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Evolving Challenges In Managing Third-Party Services

Evolving Challenges In Managing Third-Party Services

Because of a long effort over the years for companies to become better at providing services, they became more dependent on third-party services (technology providers, platform providers, and services companies). As a result, they now need to become more sophisticated in monitoring the risks of services from third parties. This requires that they professionalize how they procure and manage these services and requires a more in-depth understanding of changes in their vendor/providers’ management, financial positioning, and capabilities.

Category managers and vendor managers need to factor in-depth information about their third-party entities into their ongoing strategy for procuring and managing these services.

Category managers are responsible for procurement and strategy for a third-party service. Vendor managers are responsible for the day-to-day administration of the service contract. Depending on the company, these functions can be combined or separated. In this blog, I will refer to them together as a class – category managers.

A myriad of issues presents major challenges in category managers’ efforts in becoming more sophisticated in their strategies and management. They need clear, objective information about what is happening in the market in their supply base and in their own companies if they are to do their job with excellence.

Challenge 1: Evolving Nature

Services are, by their nature, bespoke and unique to the circumstances of a company. Although the services themselves are somewhat common (finance and accounting, IT support, benefits administration, claims processing, and many others), in practice, they are unique because they must conform to the specific challenge of a company.

Pricing information, service quality, and performance, as well as innovation, all evolve. This evolving nature makes it challenging for category managers to maintain the latest information on what happens in the industry and within a company’s service providers group, so the category managers know what to ask for.

Consider innovation, for example. For a company to get full value from its service provider, it needs to know its own company’s needs and how they are changing. But it also needs to know what is available in the market and what a specific service provider does for other similar clients. This information is difficult to come by, and it largely comes from the providers and is shaped to their agenda.

Consider the challenge of ever-evolving pricing. Companies sign long-term services contracts. However, in practice, because of unique reasons, providers’ prices evolve almost daily to accommodate the changes in both the facts on the ground and the market.

Consider also the issue of ever-evolving value. Today’s value becomes tomorrow’s hygiene. Services that companies feel are highly valuable when they first contract for them later become run of the mill as companies grow and their needs evolve. Companies are in a dependent relationship with their service providers. Yet, they constantly need to be able to get the providers to increase the value to meet the ever-changing needs of the business and continue to drive improvements in price, cost to serve, and quality of work.

Another issue is that category managers need to become like a librarian in the way they support the rest of the company with vital information about the vendors/service providers. On a periodic basis, when the rest of the organization finds it necessary to engage with their service providers, they need this support information.

Challenge 2: Asymmetrical Information

Another challenge is the asymmetry of information.

As I mentioned already, companies today must take a more assertive approach and ensure that they provide their category managers with a constant flow of accurate information across all the evolving dimensions of services (unique context, pricing, and value). They need this information so they can be more sophisticated in monitoring the risks of third-party services.

But they face asymmetrical information that is unequal or misaligned between providers and clients. Until recently, companies were very dependent upon the service provider community self-reporting or providing information. Companies find they are forced to rely exclusively on what the service provider tells them. They need to validate the information or drive initiatives themselves.

To become more sophisticated in managing risk, category managers need more sophisticated information that is constantly kept up to date.

Issue 3: Lack Of Resources

Another issue for category managers trying to become more sophisticated is that they need to expand their scope but are rarely given more people to do so. So, they are required to become more efficient at what they do. That means the company needs to provide them the tools and information to be able to do their job well.

Another aspect of their challenges is the traditional every-three-year request for proposal (RFP) structure to find out market information and pricing. This structure constrains the category managers because both a business and the market move much faster than once every three years. So, although a company may go through a three- to five-year cycle in renegotiating contracts, the need to monitor and manage contracts is really a daily or monthly issue.

Unfortunately, this problem is only getting worse. As digital transformation takes hold in the services industry, it increases the velocity of change across every dimension, further aggravating this challenge of the periodic RFP structure to gather information.

ROI On Sophisticated Category Management

Companies get a surprisingly high return from more sophisticated category management. First, they get lower cost. Typically, well-managed third-party services relationships can deliver 5-15% a year improvements in cost to serve. That is a very substantial savings over time. Likewise, companies can measure increase in value very substantially on a similar 5-10% increase a year from third-party service relationships.

If category management is not sophisticated enough to get a service provider to evolve to fit the changing business needs of the company, the company leaders become frustrated because the services no longer fit the business needs. Also, if an organization does not adequately manage and monitor its risks with third-party services, some executives lose their jobs because of unforeseen circumstances or inability to manage them when they occur.

Companies need to recognize the issues and organize to support and provide category management teams with the tools and information they need to be able to do a good job.

Pity the poor category managers without the tools and information. They effectively operate blindfolded and are only able to manage to what they have been told by their third-party service provides and their peers.

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