In his book, Buyology, Martin Lindstrom shares the results of a multi-year study that confirms we buy on emotion, not rationality, maybe to the extent of a 90% to 10% split. There are a number of reasons why we do so, but people buy based on their own biases and ideas, often quickly developing a favorite based on any number of (often irrational) reasons. We want what we want. Maybe we’ll get lucky and intuitively make the right choice – or maybe we won’t.

We quickly develop a “like” in the process that can skew our decision, even if we don’t mean to do so. After we decide what we want, we surround it with facts and process to justify buying what we were going to buy in the first place. A process or system, can help us make better decisions, and the vendor management guidelines set out a construct about how to do that.

This is a very important point. Irrationality may explain how we develop an idea for something we want, then start searching for a solution. Having worked in sales for many years, I see credit unions often settle on a vendor early in the process as an unidentified favorite, build comparison spreadsheets (based on features) and then schedule demos. The credit union then gets three proposals and, guess what, the early favorite wins the deal.

When I get a call for a demo, I ask where the credit union is in the process, something I learned in sales training. If the credit union has already done some shopping before a call, I know I’m being scouted to become “column fodder,” just another vendor in a spreadsheet column to compare to the favorite to justify the eventual selection.

What’s missing is a deeper understanding of “why.” Without a system that minimizes emotion, the credit union will miss an important step in really understanding what it’s buying. There is often a particular feature or feature set that drives the decision, without understanding what results will come from a vendor’s product or service and what it takes to get those results.

The guidelines list considerations for vendor selection, and they make a lot of sense. Service providers should be evaluated on their ability to meet the credit union’s needs, objectives (read: results), and necessary controls. This step includes a risk assessment to determine if the vendor’s product or service will deliver the results the credit union wants, consistent with its strategic plan. The risk assessment should consider what resources and expertise the credit union will need to successfully use and manage the vendor relationship. This is not a review of a vendor’s due diligence document.

Second, the credit union should discuss what provisions the vendor contract should contain. Though it’s always difficult to get a vendor to change its contract, with the right process in place and enough time to develop competitive pressure, vendors will work with credit unions to address the credit union’s most important contract terms. (More on this topic in the next article.)

The guidelines provide a list of the factors that should be considered in the selection process relating to technical and industry experience, operations and controls, and financial condition. But the key part is understanding the results you want and what you have to do to get them.

Because we help credit unions with vendor planning and vendor selection, we get the opportunity to see how vendor relationships are working and where problems arise. The two biggest issues are a misunderstanding, right from the start, about what the vendor will and will not do. It happens in 90% of the problem cases we see, resulting in conflict and loss of trust.

The second  issue is related to the first. It’s failure by the credit union to understand its role and its responsibilities. Nowhere is this more apparent than with software. Software is a tool, it doesn’t think.

Software vendors want to install software, provide training, and then move implementation to “maintenance” or “support.” That’s their business model and there’s nothing wrong with it. Credit unions often think software will fix a problem or drive a result, forgetting that it has to resource the software. Even software with lots of features and capabilities is worthless unless someone knows how to take advantage of those features.

Vendor selection begins with hard work to build a business case and needs analysis that focuses on the results you want. The question to ask is, “Why are we buying this?” The focus is on results, described in terms like increasing membership, improving member service, reducing the staff time, or making it easier for members to do business with you. It’s not about a feature you may never use.

The results you want should be shared with prospective vendors, and vendors should show you how you get those results. The vendor should describe where it’s services end and yours begin and share with you the names of other credit unions that got similar results, not just the ones that like the vendor.

Instead of a spreadsheet with rows of features and three vendor columns, consider changing that to illustrations of results others achieved and documentation of what it took the others to get those results. This approach alleviates the two common problems – misunderstanding what the vendor does and how much work or additional cost you have invest to get results. Score the vendor based on the business case and needs analysis instead.

Finally, a note about contracts. The vendor’s contract will not say you’ll get results; in fact, it says the opposite. The vendor contract will shift all responsibility for results to you, so if you don’t get them, too bad. Just keep sending the vendor their check, even if they don’t perform. Understanding what you want in the contract and making it part of the vendor selection process is the only real hope you have of getting fairness and clarity with the vendor. Stay tuned for our next article about contracting.

(Our next article will focus on Part 2: contracting well.)

Maple Street, Inc., is the provider of the Vendor Advantage System® and the only complete vendor relationship management system. Maple Street delivers lower expenses, improved vendor performance, and effective risk management, and provides an outsource service so you can focus on what you do best: exceeding your members’ expectations.

Contact Mike Crofts at (800) 513-6839.

Michael Crofts, President,

Maple Street, Inc.

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