IT Vendor Tiering - ABC is not enough
by Jeremy Smith
When evaluating IT suppliers - vendor tiering as part of vendor management - the focus is usually on spend. However, expensive commodity software has only limited strategic value. Tools and capabilities of partners who can take an organisation into the future are more important.
IT vendor tiering is actually quite simple: imagine an organisation which works with a variety of IT suppliers on a daily basis - from cloud providers to software developers and infrastructure service companies. Each partner has an impact on business processes, whether by providing a platform, developing new products or protecting the digital infrastructure, but not every supplier is equally strategic.
Prioritising IT suppliers
So how do you prioritise them? Which partners do you pay particular attention to, and which are more in the background? This is where vendor tiering comes in - an established method which helps companies categorise their IT suppliers and optimise collaboration. It categorises partners to help you make the best use of your own management resources.
Traditionally, the ABC model is often used in the context of supplier management:
- A suppliers: Key partners which are critical to the business or strategy.
- B suppliers: Important but less critical partners.
- C suppliers: Supporting suppliers who can easily be replaced.
This system sounds simple and efficient - and it was in a world where size, revenue or market share was the measure of a supplier's importance, but the reality of IT today is different.
Why is the ABC model inadequate?
Cloud technologies, artificial intelligence and hybrid work have fundamentally changed the rules. The ABC model, as useful as it once was, no longer meets these dynamic requirements. For example, a large cloud provider could be classified as an A supplier because it provides essential infrastructure, but what happens if an innovative start-up suddenly offers a specialised solution which significantly advances the company's digital transformation? These new players tend to be smaller and would typically be categorised as C suppliers in the ABC model - regardless of their strategic importance.
In addition, the strategic relevance of a supplier can change over time. What is essential today may be obsolete tomorrow because of a new technology. Rigid models such as the ABC system cannot keep up with this dynamic, because in many organisations there is a lag between development and implementation.
IT skills are key to the future
The future of a business today depends on how well it organises its IT - comprehensively. This does not primarily mean more computing power, but filling skills gaps. After all, there are not enough specialists for special IT requirements at the cutting edge to cover the needs of all companies. Examples include AI and machine learning, data science, cybersecurity, the IT sourcing lifecycle as well as IT architecture.
In addition to large consulting firms, software groups and system integrators, CIOs are now working with boutique consultancies, freelancer marketplaces and start-ups to secure access to key talent, up-to-date expertise and resources. Vendor tiering must therefore also focus on the skills and innovations a partner brings to the table - which goes far beyond key figures such as annual expenditure or market capitalisation.
New principles for modern vendor tiering
In order to meet the challenges of the modern IT world, vendor tiering needs to be revised. The aim should be to introduce transparency into relationships and invest in better governance of partners. Four principles are crucial here:
- Skills assessment: What skills does a partner have and how much does it invest in ongoing training and development of its resources? A supplier which has mastered the latest technologies and can respond flexibly to market changes is often more valuable than an established supplier without the ability to innovate.
- Business impact: Companies need to analyse which partner contributes most to achieving their strategic goals. A specialised provider which makes significant contributions to AI transformation deserves more attention, regardless of its size.
- Flexibility and agility: IT markets change rapidly, and a partner which plays a minor role today could be indispensable tomorrow. Vendor tiering must reflect this dynamic and be adjusted regularly.
- Future competences: See diversity as an opportunity, because instead of assigning rigid categories such as 'A', 'B' or 'C', companies should look at their IT suppliers through the lens of possibilities: who understands our challenges, thinks in a solution-oriented way and implements effectively?
Ideally, vendor tiering will evolve into a tool which not only reflects the present, but also actively helps to shape the future. IT organisations need different vendor management processes, new metrics and adapted governance to move beyond old ways of managing vendors. There is also a need for an understanding that vendor partnerships only work well in a win-win situation. This requires mutual trust, built through open communication, clear roles and shared goals. At the end of the day, it's not about who ends up on which tier - it's about who helps the business get there.
