IT Strategy and Balanced Scorecard

IT Strategy and Balanced Scorecard

Chapter 12

IT Strategy and Balanced Scorecard

Prepared by Dr. Derek Sedlack, South University

Copyright © 2015 John Wiley & Sons, Inc. All rights reserved.

Learning Objectives

Aligning IT with Business Strategy

Balanced Scorecard

IT Sourcing and Cloud Strategy

IT Strategy and Strategic Planning Process

IT Strategy and Strategic Planning Process

Value Drivers

Enhance the value of a product or service to consumers, creating value for the company (such as advanced IT, reliability, and brand reputation).

Three general types of Business Value Drivers:

Operational Shorter-term factors

Financial Medium-term factors

Sustainability Long-term factors

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IT Strategy and Strategic Planning Process

IT Strategic Planning

A systematic process for determining what a business should become and how it can best achieve that goal.

Reactive Approaches Fail

Fail to align IT to real business needs.

and, as a result

Fail to deliver value to the business.

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IT Strategy and Strategic Planning Process

IT Strategies Support the Business Strategy

Four IT Strategic Plan Objectives:

Improve management’s understanding of IT opportunities and limitations

Assess current performance

Identify capacity and human resource requirements

Clarify the level of investment required

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IT Strategy and Strategic Planning Process

IT Deployment Strategies

In-house development

Systems are developed or other IT work is done in-house, possibly with the help of consulting companies or vendors.

Sourcing

Onshore: sourced to consulting companies or vendors that are within the same country.

Offshoring: work sourced to other countries.

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IT Strategy and Strategic Planning Process

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Figure 12.2 IT strategic planning process.

Copyright © 2015 John Wiley & Sons, Inc. All rights reserved.

IT Strategy and Strategic Planning Process

IT Steering Committee

Set the direction

Links corporate strategy with the IT strategy,

Allocate scarce resources

Approves the allocation of resources for and within the information systems organization including outsourcing policy.

Make staffing decisions

Key IT personnel decisions involve a consultation and approval process made by the committee, including outsourcing decisions.

Communicate and provide feedback

Information regarding IT activities should flow freely.

Set and evaluate performance metrics

Establish performance measures for the IT department and see they are met.

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IT Strategy and Strategic Planning Process

Governance

Formally established statements that direct the policies regarding IT alignment with organizational goals and allocation of resources.

Long-range IT plan (Strategic IT plan)

What IT should do to achieve the goals, objectives, and strategic position of the firm and how this will be achieved.

The overall direction, requirements, and sourcing of resources.

Time frames are set for three to five years into the future.

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IT Strategy and Strategic Planning Process

Medium-range IT plan

Identifies general project plans in terms of the specific requirements and sourcing of resources as well as the project portfolio.

Tactical Plan (Short-range)

Details budgets and schedules for current-year projects and activities.

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IT Strategy and Strategic Planning Process

Project Portfolio

Lists major resource projects that are consistent with the long-range plan.

Applications Portfolio

A list of major, approved information system projects that are also consistent with the long-range plan.

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IT Strategy and Strategic Planning Process

What are value drivers?

What are the three categories of value drivers?

Why do reactive approaches to IT investments fail?

What is onshore sourcing?

What is the goal of IT–business alignment?

Why is IT strategic planning revisited on a regular basis?

What are the functions of a steering committee?

Describe the IT strategic planning process.

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Suggested Answers:

1. Value drivers enhance the value of a product or service to consumers, creating value for the company. Advanced IT, reliability, and brand reputation are examples.

 

2. Operational (shorter-term factors that impact cash flow and the cash generation ability through increased efficiency or growth),

Financial (medium-term factors that minimize the cost of capital incurred by the company to finance operations), and

Sustainability (long-term survival factors; factors that enable a business to continue functioning consistently and optimally for a long time.)

 

3. Two of the biggest risks and concerns of top management are (1) failing to align IT to real business needs and, as a result, (2) failing to deliver value to the business. Reactive IT investments tend to be patches that rarely align with the business strategy.

 

4. Work or development outsourced to consulting companies or vendors that are within the same country is referred to as onshore sourcing.

 

5. Answers may vary. IT–business alignment means how closely an organization’s IT strategy is interwoven with and driving its overall business strategy. The goal of IT strategic alignment is to ensure that IS priorities, decisions, and projects are consistent with the needs of the entire business. Failure to properly align IT with the organizational strategy can result in large investments in systems that have a low payoff, or not investing in systems that potentially have a high payoff.

 

6. The business and IT strategic plans are evaluated and adjusted annually to keep pace with rapid changes in the industry. Because organizational goals change over time, it is not sufficient to develop a long-term IT strategy and not re-examine the strategy on a regular basis. For this reason, IT planning is an ongoing process. The IT planning process results in a formal IT strategy or a reassessment each year or each quarter of the existing portfolio of IT resources.

 

7. The steering committee is a team of managers and staff representing various business units that establish IT priorities and ensure the IT department is meeting the needs of the enterprise. The steering committee’s major tasks are:

Set the direction. In linking the corporate strategy with the IT strategy, planning is the key activity.

Allocate scarce resources. The committee approves the allocation of resources for and within the information systems organization. This includes outsourcing policy.

Make staffing decisions. Key IT personnel decisions involve a consultation-and-approval process made by the committee, including outsourcing decisions.

Communicate and provide feedback. Information regarding IT activities should flow freely.

Set and evaluate performance metrics. The committee should establish performance measures for the IT department and see that they are met. This includes the initiation of SLAs.

 

The success of steering committees largely depends on the establishment of IT governance, formally established statements that direct the policies regarding IT alignment with organizational goals and allocation of resources.

 

8. Figure 12.2 shows the IT strategic planning process. The entire planning process begins with the creation of a strategic business plan. The long-range IT plan, sometimes referred to as the strategic IT plan, is then based on the strategic business plan. The IT strategic plan starts with the IT vision and strategy, which defines the future concept of what IT should do to achieve the goals, objectives, and strategic position of the firm and how this will be achieved. The overall direction, requirements, and sourcing—either outsourcing or insourcing—of resources, such as infrastructure, application services, data services, security services, IT governance, and management architecture; budget; activities; and timeframes are set for three to five years into the future. The planning process continues by addressing lower-level activities with a shorter time frame.

 

The next level down is a medium-term IT plan, which identifies general project plans in terms of the specific requirements and sourcing of resources as well as the project portfolio. The project portfolio lists major resource projects, including infrastructure, application services, data services, and security services that are consistent with the long-range plan. Some companies may define their portfolio in terms of applications. The applications portfolio is a list of major, approved information system projects that are also consistent with the long-range plan. Expectations for sourcing of resources in the project or applications portfolio should be driven by the business strategy. Since some of these projects will take more than a year to complete, and others will not start in the current year, this plan extends over several years.

 

The third level is a tactical plan, which details budgets and schedules for current-year projects and activities. In reality, because of the rapid pace of change in technology and the environment, short-term plans may include major items not anticipated in the other plans.

The planning process just described is currently practiced by many organizations. Specifics of the IT planning process, of course, vary among organizations. For example, not all organizations have a high-level IT steering committee. Project priorities may be determined by the IT director, by his or her superior, by company politics, or even on a first-come, first-served basis.

 

The deliverables from the IT planning process should include the following: an evaluation of the strategic goals and directions of the organization and how IT is aligned; a new or revised IT vision and assessment of the state of the IT division; a statement of the strategies, objectives, and policies for the IT division; and the overall direction, requirements, and sourcing of resources.

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Copyright © 2015 John Wiley & Sons, Inc. All rights reserved.

Learning Objectives

Aligning IT with Business Strategy

Balanced Scorecard

IT Sourcing and Cloud Strategy

IT Strategy and Strategic Planning Process

IT Business Alignment Improvement Activities

Commitment to IT planning by senior management.

CIO is a member of senior management.

Understanding IT and corporate planning.

Shared culture and good communication.

Multilevel links.

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Aligning IT with Business Strategy

Copyright © 2015 John Wiley & Sons, Inc. All rights reserved.

Strength of CIO & C-Suite Relationship Influences Performance

Achieve better results.

Adapt quickly.

Think together.

Act together.

More aligned on strategy.

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Aligning IT with Business Strategy

Copyright © 2015 John Wiley & Sons, Inc. All rights reserved.

CIO Skillset

Political savvy

Influence, leadership, and power

Relationship management

Resourcefulness

Strategic planning

Doing what it takes

Leading employees

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Aligning IT with Business Strategy

Copyright © 2015 John Wiley & Sons, Inc. All rights reserved.

IT/Business Alignment

CIO drives business change through the use of digital technology, not just supporting business, but introducing profitable new lines of business.

Even older organizations, considered traditional and slow-moving, can become agile, even innovative through technology.

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Aligning IT with Business Strategy

Copyright © 2015 John Wiley & Sons, Inc. All rights reserved.

How can IT–business alignment be improved?

How does strong collaboration among the CIO and other chief-level officers influence performance?

What skills are important to a CIO’s success?

How did the CIO of CBA contribute to the bank’s competitiveness?

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Aligning IT with Business Strategy

Copyright © 2015 John Wiley & Sons, Inc. All rights reserved.

Suggested Answers:

1. Alignment is a complex management activity, and its complexity increases as the pace of global competition and technological change increases. IT–business alignment can be improved by focusing on the following activities:

Commitment to IT planning by senior management. Senior management commitment to IT planning is essential to success.

CIO is a member of senior management. The key to achieving IT-business alignment is for the CIO to attain strategic influence. Rather than being narrow technologists, CIOs must be both business and technology savvy.

Understanding IT and corporate planning. A prerequisite for effective IT–business alignment for the CIO is to understand business planning and for the CEO and business planners to understand their company’s IT planning.

Shared culture and good communication. The CIO must understand and buy into the corporate culture so that IS planning does not occur in isolation. Frequent, open, and effective communication is essential to ensure a shared culture and keep everyone aware of planning activities and business dynamics.

Multi-level links. Links between business and IT plans should be made at the strategic, tactical, and operational levels.

 

2. According to PwC’s 5th annual Digital IQ global survey, compared to less collaborative companies, strong collaborators:

Achieve better results. They are four times more likely to be top performers than those with less collaborative teams. IT initiatives are more likely to be on time, on budget, and within project scope.

Adapt quickly. They adapt quickly to market changes to maintain an advantage over competitors.

Think together. IT and business leaders share the same understanding of the corporate strategy and the costs needed to implement the strategic road map. They view their CEO as a champion of IT and understand IT risks that may impact the business.

Act together. They have explicit processes in place to link the IT road map to the corporate strategy. They invest more aggressively in social, mobile, cloud, and analytics and map IT to strategic initiatives like new product and service development and market share growth.

More aligned on strategy. In a majority of strong collaborators (82 percent), the CEO is a champion of IT and actively involves IT in the strategic and operational plans, compared with 54 percent for less collaborative companies.

In addition, strong relationships support more frequent and frank conversations about problems and collaborative problem solving. Too many IT projects fail because foundational issues are not dealt with candidly and fast enough. The Digital IQ study clearly shows that strong executive leadership and collaboration are crucial to building lasting value from IT.

 

3. Skills of CIOs needed to improve IT–business alignment and governance include:

Political savvy. Effectively understand managers, workers, and their priorities and use that knowledge to influence others to support organizational objectives.

Influence, leadership, and power. Inspire a shared vision and influence subordinates and superiors.

Relationship management. Build and maintain working relationships with co-workers and those external to the organization. Negotiate problem solutions without alienating those impacted. Understand others and get their cooperation in non-authority relationships.

Resourcefulness. Think strategically and make good decisions under pressure. Can set up complex work systems and engage in flexible problem resolution.

Strategic planning. Capable of developing long-term objectives and strategies and translating vision into realistic business strategies.

Doing what it takes. Persevering in the face of obstacles.

Leading employees. Delegating work to employees effectively; broadening employee opportunities; and interacting fairly with employees.

 

4. Kaching is the mobile, social, and NFC payments apps from CBA. With the success of Kaching, CBA’s CIO Michael Harte had not just supported business activities, he had introduced a profitable new line of business (LeMay, 2013). By leading with mobile, social, NFC technology, CBA has become an innovative financial institution.

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Copyright © 2015 John Wiley & Sons, Inc. All rights reserved.

Learning Objectives

Aligning IT with Business Strategy

Balanced Scorecard

IT Sourcing and Cloud Strategy

IT Strategy and Strategic Planning Process

Balanced Scorecard

Old Approach to Business

Lagging Indicators

P&L, Cash Flow, Balance Sheets

Confirm what has happened.

Evaluate outcomes and achievements.

Represent history, not ideal for managing day-to-day operations and planning.

Multidimensional Approach to Business

Leading indicators

Predict future events to identify opportunities.

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Balanced Scorecard

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Figure 12.3 Balanced Scorecard (BSC) uses four metrics to measure performance.

Copyright © 2015 John Wiley & Sons, Inc. All rights reserved.

Balanced Scorecard

Balanced Approach Metrics

Financial

Revenue, earnings, asset utilization

Customer

Market share, Brand image, price-value relationship

Business processes

Cycle times, cost per process/transaction

Innovation, learning and growth

Employee skills, IT capabilities, R&D

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Balanced Scorecard

IT & Business Strategy Alignment through BSC

Clarify and update strategy

Align IT strategy with business strategy

Link strategic objective to long-term goals and annual budgets

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Balanced Scorecard

Chapter 12

The BSC methodology process.

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Identify performance metrics

Select meaningful objectives

Select effective measures and targets

Revise actions

Collect, analyze, and data with targets

Implement necessary data collection tools

Alignment

Balanced Scorecard

How did the BSC approach differ from previous measurement approaches?

How does the BSC approach “balance” performance measurements?

What are the four BSC metrics?

Give an example of each BSC metric.

How does BSC align IT strategy with business strategy?

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Suggested Answers:

1. Prior to the BSC concept, the typical business objective could be summed up simply as to make a profit. Performance metrics were based on:

P&L (profit and loss) reports: revenue, expenses, net profit

Cash flow statements: enough cash to pay its current liabilities

Balance sheets that reflected the overall status of finances at a certain date

 

These financial metrics are lagging indicators because they quantify past performance. As such, they represent historical information and are not ideal tools for managing day-to-day operations and planning.

 

What was novel about BSC in the 1990s was that it measured a company’s performance using a multidimensional approach of leading indicators as well as lagging indicators.

 

2. The BSC method is “balanced” because it does not rely solely on traditional financial measures. Instead, it balances financial measures with three forward-looking nonfinancial measures.

 

3. Financial. To succeed financially, how should we appear to our investors and shareholders?

Customer. To achieve our vision, how should we provide value to our customers?

Business processes. To satisfy our shareholders and customers, what business processes must we focus on and excel at?

Innovation, learning, and growth. To achieve our vision, how will we sustain our ability to innovate, learn, change, and improve?

4. Answers may vary.

Metric or

Indicator Examples of Measurement Criteria

Financial • Revenue and revenue growth rates

• Earnings and cash flow

• Asset utilization

 

Customer • Market share

• Customer acquisition, retention, loyalty

• Customer relationships, satisfaction, likes, recommendations, loyalty

• Brand image, reputation

• Price–value relationship

 

Business • Cycle times, defect rate

processes • Production throughput, productivity rates

• Cost per process

• Cost per transaction

 

Innovation, • Employee skills, morale, turnover, capacity for change

learning and • IT capabilities

growth • Employee motivation

• R&D

• Percentage of revenue from new products/services

 

5. BSC can be used to translate strategic plans and mission statements into a set of objectives and performance metrics that can be quantified and measured.

BSC is used to clarify and update the strategy, align the IT strategy with the business strategy, and link strategic objectives to long-term goals and annual budgets.

The astute student may realize that the balanced scorecard can be applied to link KPIs of IT to business goals to determine the impact on the business. The focus for the assessment could be, for example, the project portfolio or the applications portfolio. The balanced scorecard can be used to assess the IT project portfolio by listing projects along the vertical dimension, and specific measures, critical to what the organization needs to track, horizontally.

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Copyright © 2015 John Wiley & Sons, Inc. All rights reserved.

Learning Objectives

Aligning IT with Business Strategy

Balanced Scorecard

IT Sourcing and Cloud Strategy

IT Strategy and Strategic Planning Process

IT Sourcing and Cloud Strategy

Cloud Strategy and Services

Cloud Strategy

Short for cloud computing IT strategy.

Edge Service

Term that refers to a cloud service.

Tactical Adoption Approach

Incremental deployment resulting in apps and services, patched to create end-to-end business processes.

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IT Sourcing and Cloud Strategy

Cloud Complexity

Extensibility

The ability to get data into and out of the cloud service.

Migration Issues

Cybersecurity, privacy, data availability, and service accessibility.

Newer Challenges

Cloud integration with on-premises resources, extensibility, and reliability.

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IT Sourcing and Cloud Strategy

Sourcing Driving Factors

Generate revenue

Increase efficiency

Agile enough to respond to market changes

Focus on core competency

Cut operational costs

More accepted IT strategy

Cloud and SaaS have been proven

Move IT from capital to recurring operating expenditure

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IT Sourcing and Cloud Strategy

Outsourcing Risks

Shirking

The vendor deliberately underperforms while claiming full payment.

Poaching

The vendor develops a strategic application for a client and then uses it for other clients.

Opportunistic repricing

Client enters into a long-term contract with a vendor, the vendor changes financial terms at some point or overcharges for unanticipated enhancements and contract extensions.

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IT Sourcing and Cloud Strategy

Work Not Readily Offshored

Work that has not been routinized.

Work that if offshored would result in the client company losing too much control over critical operations.

Situations in which offshoring would place the client company at too great a risk to its data security, data privacy, or intellectual property and proprietary information.

Business activities that rely on an uncommon combination of specific application domain knowledge and IT knowledge in order to do the work properly.

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IT Sourcing and Cloud Strategy

Outsourcing Lifecycle

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Strategy

Reassessment

Selection

Negotiation

Implementation

Oversight Management

Build Completion

Change

Exit

IT Sourcing and Cloud Strategy

Vendor Selection Criteria

Experience with very similar systems of similar size, scope, and requirements; experience with the ITs that are needed, integrating those ITs into the existing infrastructure and the customer’s industry.

Financial and qualified personnel stability. A vendor’s reputation impacts its stability.

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IT Sourcing and Cloud Strategy

Focus On Value Not Costs

Costs undermine goals.

Close relationships are mutually beneficial.

Both sides are best served viewing relationship over simple transaction.

Before Signing…

Do a trial run.

Create SLAs.

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IT Sourcing and Cloud Strategy

What contributes to the complexity of a cloud strategy?

How does tactical adoption of cloud services differ from a coordinated cloud strategy?

What are the major reasons for sourcing?

What types of work are not readily outsourced offshore?

When selecting a vendor, what two criteria need to be assessed?

What is the risk of an overemphasis on cost when selecting or dealing with an IT vendor?

What needs to be done before signing a contract with an IT vendor?

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Suggested Answers:

1. While the concept of cloud is simple, an enterprise’s cloud strategy tends to be quite complex. Cloud is being adopted across more of the enterprise, but mostly in addition to on-premises systems—not as full replacements for them. Hybrid solutions create integration challenges. Cloud services—also referred to as edge services—have to integrate back to core internal systems.

 

2. Tactical adoption is a short-sighted approach, deploying cloud services incrementally, resulting in apps and services that are patched together to create end-to-end business processes.

 

3. Enterprises choose outsourcing for several reasons:

To generate revenue

To increase efficiency

To be agile enough to respond to changes in the marketplace

To focus on core competency

To cut operational costs

Because offshoring has become a more accepted IT strategy

Because cloud computing and SaaS have proven to be effective IT strategies

To move IT investment from a capital expenditure to a recurring operational expenditure

To differentiate from competitors—while reducing the burden on the IT organization

 

4. Based on case studies, the types of work that are not readily offshored include the following:

Work that has not been routinized

Work that if offshored would result in the client company losing too much control over critical operations

Situations in which offshoring would place the client company at too great a risk to its data security, data privacy, or intellectual property and proprietary information

Business activities that rely on an uncommon combination of specific application-domain knowledge and IT knowledge in order to do the work properly.

 

5. When selecting a vendor, two criteria to assess first are experience and stability:

Experience with very similar systems of similar size, scope, and requirements. Experience with the ITs that are needed, integrating those ITs into the existing infrastructure and the customer’s industry.

Financial and qualified personnel stability. A vendor’s reputation impacts its stability.

6. Many corporate customers lose out on the potential benefit of close relationships by an overemphasis on costs instead of value. Ideally, a customer/vendor relationship is a mutually beneficial partnership, and both sides are best served by treating it as such.

 

7. Vendors often buy hardware or software from other vendors. In order to avoid problems with the primary IT vendor, check secondary suppliers as well. Ask the primary vendor how they will deliver on their promises if the secondary vendors go out of business or otherwise end their relationship.

 

Vendors may offer the option to test their products or services in a pilot study or a small portion of the business to verify that it fits the company’s needs. If the vendor relationship adds value on a small scale, then the system can be rolled out on a larger scale. If the vendor cannot meet the requirements, then the company avoids a failure.

Before entering into any service contract with an IT vendor, get a promise of service in writing. By making both parties aware of their responsibilities and when they may be held liable for failing to live up to those responsibilities, a strong SLA can help prevent many of the disruptions and dangers that can come with sourcing or migrating to the cloud. The provisions and parameters of the contract are the only protections a company has when terms are not met or the arrangement is terminated. No contract should be signed without a thorough legal review.

 

SLAs are designed to protect the service provider, not the customer, unless the customer takes an informed and active role in the provisions and parameters. There is no template SLA and each cloud solution vendor is unique. Certainly, if a vendor’s SLA is light on details, this alone may be an indicator that the vendor is light on accountability. Additionally, if a sourcing or cloud vendor refuses to improve its SLAs or negotiate vital points, then that vendor should not be considered.

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