Going lean: How vendor consolidation creates big gains

The second quarter of 2020 launched many digital transformation projects that didn't necessarily happen at the behest of chief innovation officers, but because of the wrecking ball of disruption known as covid-19. Even if companies did succeed at rapidly orienting operations and services to digital, the transformation journey is far from over-and that means procurement and vendor management professionals now need to work some IT budgeting magic.

This content was produced by Insight. It was not written by MIT Technology Review's editorial staff.

Jamie Werve is director, e-commerce strategy, at Insight.

The reality is, you can't invest in innovation without first optimizing procurement. Sourcing, procurement, and vendor management (SPVM) professionals face critical objectives this year: optimize operations to reduce costs and free up funds to invest in innovation. How do you accomplish both when your budget has been wildly thrown off track?

While organizations are trying to go lean during challenging economic times, a bloated vendor portfolio conceals a lot of opportunities to get more with less.

Why is vendor management so difficult?

Business IT ecosystems today are highly sophisticated and ever-increasing in complexity in order to realize the return on investment promised by digital transformation. Events of 2020 have further emphasized the critical need for modern infrastructure and digital experiences. However, a robust IT ecosystem can also be expensive to maintain, resource-intensive to manage, and inefficient to operate.

On average, organizations are trying to manage more than 10 vendor relationships for a single initiative-and may have upward of hundreds of vendor relationships to fulfill the vast array of needs across the organization. Adding to the complexity is the reality that IT systems and technology-related decisions are actually happening outside of IT.

SPVM professionals are all too familiar with the painful and time-intensive coordination required to purchase across numerous vendors and their disparate fulfillment operations. Stack on top of that disparate software licensing agreements and rogue employee IT purchasing. This creates an obscured view over the organization's supply chain and IT lifecycles, leaving little opportunity to surface key insights for improvements. Vendor sprawl means companies face these top challenges:

• Increased costs
• Shadow IT
• Compromised security
• Inefficient procurement processes

But costs and processes aside, perhaps the most damaging result of vendor sprawl is the threat to successful business transformation. Disparate systems and partners can lead to siloed communications, integration challenges, security gaps, and a growing landscape of one-off solutions. Visibility over the whole IT environment becomes obscured.

What is strategic vendor management?

Vendor consolidation isn't as simple as reducing the number of IT vendors from which you purchase products and services from-it's a strategic partnership.

Although it's unrealistic to consolidate down to a single vendor, establishing stronger relationships with a short list of key partners can lead to efficiency gains, optimized costs, and enduring business outcomes. That's because working with fewer vendors helps to optimize the entire supply chain-driving efficiency across procurement, delivery, deployment, asset management, and services. The IT lifecycle becomes much easier to manage and enables automated procurement tasks and fewer service-level agreements (SLAs).

A common misconception about vendor consolidation is that working with fewer vendors will dissolve a company's ability to negotiate SLAs and pricing against a vendor's competitors. But, in fact, the opposite is true. Rationalizing spending across a few vendors allows businesses to take advantage of scale or volume pricing, as well as potential preferential pricing and priority customer service. Consider the following benefits of vendor consolidation:

• Ability to automate procurement and increase business agility
• Access to data analytics to optimize purchasing
• Reduced costs associated with IT support for vendor management
• Increased discounts due to preferential, scale or volume pricing
• Simplified view that enables effective IT governance and compliance

When it comes to vendors, less really can give you more

An optimal vendor portfolio will provide end-to-end IT products and services. But more than that, the right partner should feel like an extension of your IT team. This is especially important today with increasing demand for hybrid IT, or a combination of internal and external IT talent. This is particularly helpful for offloading low-level IT support or for more complex work in which specialized IT talent is needed to fill knowledge gaps. As IT further intensifies its role within organizations, technology vendors are also evolving to offer more comprehensive support.

A compelling reason for organizations to trim the vendor list is due to a rising breed of super solution integrators (SSIs). An SSI is a single team, or organization, with expertise and capabilities that span the entire IT ecosystem and can architect, manage, and execute IT initiatives from end to end. That means they've got you covered from procurement to asset management and beyond-empowering SPVM professionals to meet both cost optimization and innovation objectives.

How to begin a vendor consolidation

There are clear and overwhelming benefits to vendor consolidation-but there are also existing misgivings and concerns about consolidating. The white paper Driving Business Value Through Vendor Consolidation" digs deeper into the current pain points of SPVM professionals and uncovers key benefits of vendor consolidation supported by industry research. It can help you build a business case and help determine which partners will ultimately meet your needs today-and in the future.