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Process activities, methods and techniques. This section provides more detail on the Supplier Management process, its sub-processes and activities

This section provides more detail on the Supplier Management process, its sub-processes and activities, and the management of the contract lifecycle.

When dealing with external suppliers, it is strongly recommended that a formal contract with clearly defined, agreed and documented responsibilities and targets is established and managed through the stages of its lifecycle, from the identification of the business need to the operation and cessation of the contract:

  • Identification of business need and preparation of the business case:
    • Produce a Statement of Requirement (SOR) and/or Invitation To Tender (ITT)
    • Ensure conformance to strategy/policy
    • Prepare the initial business case, including options (internal and external), costs, timescales, targets, benefits, risk assessment.
  • Evaluation and procurement of new contracts and suppliers:
    • Identify method of purchase or procurement
    • Establish evaluation criteria – for example, services, capability (both personnel and organization), quality and cost
    • Evaluate alternative options
    • Select
    • Negotiate contracts, targets and the terms and conditions, including responsibilities, closure, renewal, extension, dispute, transfer
    • Agree and award the contract.
  • Establish new suppliers and contracts:
    • Set up the supplier service and contract, within the SCD and any other associated corporate systems
    • Transition of service
    • Establish contacts and relationships.
  • Supplier and contract categorization:
    • Assessment or reassessment of the supplier and contract
    • Ensure changes progressed through Service Transition
    • Categorization of the supplier
    • Update of SCD
    • Ongoing maintenance of the SCD.
  • Manage the supplier and contract performance:
    • Management and control of the operation and delivery of service/products
    • Monitor and report (service, quality and costs)
    • Review and improve (service, quality and costs)
    • Management of the supplier and the relationship (communication, risks, changes, failures, improvements, contacts, interfaces)
    • Review, at least annually, service scope against business need, targets and agreements
    • Plan for possible closure/renewal/extension.
  • End of term:
    • Review (determine benefits delivered, ongoing requirement)
    • Renegotiate and renew or terminate and/or transfer.

The business, IT, finance, purchasing and procurement need to work together to ensure that all stages of the contract lifecycle are managed effectively. All areas need to be jointly involved in selecting the solution and managing the ongoing performance of the supplier, with each area taking responsibility for the interests of their own area, whilst being aware of the implications on the organization as a whole. The processes involved in the stages of the contract lifecycle are explained in detail in the following sections. Evaluation of new suppliers and contracts

The activities associated with the identification of business needs and the subsequent evaluation of new suppliers and contracts are part of the Service Design process. The outputs from this area provide the inputs to all other stages of the contract lifecycle. IT is vital to the ongoing success of the contract and the relationship that the business is closely involved in all aspects of these activities. Every organization should have templates and a formal method for the production of business cases and their approval and sign-off. The detailing of the business needs and the content of the business case should be agreed, approved and signed off by both the business and IT.

When selecting a new supplier or contract, a number of factors need to be taken into consideration, including track record, capability, references, credit rating and size relative to the business being placed. In addition, depending on the type of supplier relationship, there may be personnel issues that need to be considered. Each organization should have processes and procedures for establishing new suppliers and contracts.

While it is recognized that factors may exist that influence the decision on type of relationship or choice of supplier (e.g. politics within the organization, existing relationships), it is essential that in such cases the reasoning is identified and the impact fully assessed to ensure costly mistakes are avoided.

Services may be sourced from a single supplier or multi-sourced. Services are most likely to be sourced from two or more competing suppliers where the requirement is for standard services or products that are readily available ‘off-the-shelf’. Multi-sourcing is most likely to be used where cost is the prime determinant, and requirements for developing variants of the services are low, but may also be undertaken to spread risk. Suppliers on a multi-source list may be designated with ‘Preferred Supplier’ status within the organization, limiting or removing scope for use of other suppliers.

Partnering relationships are established at an executive level and are dependent on a willingness to exchange strategic information to align business strategies. Many strategically important supplier relationships are now positioned as partnering relationships. This reflects a move away from traditionally hierarchical relationships, where the supplier acts subordinately to the customer organization, to one characterized by:

  • Strategic alignment: good alignment of culture, values and objectives, leading to an alignment of business strategies
  • Integration: a close integration of the processes of the two organizations
  • Information flow: good communication and information exchange at all levels, especially at the strategic level, leading to close understanding
  • Mutual trust: a relationship built on mutual trust between the organizations and their individuals
  • Openness: when reporting on service performance, costs and Risk Analysis
  • Collective responsibility: joint partnership teams taking collective responsibility for current performance and future development of the relationship
  • Sharedriskand reward: e.g. agreeing how investment costs and resultant efficiency benefits are shared, or how risks and rewards from fluctuations in material costs are shared.

Both parties derive benefits from partnering. An organization derives progressively more value from a supplier relationship as the supplier’s understanding of the organization as a whole increases, from its IT inventory architectures through to its corporate culture, values and business objectives. With time, the supplier is able to respond more quickly and more appropriately to the organization’s needs. The supplier benefits from a longer-term commitment from the organization, providing it with greater financial stability, and enabling it to finance longer-term investments, which benefit its customers.

A partnership makes it possible for the parties to align their IT infrastructures. Joint architecture and risk control agreements allow the partners to implement a range of compatible solutions from security, networking, data/information interchange, to workflow and application processing systems. This integration can provide service improvements and lowered costs. Such moves also reduce risks and costs associated with one-off tactical solutions, put in place to bridge a supplier’s IT with that of the organization.

The key to a successful partnering relationship is being absolutely clear about the benefits and costs such a relationship will deliver before entering into it. Both parties then know what is expected of them at the outset. The success of the partnership may involve agreeing the transfer of staff to the partner or outsourcing organization as part of the agreement and relationship.

Service provider organizations should have documented and formal processes for evaluating and selecting suppliers based on:

  • Importance and impact: the importance of the service to the business, provided by the supplier
  • Risk: the risks associated with using the service
  • Costs: the cost of the service and its provision.

Often other areas of the service provider organization, such as Legal, Finance and Purchasing, will get involved with this aspect of the process. Service provider organizations should have processes covering:

  • Production of business case documents
  • Production of SoR and Invitations to Tender or proposal documents
  • Formal evaluation and selection of suppliers and contracts
  • The inclusion of standard clauses, terms and conditions within contracts, including early termination, benchmarking, exit or transfer of contracts, dispute resolution, management of sub-contracted suppliers and normal termination
  • Transitioning of new contracts and suppliers.

These processes may, and should be, different, based on the type, size and category of the supplier and the contract.

The nature and extent of an agreement depends on the relationship type and an assessment of the risks involved. A pre-agreement Risk Analysis is a vital stage in establishing any external supplier agreement. For each party, it exposes the risks that need to be addressed and needs to be as comprehensive as practical, covering a wide variety of risks, including financial, business reputation, operational, regulatory and legal.

A comprehensive agreement minimizes the risk of disputes arising from a difference of expectations. A flexible agreement, which adequately caters for its adaptation across the term of the agreement, is maintainable and supports change with a minimum amount of renegotiation.

The contents of a basic underpinning contract or service agreement are as follows:

  • Basic terms and conditions: the term (duration) of the contract, the parties, locations, scope, definitions and commercial basis.
  • Service description andscope: the functionality of the services being provided and its extent, along with constraints on the service delivery, such as performance, availability, capacity, technical interface and security. Service functionality may be explicitly defined, or in the case of well-established services, included by reference to other established documents, such as the Service Portfolio and the Service Catalogue.
  • Service standards: the service measures and the minimum levels that constitute acceptable performance and quality, e.g. IT may have a performance requirement to respond to a request for a new desktop system in 24 hours, with acceptable service deemed to have occurred where this performance requirement is met in 95% of cases. Service levels must be realistic, measurable and aligned to the organization’s business priorities and underpin the agreed targets within SLRs and SLAs.
  • Workloadranges: the volume ranges within which service standards apply, or for which particular pricing regimes apply.
  • Management information(MI): the data that must be reported by the supplier on operational performance – take care to ensure that MI is focused on the most important or headline reporting measures on which the relationship will be assessed. Key Performance Indicators (KPIs) and Balanced Scorecards (BSCs) may form the core of reported performance data.
  • Responsibilities and dependencies: description of the obligations of the organization (in supporting the supplier in the service delivery efforts) and of the supplier (in its provision of the service), including communication, contacts and escalation.

An extended service agreement may also contain:

  • Service debit and credit regime (incentives and penalties)
  • Additional performance criteria.

The following gives a limited sample of the legal and commercial topics typically covered by a service or contractual agreement:

  • Scope of services to be provided
  • Service performance requirements
  • Division and agreement of responsibilities
  • Contact points, communication and reporting frequency and content
  • Contract review and dispute resolution processes
  • Price structure
  • Payment terms
  • Commitments to change and investment
  • Agreement change process
  • Confidentiality and announcements
  • Intellectual property rights and copyright
  • Liability limitations
  • Termination rights of each party
  • Obligations at termination and beyond.

The final form of an agreement, and some of the terminology, may be dictated by the views and preferences of the procurement and legal departments, or by specialist legal firms.

Seek legal advice when formalizing external supply agreements.

Formal contracts

Formal contracts are appropriate for external supply arrangements that make a significant contribution to the delivery and development of the business. Contracts provide for binding legal commitments between customer and supplier, and cover the obligations each organization has to the other from the first day of the contract, often extending beyond its termination. A contract is used as the basis for external supplier agreements where an enforceable commitment is required. High-value and/or strategic relationships are underpinned by a formal contract. The formality and binding nature of a contract are not at odds with the culture of a partnering agreement, but rather form the basis on which trust in the relationship may be founded.

A contract is likely to be structured with a main body containing the commercial and legal clauses, and with the elements of a service agreement, as described earlier, attached as schedules. Contracts may also include a number of other related documents as schedules, for example:

  • Security requirements
  • Business continuity requirements
  • Mandated technical standards
  • Migration plans (agreed pre-scheduled change)
  • Disclosure agreements.

Most large organizations have procurement and legal departments specializing in sourcing contracts. Specialist legal firms may be employed to support the internal procurement and legal function when establishing significant formal contracts.

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