The Vendor Management Office: Recent Comments

Comment on Software Industry M&As are Doing Your Vendor Rationalization Work for You

Michelle — 2010-03-03T19:46:48Z

Hi Stephen,

I have spend the past 12 months getting my arms around the software spend of our organization. It was the largest area of spend with IT – 17% of our “controllable” spend (excluding salaries, lease, etc.). We found so much low hanging fruit by simply analyzing the usage versus maintenance spend. I would encourage any procurement or vendor management offices to look closely into their overall software spend data. I could go on and on regarding all the sales traps, bundled services, “free” software – but utilization review will return a significant amount of savings very quickly.

I would love the idea of rationalizing our vendors in the software arena. I am exploring the options now - but it is proving difficult. Some of our legacy applications are so embedded proving even the notion MORE difficult. The complexity for our support staff moving to a whole solution is met with a ton of resistance. I wonder if your other members are running into the same hurdles?

We recently started to mature our architecture group. It was previously made easy for an associate to spend $100k on a new solution – when IT already had made an investment in another solution. We are moving toward a solution based model within IT. Our business units come to our relationship managers and architecture with a need – IT fills the need with our existing architecture solutions.

Although this will take time – it is already improving efficiencies. Our architecture lead has an analogy of a car manufacturing line. Right now our business units are picking out different engines, body styles and sizes of their car – all while having input the whole way down the manufacturing line making more requested changes. Now they can pick out the color and we can help tweak some options the company car. But we are not willing to allow for custom builds on an already great car – it is far too costly and takes too much time.

I would love to cut us down to a small handful of Strategic vendors. My comments are only around my organizations agility.

Michelle

Comment on IRS Issues Request for Quotation--for Shotguns! Pow! Pow!

Mike Oswalt — 2010-02-03T18:51:19Z

Nice FIND! Getting some play from Twitter and Drudge

Comment on VMOs, Organizationally

Stephen Guth — 2010-01-22T22:33:03Z

Hey Eric,

Yes, there are a number of ways for incentive-based pay for procurement pros to get side-tracked. One consideration is that incentive pay drives behavior and money + people = occasional irrational behavior. Questions arise such as:

Will procurement push customers to spend in patterns to match the comp plan (e.g., quarterly quotas, rushing deals to meet a comp timeline rather than spending the right amount time on the deal, pushing customers to spend when they shouldn't be spending)?
Will vendors react by increasing prices knowing that procurement is comped on savings?
What happens when the customer reduces capital or other spend or delays projects? How does that impact procurement comp?

Comment on VMOs, Organizationally

Eric Johnson — 2010-01-22T21:29:47Z

Stephen,

We've had this same discussion in our VMO recently. While we agree that being paid on an incentive basis would be motivating, we also agree that introducing incentives could create ethical and behavioral problems.

It is difficult enough to repair relationships damaged by "vendor bashing" during the normal course of business. If a vendor learned our approach to the relationship was partially based on incentives, they would have a valid reason to question our motives every time we interacted.

Comment on VMOs, Organizationally

Stephen Guth — 2010-01-21T00:31:33Z

Hi Michelle,

It sounds like your employer is being short-sighted. In my personal experience, having worked in Fortune 100 companies in both low and high cost of living areas, a $100K comp package for good, solid vendor management types has been pretty typical over the past few years. Incentive polices range from no incentive (meaning base only) to a significant portion of the comp being based on incentives. I've seen all sorts of ranges in between, but it is definitely more common to have some part of the pay incentive based than not. In this economy, I'm finding procurement / vendor management salaries at the more senior levels really escalating--the reason being is that when sales are down or flat, the only way to increase margins is to cut costs (e.g., negotiating better pricing from vendors or getting more value from vendors for the same amount of spend). And, as you indicated, it takes good people to save those "millions" and those good people come at a price. Good luck convincing your employer, but, at some point, you may want to look for another employer.

P.S. Thanks for buying my book!

Best,
Stephen

Comment on VMOs, Organizationally

Michelle — 2010-01-21T00:06:54Z

I began reading your book - The Vendor Management Office. I have been an internal IT vendor management consultant for a health care insurance firm. I am having the hardest time getting people to understand that we cannot pay talented people to successfully manage vendors and implement effective strategic sourcing with the peanuts they want to pay them. I have been told by colleagues in the "professional buying" arena that it is more uncommon not to be paid on an incentive basis.

Is that what you are finding? Are there companies that are willing to compensate contributing parties that save their company the millions of dollars in annually?

I finally received an additional head count to assist in my efforts but they are admin quality staff. I need an A team!

Comment on Test Your Procurement Skills: Find the One Word Death Trap

Chris Lemens — 2010-01-08T18:27:17Z

1. The way I get to the idea that the customer could refuse all three remedies is that "shall" creates a right for the customer. "Shall" does not create a right for the supplier at all. One drafting approach would be to say that the supplier may do any of the options on the filing of a case and shall do one of them in the event of an injunction. (And, presumably you should want to say "no later than the effectiveness of an injunction.)

2. The language is poorly drafted. It says "indemnify, defend and hold harmless . . . any suit." Indemnify and hold harmless are redundant because they mean the same thing -- to make good a loss that someone has suffered because of another's act or default. (See Byran A. Garner, A Dictionary of Modern Legal Usage at 436.) The language specifies that the supplier has to indemnify certain lawsuits. Since this is the supplier's language, and ambiguity gets interpreted against the supplier, I would read that to mean that the supplier has to make good all losses arising from the suit, not just pay the judgment. One common issue that customers raise is "what about my internal costs of assisting you in the defense?" In the absence of any other language, simply saying that you indemnify against the suit would cover those kinds of losses. There is nothing in the first two sentences that makes me believe that the indemnity is limited to paying the judgment. If the supplier had wanted to indemnify against a judgment, rather than a suit, it could have said so. I often do.

Also see Stephen Guth's language in his form Master Software License Agreement. It clearly covers these kinds of damages.

3. Since I believe point 2 above is wrong, I think this point is also wrong. If the language had, in fact, limited the indemnity to the plaintiff's recovery, then I would agree with you.

4. I could never support language that would require me to spend money curing unmeritorious infringement claims. The risk is largely on the licensor, so you should give the licensor some discretion. As noted above, I could support language that requires the licensor to do one of these things in the face of an injunction. But a meritorious defense should be allowed.

5. At the end of the day, no contract provision should be very one-sided; they should all be balanced based on the real risks that the parties run and should not require either party to engage in economically unreasonable activity. Replacing software where the supplier has a valid defense to the infringement case is ridiculous. (Also, you seem to imply that the supplier has control over all infringement risk. This would be incorrect with respect to patent infringement risk in the US, with the rise of submarine patents and patent trolls.) Also, I rarely see a case where the supplier truly has sole control over the defense. The customer almost always retains some rights, often including the right to refuse any settlement including an injunction.

Chris

Comment on Test Your Procurement Skills: Find the One Word Death Trap

Jeff Gordon — 2010-01-08T17:43:37Z

I'm going to number the issues for further discussion.

1. Regardless of what damages the infringed party seeks, the supplier can choose option 2. The real goal for the customer is the ability to keep using the software (quiet enjoyment). I don't see in this language where the customer, given the specific remedies for the supplier, can choose to not accept any of the 3 options.

2. As these are specific remedies, I don't see how you can get the "damages" from having to remove the infringing item. The opening two sentences don't provide for damages outside those awarded to the third party against the customer.

3. Which leads me to the last paragraph of your reply above - since they aren't entitled to any other damage amount but for what they have to pay out to the IP holder, and such damages aren't going to include the cost of removing the infringing item, there's really not going to be a reliance on the indemnity clause to try to recoup those costs.

4. From a customer standpoint, the supplier shouldn't ever do NONE of the three options - even if they think they can win. The quiet enjoyment issue from #1 above is still there and needs to be addressed. As a customer, I don't care if the claim is frivolous or mistaken. I only care about continued, uninterrupted use of the product. It should be the suppliers burden to get me the right to keep using the product during the suit... and settle with the third party later in the event it's a mistake.

5. At the end of the day, IP indemnification IS and SHOULD BE very one-sided. As a customer, I have NO control over what IP is in a supplier's product (nor should I, in most cases). Therefore, in the event of an infringement assumption, I should not have to worry about it - and in most cases again, the supplier wants "sole control" over any defense.

In trade for sole control is sole responsibility. Which balances the equation. At the end of the day, the customer should have one of three solutions:

a. Continued use of the product at no additional cost.

b. A modified product that doesn't infringe at no additional cost.

c. Their money back (Steven is nice enough to do pro-rata refunds - I don't). I want 100% of my money back (which, in my mind, I use to cover the switching costs).

Why should it be any other way? I lived up to my end of the deal (presumably, I paid in full and I didn't breach any contractual terms).

Comment on Test Your Procurement Skills: Find the One Word Death Trap

Chris Lemens — 2010-01-08T16:14:30Z

Jeff:

If you use the word "may," the supplier also has the option of doing none of the three, which it would do if it believed that it would prevail in the lawsuit. A rational supplier will only exercise one of the three options if it believes it will (or is not willing to risk that it might) lose the case. I would argue that it is inappropriate to use the trigger in the first dependent clause of this sentence and change the word "may" to "shall" because it would require the supplier to take one of those actions on a case it will win.

At the very least, if you change "may" to "shall," then you need to change the trigger to be the likelihood of an injunction, not the mere filing of a suit. I mean, what if the claim is only for damages, and not an injunction? What if the claim is frivolous or obviously mistaken? The supplier shouldn't have to do any of these options under those circumstances.

If you change the language to "shall," then the customer has two remedies. The first is complete indemnification against the infringement claim. Absent any other limitations in the contract, the customer would be (at least argue that it is ) entitled to damages arising from having to remove the infringing item. (This is especially true if the language includes a very broad listing covering things like "damages, losses, cost, expense" and so on that the indemnioty covers.) Turning "may" to "shall" gives the customer an additional remedy on top of that. That is the sense in which I meant that the triple option sentence is an additional remedy.

The change to "shall" also calls into question whether the customer can refuse all three remedies -- that is, what happens if the customer says "no, I'll obey the injunction, but I'm waiving all three of these remedies and I'm going to rely on the indemnity to claim my damages arising from having to remove the infringing item." Language of obligation does not necessarily imply countervailing permission on the other side. Just because I have the right to get my fridge fixed under the warranty doesn't mean that the company that sold it to me has the right to fix it.

Chris Lemens

Comment on Test Your Procurement Skills: Find the One Word Death Trap

Jeff Gordon — 2010-01-08T02:23:45Z

Chris: I'm not sure your point is well made here.

With the word "shall", the supplier still has 3 options:

1. replace or modify the Software so that it becomes non-infringing;

2. procure for Customer the right to continue using the Software under the terms of this Agreement; or,

3. accept return of the infringing Software, terminate this Agreement as to the infringing Software, and refund or credit for the fees paid by Customer for such infringing Software less a reasonable allowance for the period of time Customer has used the Software.

How is this a problem for the supplier? It gives THEM the option to PICK whichever option is the most economically feasible. In fact, the way I usually like to tighten this clause is to make option #3 an "as a last resort" option, so that they simply don't decide to cut and run - because the switching costs to me as a buyer are usually pretty high.

At the end of the day, indemnification remedies are usually sole remedies - not additional remedies.