Lane On… Vendors are employees too

If you think vendors are a source of value to be exploited you need to reassess this position. Your vendors and suppliers are almost indistinguishable from employees.  How are vendors like an employee?

You, as an executive, are responsible for what your vendors do, and as appealing as it sounds, you can’t delegate that responsibility to a vendor or someone outside the organization.  The performance of the vendor directly affects the performance of the company.  If they under-perform, it affects the value of the business, which should be reason enough, but like-as-not, it will affect your performance as well if you are responsible for the area in which they perform.  So while we can delegate activities to vendors, we cannot delegate responsibility… just like with employees.

Vendors have life cycles just like employees have career paths.  They need to be on-boarded, developed and perhaps dismissed.  Each of these milestones comes with costs.  It takes time to properly on-board a new vendor, it takes time to develop them and teach them about your organization; how it operates and their role in company processes.  …and it takes time to transition them out of the company if they fail to work out.  Vendor turnover, just like employee turnover, increases the costs associated with vendor life cycle management.  It is valuable to develop vendors... just like employees. 

It is worth noting, however, that unlike employees, vendors don’t retire.  A well-managed vendor can be a resource forever unlike an employee.

Vendors understand the difference between value generated for you and value generated for them.  Just as an employee might slack off if you poorly organize or manage work, a vendor might do this too.  For this reason, If you assign something to a vendor; you had better organize it first or you will be giving them too much of the value associated with that activity.  So if you are outsourcing a process to a vendor, you should take the time to optimize that process before you do.  Otherwise the vendor will take over the process, optimize it and pocket the savings themselves.  Vendors can be motivated by easy money... just like employees.

Vendors are not interchangeable.  They are highly unique with wide variances in experience and culture that make a difference to the company.  Just like you wouldn’t hire an employee based solely upon their current salary and the degree they earned, you cannot hire a vendor based upon their price and the widget they make.  You need to determine how they fit with the culture of the company and how intangibles will affect their performance and the performance of the organization... just like employees.

So now you’re wondering, why would I ever use a vendor?  Why not just in-source everything? Because of scale and core competencies.  Vendors can often gain economies of scale because they focus on a small number of processes and this brings unit costs down.  A company must decide what it’s core competencies are.  Everything else, it can consider purchasing from a vendor.  In the sixties, companies wrote their own software for example.  There were very few software packages for sale, and they were nothing like what we use today.  So companies had no choice but to write their own software.  This was expensive and error prone.  As a result, an entire industry developed around engineering and selling software packages .  This saves most companies from having to be software developers and vastly reduces the cost of computer software.  Unlike an employee, a vendor can aggregate work across companies and thus reduce the cost of that work through economies of scale.

So, what impact does this have on the company and you as an executive?  You need to consider your vendors as resources and just like human resources; you should manage their ‘career’ path and life cycle.  Forward looking companies are measuring vendor experience just like they measure employee experience.  It’s an opportunity to get direct feedback about how the company affects its vendors and in turn how that affects company performance. Developing your vendors is every bit as valuable as developing employees.