How Cisco IT Helped with Strategic Vendor Management

Lance Perry, vice president, IT Customer Strategy and Success

Editor's note: This month we focus on how IT can help with strategy. In our feature story, we look at the strategic importance of deploying new technology. We asked Cisco IT to describe how it aids the company's strategic efforts.

John Chambers, president and chief executive officer of Cisco, has said, "Time has continuously redefined success for business. In the 1980s it was companies that had effective internal product development. In the 1990s it was companies who could mix internal development with the ability to effectively acquire and integrate. In the new millennium, it will be those companies that can do the above and effectively partner."

Cisco tackles that last challenge through strategic vendor relationships, and IT plays a part in building and maintaining those relationships. After all, with hundreds of locations and more than 35,000 employees, Cisco has an enormous IT infrastructure budget. Each Cisco office—like most companies—has complex IT requirements: high-speed connections; voice, data, and video networking equipment; computers, servers, and storage; and security and support. While Cisco naturally uses its own products and services wherever possible, it still spends $500 million per year globally on other IT products and services.

In the past, the company had no consistent process for acquiring new products and services. Every time it opened a new location or implemented a new service in an existing location, one of several scenarios occurred:

• Local managers called local suppliers and ordered whatever was needed: This was the fastest path to deployment.
• Regional IT offices negotiated contracts with local suppliers: Each contract was negotiated individually, which meant that past lessons and economies of scale were lost.
• Cisco IT would issue requests for proposals or quotes (RFPs or RFQs) and award the business based on responses: While this frequently resulted in better prices, the proposal process was inconsistent, resulting in little or no emphasis on establishing strategic vendor relationships or planning for the future.

This lack of consistent process meant that Cisco might receive 20 agreements for the same service with the same vendor. Agreements in different countries would have different prices, lengths of service, terms, and service levels. The entire process proved to be inefficient and too complex for either the vendor or Cisco to manage. In addition, as Cisco became more successful, the number of vendors seeking business with the company dramatically increased. Without a standard or consistent method for dealing with these contracts, more Cisco employees had to spend more time responding to them.

Aside from the complexity of these agreements, the lack of strategic planning also began to cost Cisco significant amounts of money. The company discovered that it had signed multiyear contracts for products or services that became obsolete when employees moved to larger offices or deployed new technologies. With so many small agreements, Cisco missed the opportunity to negotiate for better terms and prices based on its total sales volume. This resulted in the company paying more than necessary for products and services. A benchmarking survey conducted in the Europe, Middle East, and Africa (EMEA) region confirmed that the company was paying more for similar services than other enterprises did.

Finally, the lack of consistency negatively affected the relationships between Cisco and its vendors. Informal contracts do not properly set expectations for the seller or the buyer. It was not always clear to vendors what Cisco's criteria were for awarding business. There was no standard process for weighting bids, vendor communication, and oversight, and that led to an escalation of disagreements between Cisco and the senior management of vendor companies. This was particularly serious because many Cisco vendors are also significant Cisco customers. Sales teams began to complain that the situation was affecting their customer relationships.

The Beginnings of Vendor Management

The impetus for change began in Europe, where the vast number of service provides made it particularly complex to choose suppliers for wide-area network infrastructure. In 2001, the EMEA theater formed a vendor management office (VMO), the goal of which was to develop a strategic, consistent approach to selecting WAN infrastructure vendors that would reduce cost and risk for Cisco. The VMO chose to work only with vendors in those regions who were strategic to the needs, marketplace, and business of Cisco. Within a short period of time, it had successfully renegotiated contracts and repaired relationships, which attracted the attention of executives at Cisco headquarters.

In May 2002, the VMO became a global IT group. Its mandate expected to include managing strategic vendors that supply hardware infrastructure, software, storage, telecom services, and outsourced infrastructure services. In addition, the VMO provides value and expertise in process and business development, asset management, and vendor engagement.

The VMO identified seven phases of vendor management that effect successful outcomes. These phases help any company to organize and standardize functions, while they encourage change and continuous improvement in the procurement process.

The seven phases are as follows:

Engage: Vendors come to Cisco's attention in a variety of ways, often when there is a need for products and services as a result of changing business climates or technologies. New vendors might call Cisco hoping for new business opportunities, or Cisco might receive sales referrals from other business partners. At times, the VMO might actively seek out a vendor, either when internal Cisco client groups require new service or when bankruptcies or other business problems affect a current vendor's ability to deliver service. The VMO handles the initial engagement and contact with these vendors to ensure consistency and fairness of communications.

Investigate: To evaluate competing products and services, the VMO works with client groups in Cisco's IT Infrastructure Operations group to investigate industry trends in technology, pricing, and standards. The VMO also works with sales, marketing, development, business units, finance, and procurement to identify potential vendors and investigate possible solutions. This requires the VMO staff to be familiar with a wide variety of industry technologies and trends. Select VMO personnel specialize in a number of technology sectors. These sector specialists monitor the technology and pricing trends, and engage external technology consultants to learn more. The VMO also meets with vendor management groups in other companies and participates in customer forums and panels and share and gain information.

Evaluate: If warranted, the VMO initiates a bid process, which produces a short list of quality candidates that meet all Cisco client and IT criteria. "We try to communicate all the business issues that exist and make business decisions that are strategic to Cisco accordingly," says Wallace Chan, the IT director for the VMO. This process helps to educate vendors about Cisco needs and expectations, and to engage in clear communication about what the vendor can deliver, in a consistent, open, and fair manner.

Negotiate: Once a vendor has been selected, the VMO manages the negotiation. This includes balancing the internal client needs for reliable service (articulated in a clear service-level agreement), low prices, and strong strategic partnerships with the vendor's need for clear deliverables and a fair price for the services delivered.

Contract: Following the negotiation phase, the Cisco purchasing group confirms the contract, working closely with the Cisco legal department to resolve any contract issues. The VMO remains engaged during this process, but allows the purchasing group to manage the contracting process. To help streamline this phase, the VMO has established several guidelines—for example, limiting the contract length to no more than 36 months.

Compliance: Once the contract is signed, the VMO generates quarterly reviews that compare commitments and performance with established criteria. This process continues to set expectations between Cisco and the strategic vendor, and improves communications, while still holding the vendor accountable for the quality of its products and services. Within the VMO, Cisco assigns a primary contact for each strategic vendor.

Renewal: When it is time to renew the contract, the VMO reengages with vendors and client groups within Cisco to restart the process. It is important to do this long enough before the contract expires to help ensure that there is time to investigate options. The VMO must determine if it is best to renew the contract (while negotiating terms based on the current situation) or repeat the seven-step process.

Internal collaboration is critical to the success of the vendor management process. "We've learned that the way to succeed is to work closely with other Cisco groups," says Chuck Trent, vice-president of information systems for the VMO. "Without the shared ownership and commitment to success from procurement, legal, purchasing, and operations groups, the VMO could not achieve its goals."

Part II looks at the results achieved from the vendor management organization.