Is It Time to Change Vendors?

Why CFOs must challenge vendors to bring problem-solving ideas to the table.

As chief financial officers move beyond traditional roles, many are finding that vendor selection is becoming an important part of their expanded duties. When deciding which vendors are the right fit, CFOs should distinguish between those who simply supply a product or service and those who have the ability to challenge and collaborate in ways that make us and our companies stronger.

When is the right time to change vendors, and what is the best way to go about it? Those are extremely important questions that take on strategic significance and can have serious consequences.

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“Acceptable” is not good enough to meet the aggressive goals and objectives of most companies today.

It’s easy to become comfortable with vendor relationships, especially those that have existed for a number of years and where the service and results delivered are fully acceptable. But acceptable is not good enough to meet the aggressive goals and objectives of most companies today. That’s why we need to challenge our vendors to continue to up their game.

If a company’s most important vendors are providing the same service that they’ve provided for years, using the same processes and approaches, it’s time to evaluate your options.

Getting outside your comfort zone

Of course, replacing vendors can be challenging and pose a unique set of problems for CFOs, many of whom are uncomfortable with change. As a change agent, however, this is a challenge CFOs must to embrace. If we don’t force ourselves outside of our comfort zones, we’re doing a disservice to ourselves and to our companies.

Here’s the risk: relying on service providers who are comfortable with the status quo puts your company at a competitive disadvantage to those that are aggressively seeking the most innovative and progressive support. What’s more, it may also threaten your own position if you are viewed as accommodating their performance.

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Relying on service providers who are comfortable with the status quo puts your company at a competitive disadvantage.

Once the evaluation process is underway, place vendors into two different camps: those that provide competent service and those considered critical partners. It’s an important distinction because the first group guarantees more of the same; the second group has the potential to drive increased value for small- and medium-sized firms.

Understanding which vendors can bring you new ideas and help solve problems, rather than only provide acceptable service, is critical to helping drive the business forward.

Looking at cost allocation

Once a professional service firm identifies its key vendors, it should also focus on day-to-day cost allocation. It’s absolutely essential to generate the appropriate billing and the flow-through to understand the profitability of accounts. If the process isn’t streamlined, billable time suffers. Cost allocation is even more challenging in companies that have reduced their administrative staff, which puts more of a burden on the professionals to do what had been the work of the admin staff.

One solution is to embed information into the normal course of business so those costs are captured without a lot of additional work. This is how we do it at UPS. The challenge for CFOs in professional service firms is how to gather that information. Is it collected naturally, as a part of normal activities? Can it be accomplished with little or no added work? Are we referencing the right fields? Can it be automated?

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Give vendors a problem to solve so they become part of the solution.

Effectively allocating costs can significantly increase billed revenue. On the other hand, companies that don’t effectively address this issue often find processes become cumbersome and, in some cases, decide not to bother charging some expenses. That decision may ripple through an organization with costly consequences.

As the CFO looks to develop a cost-allocation strategy, I return to a familiar solution: seeking help from vendors. One tactic I’ve employed successfully is to give vendors a problem to solve so they become part of the solution.

To find vendors that will rise to the challenge, pick a select group and work collaboratively with them. There will always be some vendors that are simply going to provide a basic service. In doing so, they identify themselves as non-essential parts of your business. But I’ve also found that if you choose skilled service providers who work creatively and collaboratively with you to solve problems, they will add value to the solution and to your business. goldbrown2

Kurt Kuehn is the former CFO of UPS. He retired in 2015

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Reprinted with permission of Longitudes, the UPS blog devoted to the trends shaping the global economy.