Last week, I wrote about how sole sourcing can have significant benefits, primarily because it focuses everyone on the problems instead of the dynamics between vendors and, assuming the primary vendor doesn't screw up (which, unfortunately, isn't always a good assumption), can reduce dramatically the often hidden costs associated with switching vendors.

I'll address how to mitigate the three main problems with sole sourcing: the implication of self dealing to auditors, particularly internal auditors, who assume guilt when a sole source agreement is discovered; inflexibility if the vendor runs into problems executing; and the sole source vendor's tendency to take an account it owns for granted and moving its best people to other accounts that are competitively "at risk."

Avoiding the Self Dealing Stigma

The best way to avoid the perception of self dealing is to go to the oversight body, internal audit and/or management before making the agreement and make the process as open inside the company as possible. Problems arise when groups doing sole source agreements intentionally or accidentally conceal them.

Remember that there are often policies that allow sole sourcing if certain conditions are met, but you first need to know what those conditions are and how they are interpreted by the oversight body. People have a tendency to interpret rules in their favor; an auditor will likely see things differently. If you understand how they interpret the rule and get their pre-approval on the process, you'll likely be able to mitigate the exposure significantly.

Mitigating Vendor Problems and Avoiding Vendor Abuse

The second and third problems have different causes but the solution I suggest is the same for both: an active secondary vendor. This seems counter-intuitive because the goal was to sole source in the first place. However, organizations can often be on different technologies if they have subsidiaries or don't closely collaborate. Even in a homogeneous organization, IT itself can be operated somewhat independently of line management and can sometimes be served by a secondary vendor.

The purpose of having a secondary vendor is to make sure the primary vendor, the one you are trying to sole source, always thinks the account is at risk and will not take you for granted. If the vendor does take you for granted, you legitimately, in fact, have a secondary vendor that can step in and become primary. This secondary vendor will be motivated to try harder if it sees an opportunity to displace the entrenched competitor.

Now, you could try to bid out the business regularly through a closed and confidential bidding process but, eventually, the losing vendor/vendors would figure out that there is nothing they can do to win your business and they'll stop playing aggressively. In addition, if the primary vendor knows it will always win, it is just as likely to take you for granted.

Closing with Executive Relationships

On top of this, executive relationships remain very important. For instance, Microsoft's CEO is known for stepping in personally for the CIOs he knows and Microsoft is a company whose income is so spread out there is really no single entity that is material to it. This is true of every company I've ever worked with; if the personal relationship between the executives is strong, problems get addressed. You do have to be careful that you don't overdo this; just as you learn to ignore friends who constantly whine to you, executives in the vendor firms do the same.

Next, I will talk about how to deal with major vendors. There is an art to this that I think is often lost. Until then, remember: You can sole source, and there are advantages, but you need to think through how to mitigate the risks.