The ROI of Nice
- 22 January, 2007 12:27
Reader ROI
- Why vendor management is a strategic activity
- How to drive innovation through good vendor relations
- How to group technology providers by strategic importance
Can this relationship be saved? That was one of the questions in the mind of Mike Hmel, FedEx Ground's senior vice president of IT and CIO, as he prepared for a meeting with Sun Microsystems.
The IT department at FedEx Ground was struggling to develop a transportation management system (TMS) using what was a new technology in 1998 — Sun Microsystems' Java software. The TMS would help determine the most efficient and cost-effective way for the $US5.3 billion company to move its tractors, trailers and dollies among its 29 hubs and more than 500 pickup/delivery terminals. As such, it would be the backbone of the Pittsburgh-based FedEx Corp. subsidiary.
The experience of struggling to deploy new, complicated technology made Hmel realize that he needed to maintain more constructive relationships with his most important technology providers
Tired of the impasse his company had reached in its development efforts, Hmel was meeting with Sun to address the issues and come up with a plan for completing the transportation management system. "Sun was a trusted business partner at the time. We had a lot of their equipment, people and services at FedEx Ground," says Hmel. "We had some problems with their hardware, and they had problems supporting us with the TMS. We made a real effort to work with Sun, but [the relationship] never got better."
Eventually, the TMS was completed, and it saved FedEx Ground $US100,000 a day in staffing and administrative costs and helped shave a day off the time it takes the company to move shipments in many of its shipping lanes.
But the experience of struggling to deploy new, complicated technology made Hmel realize that he needed to maintain more constructive relationships — partnerships, really — with his most important technology providers if he was going to get the help he needed to deploy such expensive, mission-critical applications in this brave new world of open systems and Internet-based computing.
"We were getting into much bigger [IT] projects [at the time] with more impact on the company. We couldn't afford failures," says Hmel.
His epiphany led him to rethink his methods for working effectively with vendors. Over the next four years, he and senior technologist John Aiello established a series of best practices that includes channelling all vendor communications through a single group within IT; dividing vendors into different categories according to strategic importance; and meeting with vendors regularly to fill them in on FedEx Ground's financials, business goals and strategic initiatives. (For a full list of best practices for vendor management, see "Eight Tips for Working Effectively with Vendors".)
Technology analysts laud FedEx Ground for its unique approach to vendor management, which hinges on collaboration instead of sweating vendors for every last nickel. CIOs, they say, would do well to appropriate these practices for vendor relations.
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Innovation Through Smart Sourcing
In the past, the goal of vendor management programs was to get the best prices from hardware, software and services companies. Although competitive pricing remains an objective of vendor management, it's no longer the primary one. In today's growth-obsessed business climate, constructive relationships with technology providers often prove to be a source of innovation. Dennis Gaughan, a research director with AMR Research, says maintaining healthy relationships with technology providers helps CIOs improve the service they provide to their end-users and the services their companies provide to their customers.
"It gives them an opportunity to leverage their vendors' skills and capabilities," he says. Companies now spend so much on technology, which is such a significant source of competitive advantage, that managing vendor relationships ought to be treated as a strategic activity and not a tactical or administrative one.
Hmel certainly views vendor management as a strategic activity, given the $US280 million his company spends on technology each year. "It's a way to make FedEx Ground more successful," he says.
Indeed, the care and feeding of 30 technology providers has made his company more agile and his IT group more innovative. For example, with the help of EMC, Hmel's IT department put in place disaster recovery capabilities in a matter of months. "It has really, really helped us get things done faster," he says of vendor partnerships.
Vendor management is so important to Hmel that he uses the phrase "strategic business partnerships" to elevate the concept. "We call the people that we've invited into this inner circle our trusted business partners. They were a vendor when we first started dancing with them. Now that we're in bed with them, they're our partners."
Hmel and Aiello facilitate collaboration with their strategic business partners in a number of ways. These include celebrating successes together and honouring the technology companies that provide the best service with a supplier quality awards luncheon. In addition to meeting with them regularly, they also give vendors physical access to the IT department during projects.
FedEx Ground's vendor management practices are "absolutely worth emulating", says Julie Giera, a vice president who covers vendor management for Forrester Research. She says FedEx Ground is unique in combining so many best practices into a cohesive vendor management strategy; most companies use only one or two of these tactics.
"The return FedEx gets by having such a comprehensive vendor management program will pay off in so many ways," adds Giera. "It's not just that they'll get a good deal, which they will, but the vendor's commitment to FedEx will be much higher. They'll involve FedEx in R&D, and FedEx will have influence over what features and functions come with future releases of software and hardware."
Getting to Know You
Meetings like the one with Sun, which grew out of confrontational, combative relationships, are largely a thing of the past at FedEx Ground. Hmel and his direct reports now hold bimonthly and quarterly meetings with key vendors, says Aiello. One of the goals of these sessions is to educate the vendors about FedEx Ground's business so that they have more skin in the game and can provide products and services that will help IT meet corporate objectives.
In those meetings, Hmel and his executive staff brief their partners on the company's quarterly financials, its short-term and long-term strategy, business goals and priorities, current and future IT initiatives, and the dynamics of the logistics business in terms of cost, revenue and margins. They also explain their business processes and how they envision technology supporting them.
"You can't just be sought out by people willing to sell you their things," says FedEx corporate senior VP of IT Kevin Humphries. "You have to let them know as much as you can about yourself so they can select the best they have to offer for you and not overwhelm you with a full Chinese menu of what they have to sell."
FedEx Ground lifts the corporate veil in these meetings to build trust with vendors and to demonstrate the role their products play in the company's success. Hmel used this tactic effectively to reinvigorate his company's relationship with Oracle.
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When FedEx Corporate took over FedEx Ground's Oracle contract in 1999, the software provider stopped meeting with FedEx Ground's IT executives. Oracle executives didn't see any reason to meet with FedEx Ground since product payments now came from FedEx Corporate, according to Aiello. Oracle's attitude did not sit well with Hmel. He needed the vendor's support because his company relied heavily on its products to power a data warehouse and data marts. To get Oracle to devote time and personnel to FedEx Ground, Hmel needed to show Oracle execs that their products were critical to FedEx Ground's success. Through dogged persistence, he and Aiello convinced the Oracle reps to visit their facility so the reps could see their products in action. Such persistence paid off: Oracle has had a consistent presence at FedEx Ground ever since.
FedEx Ground's candour encourages its vendors to share their own financials and business and technology strategies with the company. Hmel says he could not have gotten his vendors to be so frank about their strategies and finances without his company taking the first step.
Those regular meetings at FedEx Ground's office in Pittsburgh spawned the Executive Technology Briefings, designed to tie the company more closely to its technology partners. During the briefings, which usually take place at the vendor's facility, the vendor gets to showcase bleeding-edge technologies and offer a peek into its three- to five-year strategy.
Although vendors are treated with trust and respect, they don't enjoy unfettered access. Vendors can work through a six-person strategy management office (SMO) led by Aiello or with IT VPs and directors; however, the SMO manages the whole process so that vendors don't inundate the IT group with phone calls, e-mails, event invitations and sales pitches.
Divide and Conquer
Analysts say one of FedEx Ground's smartest moves is to group its technology providers by strategic importance. It's an idea also practiced by FedEx Corporate, which separates about 1000 IT vendors into three categories: most strategic partners, base business partners and emerging business partners, according to Humphries. "Technology is such an important part of our spend, and we do business with such a large number of technology providers, that we have to have a methodical way of dealing with them," he says.
FedEx Ground's categories are slightly different from its parent. FedEx Ground has a group of what it calls "trusted partners", three key vendors (IBM, Hewlett-Packard and Oracle/PeopleSoft) that play the biggest role in helping IT execute its strategic technology plan. Hmel and his executive staff meet with them every other month. Another group of "important providers" include AT&T, Business Objects and EMC. Hmel meets with this group quarterly. He assigns one of his managing directors to maintain relationships with vendors in a third group of "occasional partners", which include Accenture and Sun. The managing directors meet with these vendors once or twice a year.
"We deal with so many vendors that we can't give them all equal time," says Hmel. By dividing vendors into different groups, he can identify how much time to devote to each one and ensure that trusted partners get a fixed amount of his time every other month.
"Not all vendors are equal," notes Forrester's Giera. She adds that many companies make the mistake of thinking the vendors with which they spend the most money are their most important technology providers. Instead, she suggests companies evaluate a vendor's importance according to the following criteria: the extent to which its products or services are used; a company's level of dependence on the vendor's technology; whether similar products or services can be obtained from other vendors; whether a product or service provides a competitive advantage; and finally, how much a company spends with a vendor.
"By developing a schema like that, you can categorize your vendors into tier one, two and three," she says.
The Ties That Bind
The time and effort Hmel put into creating a vendor management program has paid off. When he needs their help, vendors jump because they work so closely with FedEx Ground and understand the impact of technology on its business.
For example, when a competitor to one of FedEx Ground's specialty businesses, SmartPost (which specializes in shipping high volumes of low-weight packages), went out of business, SmartPost's business spiked overnight. SmartPost's IT infrastructure couldn't handle the dramatic increase in transaction volume. Hmel called HP and told his account representative that he needed additional hardware ASAP. HP delivered the goods the very next day. "Speed is key to us," says Hmel.
HP moved so quickly for two reasons: It understood FedEx Ground's business and the technology its customer uses. In fact, HP had just had one of its regular meetings with FedEx Ground. During that meeting, one of Hmel's managing directors discussed the company's recent acquisition of SmartPost and the integration challenges it could face because SmartPost's technology differed from FedEx Ground's. So HP was already aware of FedEx Ground's potential technology needs. "The day FedEx Ground announced publicly that they had acquired this company, we started learning about it," says Gerard Katilius, HP enterprise account manager.
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HP has a consistent presence at FedEx Ground's headquarters, so the vendor knows what equipment its customer needs and how to configure it. "When Mike called up and said, 'We need servers,' we knew exactly what to give them," says Katilius because FedEx Ground has worked closely with HP to ensure that new equipment fits its IT standards. "I have support engineers who know the FedEx environment. When they go into the data centre, they know where the [HP] rack is and they know exactly what network connector and what power connector to use to plug in computers," he adds.
HP came through for FedEx Ground because the vendor trusts its customer. "They knew we were going to pay them," says Aiello. And FedEx Ground's IT department doesn't cry wolf unless it really needs help, says Hmel.
The goodwill between FedEx Ground and its trusted partners allows vendors to expedite some of their processes when problems requiring immediate attention crop up. "I can pick up the phone and tell one of my strategic business partners: 'I need someone for X amount of time.' They give me a rough dollar amount of what it will cost to have that extra person and we agree without having to sign a paper," says Hmel. "We can prepare contracts and agreements that are open-ended without lawyers on top of us at every step." Not having to barter over contract negotiations saves days or weeks for Hmel.
Forging close ties with vendors gives FedEx Ground access to innovative new technologies that save the IT group time and the company money. For example, FedEx Ground needed to implement disaster recovery capabilities at FedEx Corporate's Memphis data centre. In the event that the TMS in FedEx Ground's Pittsburgh data centre went down, the company could bring up the same functionality in Memphis within one to two hours. It was shaping up to be an enormous project that the IT department thought it had no choice but to do on its own. EMC got wind of the plan when FedEx Ground started purchasing storage from it to use in the Pittsburgh data centre. Instead of just selling the storage, EMC showed FedEx Ground packaged solutions that could help speed the project. It was just what FedEx Ground needed.
"We grabbed it and implemented it in eight months," says Hmel. He estimates it would have taken FedEx Ground twice as long to plan the architecture, develop the software in-house and make sure the data in Pittsburgh was in sync with the data in Memphis. Instead, it "turned out to be a no-brainer" because EMC understood what it was striving for. Hmel adds that FedEx Ground probably saved $US500,000 by purchasing packaged solutions.
A More Perfect Union
FedEx Ground's strong vendor relationships help it innovate and stay on the cutting edge of technologies that drive revenue for the company. At the same time, its technology partners have come to appreciate the processes that keep them connected to the business.
"FedEx has one of the best attitudes and processes in place for governing and maintaining strong vendor relationships," says HP's Katilius. "They've allowed me to visit their facilities and participate in their business. I can load and unload vans. I've been at their 'sortation sites'. I understand their business so that I can quickly recommend the right solutions that will make them more flexible."
Speed and flexibility are precisely what Hmel wants from his partners. He says it's hard to quantify FedEx Ground's overall financial gain from focusing so much attention on vendor management. What the company has earned, Hmel says, is agility and a reputation throughout FedEx for meeting milestones on mission-critical IT projects.
"We're a growing company, and there's a ton of stuff to get done. By finding partners that move at the speed we do and working with them, I can deliver value to the business," he says.
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SIDEBAR: Eight Tips for Working Effectively with Vendors
by Meredith Levinson
1. Channel vendors through a strategy management office or vendor management office so they don't flood staff with information, invitations and questions.
2. Divide vendors into categories according to level of strategic importance to help determine how much time to devote to each relationship. Meet with first- and second-tier vendors regularly.
3. Assign managers to steward relationships with third-tier vendors to keep those relationships alive.
4. Share as much information about your strategy, business model, processes, goals and technology projects as you can with your most important vendors.
5. Celebrate successes together with dinners or lunches to reinforce the idea that your business relationship is a partnership. Alternate who pays for them.
6. Give vendors access to your facility. This shows trust.
7. Recognize vendors for jobs well done with formal annual supplier quality awards.
8. Visit your most strategic vendors' facilities regularly to check out their bleeding-edge technologies.
