Organization

IT Vendor Risk Management

IT vendor risk management is a component of over all IT risk management. In my previous blog on over all IT risk management, there is a comment from pmhut  to expand each component of the IT risk management.  Let me expand my thoughts on IT vendor risk management and provide a framework to develop the IT vendor risk management.

Steps to develop a IT vendor risk management plan:

  1. Develop a consolidated list of all IT vendors
  2. Categorize the vendors broadly
  3. Prioritize the vendors in each category based on the type of business you are in. For instance, if IT supports retail business, the Point of Sale is key functioin and the vendors supporting that line of business is very critical to the day to day operation. It will have top most priority than any other vendors.)
  4. Identify the potential risk of the vendors
  5. Analyze the potential risk of the vendors
  6. Develop residual risk matrix
  7. Monitor the residual risk matrix and repeat from step 4.
  8. Report the residual risk matrix to CIO office periodically.

Step I: Develop a consolidated list of all IT vendors

Get a IT vendor list from corporate purchase/procurement department. Make sure the following information are available

  • Account representative contact information – Office Phone, cell phone, snail address, email address
  • Investor contact information – Depends on the type of the company – corporate, partnership, properitary and etc
  • Client list

Step II: Categorize the vendors

Types of vendor involved in a typical IT organization.

  • Sourcing provider
    • Alliance provider (like out sourcing provider)
    • Human resource provider for in sourcing. It is generally for time and material model for 6 months to 1 year engagement
    • Consultant provider for insourcing. It is generally for time and material model for a specialized role for a very short time.
  • Software provider
    • Enterprise software system provider (like SAP, Peoplesoft, Fidelity and etc). Enterprise software system depends on the type of business.
    • Office software (like MS Office,and etc)
    • Specialized software provider  (for instance, in the financial industry, quantum is a specialized treasury software provided)
  • Service provider
    • Infrastructure service provider (in most cases, it includes all the system software like OS, database and etc)
    • Research consulting service provider (market research and etc – like gartner.com, executiveboard.com)
    • Specialized service provider (depends on type of business – credit score card development provider and etc)

Step III: Prioritize the vendors

Prioritize the vendors based on their dependencies to the core IT operation. It depends on the business you are in. If there is alliance provider to performing lights on support to an IT organization, then that provider play a vital role in IT operation. For an instance, if it is financial administration company (like financial out sourcing) then their enterprise application like SAP financial plays a major role to perform their core operation. 

 Lately, almost all organization utilizes the outsourcing company to provide lights on service to the core IT operation.

Step IV: Identify the potential risk of the vendors

Sourcing provider (includes alliance and out sourcing provider) is taken as an example and the associated risk are identified. The similar steps can be taken for other types of vendors.

Service level risk

Measure the performance of the provider against the objective set in the beginning of the engagement.  In some cases, the sourcing provider is selected to provide partnership or alliance to improve innovation or business consultation or value creation and few other cases, the provider is selected to provide the on going lights on support. In my example, I will assume the provider is selected to provide the on going lights on support. The typical performance measure for the lights on support are given below:

  • Service quality
  • Service delivery time
  • Missed service level
  • Response time
  • Resolution time
  • Problem repeatability rate

For an outsourcing engagements after the due diligence and contract and terms & conditions are agreed by all parties, there are two major phases. Transition phase and stabilization phases. The sample performance measure listed above will be used for the risk identification after the stabilization phase.

Receive the trend data for the performance measure and compare against the original agreement with the provider. Develop a variance analysis and repeat the cycle. If there is a negative variance in the measure for a prolonged duration then there is an issue. There is a risk that provider to continue under perform and impact the core IT operation.

Vendor Financial stability risk

I would not have come up with this as one of the potential risk item before Satyam scandal. I would not had  even considered it before the scandal. 

  • Participate in quarterly earning call
  • Study the provider balance sheet
  • Study the probability of liquidation or solvenacy
  • Identify your contribution percentage to the provider’s bottom line
  • Identify their auditors reputation. 

Vendor strategy risk

Request vendor to provide their corporate strategy and make sure their direction is aligned to your expectation of their service. If provider corporate strategy is to out of service business and sell software products, then organization currently receiving provider’s service need to know that. There is a risk that the provider will not focus on the service in near future and their service quality will deteriorate

Vendor cultural risk

It is a philosophical discussion. It depends on the philosophy you believe in. Few believes, same behavioural partners will lead into the strong longer marriage and few believe the opposite. I have an unpublished paper on “Q-learning algorithm for a quick and better mutal understanding of marital partners in the east Indian arranged marriage culture”. Two years after my arranged marriage (I saw my wife a week before my marriage) I wrote this paper. This paper assumes that both partners have commitment before the marriage that no matter what happens, they are going to make their marriage successful. 

I will leave the vendor cultural risk assessment up to your belief. Whatever your believe, the vendor cultural risk must be assessment.

Vendor Geo-political risk

Majority of the outsourcing players are from India. Geo-political risk for an outsourcing project has been a factor all the time. When it comes the analysis of the risk and probability of occurance, it used to score very low. In the recent past, as mentioned in my previous blog, it is elevated.

Vendor take over risk

In the financial world, when a small fish swims with strong cash gills, the big fish will swallow for good.

The above identified risks are  the major risks I could think of. There are few risks like provider employee retention and etc.. Those risk can be amplified based on type of organization you are in. I heard many times that business knowledge like electronic fund transfer knowledge will be lost if the provider keep losing their employees. In my opinion, those are very insignificant risk because eft can be learned by any programmer very quickly. However there are areas like 3D drafting package development out sourcing. Systems like this needs extensive analytical geomentry mathematical knowledge, programming language knowledge, device drivers knowledge and etc. It is very difficult to get people with all the skills. Mathematicians with extensive computer engineering hands on experience with executive level communication skills.  The initial training for these kind of development would take 8 – 10 months. These are rare cases and I’m not going to expand.

Step V: Risk analysis

All the above identified risk should have:

  • Probabaility of occurance
  • Cost of business impact if the risk becomes an issue
  • Risk treatment
    • Avoidance
    • Reduction
    • Transfer
    • Retention (accept it)
  • A plan for avoidance, redution and transfer risk treatments

Step VI: Residual Risk Matrix

The residual risk matrix is a consolidated vendor risk exposure to the organization.

Step VII: Monitor Residual Risk Matrix

A dedicated team and process to monitor the residual risk matrix of the organization.

Step VIII: Reporting

Report the RRM to the CIO, steering committe and operating committe of vendor management for a proactive informated decisions.

Maturity Assessment – A General Approach

Maturity assessment in an organization is part of current state analysis. In strategy formation or in the enterprise architecture projects, understanding the current state is one of the major milestone. The maturity assessment includes project management, project portfolio management, application portfolio management , process management, IT financial control management, IT investment management, risk management, etc. The maturity level can be determined based on the answers on the following questions. It is more general (abstract) model and it can be applied almost any functional area except the people management.

  • Is there a process exist today in an organization?
  • Is the process documented?
  • Is the process communicated to the organization? (people are aware of the existence of the process)
  • Is the process consistently followed?
  • Is the process institutionalist ?
  • Is the process managed?
  • Is the process optimized?

For any maturity assessment, the level of maturity can be determined by depth of the “yes” answer in the list. If none of the above question has a yes answer, then the maturity of that area is in level 0.

Let us take a project management maturity assessment in an organization. Project management’s key objective is to manage cost, quality and time. It is triple constraint in the project management. There are frameworks available from PMBOK to perform the project management in an organization. PMBOK framework suggests that there are nine knowledge area and five process groups.

Five process groups

  1. Initiation
  2. Plan
  3. Execution
  4. Control and Monitor
  5. Closure

Nine knowledge areas

  1. Integration Management
  2. Time Management
  3. Scope Management
  4. Cost Management
  5. Risk Management
  6. Quality Management
  7. Human Resource Management
  8. Communication Management
  9. Procurement Management

Take each member of the process group and ask the above questions. For instance let us take initiation process. During this phase, for any projects, the organization must make sure there is a business case. cost benefit analysis, benefit realization plan etc. Identify the major steps in the initiation phase and ask the above questions. Collate the answers to determine the maturity level in the initiation process. Repeat the steps for all members of process groups. Collate all the answers from all the process groups and will determine the project management maturity level in the organization.

The above model can be applied to portfolio management assessment, IT financial management assessment, IT investment management and etc..

General mentoring advise..

I was asked by many mantes that how they can get a promotion in the organization. Well, it is a difficult question to answer. For anyone in an organization with any responsibility to move to the next level is contextual. In most of the organization, the organization structure is hierarchical, that is a pyramid, and higher you climb the pyramid, the lesser the growth opportunity. The top most of the pyramid is a point which is a person like CEO, CIO based on the organization you are in.

How to go to next level?

In an organization, generally, no body is going to tap your shoulder and ask you to move on in your career step. There are lots of opportunity exist in an organization and it is up to an individual to learn and grow in an organization. It is generally true. Luck is also a factor and persistent hard work creates luck.

Key principle to keep in mind before anyone consider to go to next level.

  • Be great in what you are currently doing (master the subject and be evangelist in that subject)
  • Let everyone know that you are really great in what you are doing. Do it shamelessly.

If you follow the above two principle and you consistently do it over a period of time (time depends on your position and organization) AND you need to ask this question to yourself. Are you ready for the next level? You need to honestly answer this question to yourself. Do NOT answer yes because of power, money, prestige etc. Honestly and truthfully answer to yourself. If the answer is yes because you think you are qualified to the next level then start build the network through mentoring. Perform mental shadowing. Observe the members in the organization who is in your to be level and analyze how they are performing their daily operation, how they deal their situation in a daily manner and position yourself in their shoes. How they did certain things, how they answered few questions asked in the town hall, deparment meeting, staff meeting etc and position yourself how you would have done it if you were in their position. Perform a variance analysis. The key is to select the top successful person in your next to be level. A role model.

If you keep doing this, I’m confident you will get where you want to be.