Vendor management office

Vendor Management Office or “VMO,” is an over-arching organizational concept of strategically managing procurements and vendors to maximize an organization’s investment in key commodities—while at the same time minimizing business risk. A definition of a VMO follows:

A Vendor Management Office is a strategically-focused purchasing organization comprised of highly-skilled business advisors who are entrusted with strategic sourcing and management of vendor relationships such that investments in key commodities are maximized to the fullest extent and risk to the business minimized.

While it is not clear who deserves credit for coining the term “Vendor Management Office,” it is clear that VMOs only started to appear in force on IT organizational charts in 2000. Early adopters of the VMO concept were typically the IT departments in large companies, like Cisco Systems and Aflac Insurance, who were dissatisfied with the service provided by their traditional purchasing organizations. At the time (and as it still does) IT really did matter.

Companies, stinging after the expense of Y2K remediation, were hurriedly moving to client / server architectures and trying to make sense of all of the new functionality being churned out by newly-minted software vendors. Even legacy software companies were jumping on the bandwagon to cash-in on the technology shift to client / server, re-branding and re-pricing their software accordingly. CFOs, still wondering why Y2K cost so much, took exception to IT’s burgeoning budgets regardless of Sarbanes-Oxley and HIPAA looming on the horizon. Too many products, too many vendors, too much cost, and too little customer control.

Unfortunately, purchasing organizations offered little help and were focused on what they did best: getting the lowest possible price and placing orders. IT departments needed more—they needed business advice, guidance, and expertise to manage the sourcing of strategic technology investments. They needed an organization that focused less on price and more on the “value” that vendors could provide. They needed an organization that focused on total cost of ownership and the entire vendor relationship lifecycle. In the vacuum created by purchasing departments being unable to step up to the plate, IT departments in large U.S. companies, like Aflac Insurance, sought to control their destiny by building a new type of organization to source technology commodities and manage their vendors. This new organization became known as the VMO. Essentially, it was an organizational experiment born from necessity. The mission of a VMO at the time was straight-forward: maximize the company’s technology investments.

The crux was how to implement a VMO. First, they never really existed before so there was nothing to model against. Even though their mission was clear and there were some obvious “low-hanging fruits” like vendor consolidation, it was not clear what functions a VMO would actually serve. Further, the question of how to staff a VMO arose. Ideally, a technology background, legal training, financial skills, and business savvy would be needed to staff a VMO, or at the very least, be required of a person who would lead a VMO. At the time, that unusual combination of experience and skills was rare in the marketplace. Enterprising IT departments did manage to find the right talent to implement early generations of VMOs in the 2000 - 2001 timeframe. Almost immediately, the VMO concept began showing value and respected technology industry publications like CIO Magazine and Computerworld quickly took note.

In the 2003 - 2004 timeframe, peers to CIOs began to get wind of the so-called VMOs and the value that was being generated. The CIO’s fellow executives were also beginning to face more complex sourcing needs, like business process outsourcing, which required more consultative support than a traditional purchasing department could muster. These executives were trying to do the deals themselves—sometimes with the assistance (or hindrance) of legal staff—but they were savvy enough to realize they needed real help. Not ones to re-invent the wheel, wily executives begin implementing VMOs to augment or replace their traditional purchasing departments. Transactional purchasing support was still needed, but it either began reporting to a VMO or was pushed down further in the organization and accomplished with lower cost resources.

Similar to the early generation of IT VMOs, enterprise-wide VMOs began to appear in 2005, sometimes being centralized with an IT VMO component. It is expected that this trend will continue, that the VMO concept of strategically managing procurement and vendors to drive value will become pervasive—if not by name, then almost certainly in concept. The concept of enterprise VMOs has been further popularized by Stephen Guth, an early implementer of VMOs, in his book "The Vendor Management Office: Unleashing the Power of Strategic Sourcing."

Those familiar with emerging trends in purchasing may ask whether there is really any difference between a VMO and a strategic sourcing organization. Or are they one and the same? Strategic sourcing was first introduced as a supply chain improvement initiative in the 1980s by General Motors, intended to gain time-to-market and cost advantages by leveraging targeted spend with what were considered their strategic vendors (for example, Michelin and Goodyear being particularly strategic to General Motors). Other companies, particularly companies heavily dependent upon vertically integrated supply chains, begin adopting the concept of strategic sourcing and improved it even further by focusing less on cost and more on value. However, the management of the entire vendor relationship lifecycle was still considered to be something that occurred after strategic sourcing. Within a VMO, strategic sourcing and management of the vendor relationship lifecycle are brought together.

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