Vendor Management KPIs: How to Track Your Key Vendors' Performance

The number of active vendors in most organisations means that it is challenging, if not impossible, to effectively monitor them all.

Segmenting vendors in a way that highlights those that are critical to your business paves the way to track their performance.

The main objective of vendor performance management (VPM) is to achieve the highest level of reliability, quality and performance from key vendors while limiting risk.

"Relationships with strategic vendors are increasingly key to business performance." - Gartner

What is vendor performance management?

Vendor performance management is a discipline put in place to ensure vendors are meeting expectations. The context may be different depending on your business’s requirements.

Quality, reliability and delivery may all be considered when measuring performance. For others, innovation and identification of new opportunities may count as strong performance.

This practice helps to protect businesses from underperformance. By knowing exactly how a vendor is or isn’t performing, the right steps can be put in place to achieve business continuity. It can also help to inform decisions about the third-party relationship, such as whether to renew or terminate the agreement.

What are KPIs and why do they matter?

KPIs, otherwise known as Key Performance Indicators, are the metrics by which vendors are measured. Setting KPIs matters because it outlines expectations for third parties and helps businesses to define the relationship at the negotiation stage. KPIs are mutually agreed upon. Once put in place, they keep vendors accountable when it comes to fulfilling their obligations. And they help businesses to act swiftly if performance isn’t as expected.

Benefits of managing vendor KPIs

A robust program to improve the performance of key vendors leads to more than reduced costs.

It can generate ideas for continuous improvement, both in products and services. It also is a critical move towards lowering business risks. Furthermore, streamlining administrative processes can contribute to cost savings for both parties.

If we can identify the root causes of issues and solve them quickly we can also expect a higher level of customer satisfaction.

Moving from no vendor management to world class

Where there is poor, or little, focus on managing vendors and their performance, all actions are reactive and unlikely to help improve delivery.

If there are no agreed measures in place and no way of tracking what went well or what failed (and why), the chance of improvement is correspondingly low.

The ultimate goal is to move to world class vendor management but, depending on your starting point, that can involve up to three initial stages: 

Many enterprises reach the exploring phase before stalling. The main reason for this is the need to move from one-way to two-way measurement.

One-way measurement means that the buying company measures and monitors the vendor performance with little negotiation on the measures to be used.

Try asking “How am I doing?”

Organisations have to be sure of their own behaviours if they are bold enough to ask this question of the vendor.

At the world-class level, the parties usually measure and monitor each other’s performance (two-way) and automate their reporting using a balanced scorecard.

Measurement goes beyond the basic measures of quality, delivery and cost; it would include measuring the overall success of the relationship taking into account responsiveness and ability to communicate well at all levels.

Adherence to contract terms

Full “adherence to contract terms" is a challenge for many organisations. The intention may be there but delivery can still fall short of expectations. Why is this?

One pitfall is choosing too many vendor performance metrics to monitor. The most important goal of each measure or metric is to motivate the appropriate behaviour of not only the vendors, but the buying organisation too. 

Drowning in the data is a real possibility, which can leave insufficient time to analyse the information and take any remedial actions. At worst, your business could be victim to contract breaches without even realising it. 

It can also be the case that the metrics chosen do not have the support of stakeholders. In this case, it can be very hard to motivate the parties to report on the KPIs, let alone to hit them consistently.

Establishing the Vendor Management kPIs

Vendor performance is usually measured by a series of agreed and contractual Key Performance Indicators (KPIs) that are most relevant and suited to the industry. This prevents any obscurity and means that everyone involved knows what's expected from each party. 

If best practice is to define, agree and implement measurable KPIs, what should they be?  We outline some examples below, but you can also read our related article on Contract Management Measures that Matter Most. 

Here are some examples:

Success is likely when the vendor performance metrics are known to all stakeholders and no one is surprised when the results are tabled.

Process improvements can only happen if evaluation reports are communicated to both parties and acted upon. This is often where the process falls down.

It may be that vendor management roles are not clearly defined or those with the responsibility are not able to tackle the vendor with requests for remedial action. Amendments to either processes or behaviours may be required and should be addressed, sooner rather than later.

Unpredictable circumstances, such as the COVID-19 global pandemic, may also lead to changes in performance from your vendors and leave room for contract disputes. In this instances, effective vendor management for is crucial. 

Punishment may not be the best way to improve performance. Penalties without incentives will not enhance either service delivery or the relationship with your vendor.

Penalties may keep the vendor on track but incentives can be used to encourage innovation and continuous improvement.

5 vendor management KPI best practices

1. They must be established for each critical element of the product and/or service and should be realistic and achievable
2. KPIs should be both quantitative and qualitative and relevant to the importance of the vendor relationship
3. They should be based on a minimum acceptable required level of performance
4. If they attract penalties, there should be incentives for the vendor.
5. KPIs should be reviewed regularly and realigned as required.

For more best practice advice on effective vendor management, you can read our related blog article.

How to track vendor performance with a dedicated solution 

Establishing KPIs is all well and good. But a list of performance indicators will only ever be a list if it’s not put to strategic use. Tracking vendor performance requires action. Monitoring, measuring and analysing don’t lend themselves to passivity. Teams need visibility of performance and they need proactivity to drive better outcomes. 

Proactivity is built on seamless performance management processes. If you’re working from fragmented foundations, your efforts may eventually fall down. 

Manually tracking performance can be difficult. Businesses often have too many vendors, services and complexities to keep an eye on. If you’re trying to track performance retrospectively, using a mixture of spreadsheets and emails, it’s unlikely you’ll build a clear view of what your vendors are up to. Implementing vendor management software makes tracking performance easier. Let’s take a look at how. 

1. Centralise all vendor records

Knowing everything about your vendors, including what they’re committed to, is key to tracking performance. If maintaining compliance is a KPI, for example, you need visibility of all their certificates to know if they’re out of date. 

Gatekeeper allows you to store your vendor records and related information in a central repository. See everything you need in one place and easily search for information by vendor, category and even file name. By having the information you need at your fingertips, you can easily see what your vendors have agreed to. 

Easily digestible dashboards also make it clear to see your vendor base at a glance. See what events are coming up, which information is about to expire and if the relationship itself is due for renewal. No more digging through emails to find out which stage each vendor is at or the work that still needs completing. 

Centralise vendor records within Gatekeeper

2. Automate performance data capture

Once you’ve got all your information in one place, it’s time to focus on capturing performance data. For many businesses, tracking performance may be as brief as an internal conversation about how things are going. For others, it might not even take place until something has fallen short of the mark. 

Tracking vendor performance needs to be a proactive process. It isn’t just about whether or not obligations have been fulfilled. It’s about pre-empting when performance could go awry and putting a strategy in place to prevent it from happening. 

If your business waits until a vendor has failed to deliver a service or the quality isn’t as expected, it’s already too late. Depending on the scenario, the damage will already be done and your business may feel the consequences financially, operationally or legally."

Gatekeeper helps your business to automate performance data capture. Its Balanced Scorecards give all stakeholders the opportunity to provide in-depth feedback about vendors. This is done in a centralised module, eliminating multiple emails and various communication formats that need to be revisited once feedback is provided. 

Vendor performance surveys can be automated and scheduled. Manual administration isn’t required and notifications bring the survey front of mind for stakeholders. Keep teams accountable for providing inputs with deadlines that must be adhered too. A slick process gives way to timely performance reviews, providing up-to-date reflection of a vendor's current value to the business. 

Collect, analyse and measure vendor performance feedback 

3. Build in time for reviews and keep everyone accountable 

Actively managing multiple vendors is time consuming. Tracking performance may feel like another thing to add to your to-do list. And for this reason, some businesses struggle to carve out time for the activity. Performance management may not feel as urgent as executing new contracts, but resolving the consequences of poor performance certainly will. 

Fragmented, undocumented processes can cause barriers for vendor performance management. Who owns it, when reviews should happen and what teams need to be available can all become points of contention. 

Using vendor management software will put you back in control. Not only does it automate and streamline processes, but it helps you visualise workflows. Using Gatekeeper’s Kanban Workflow Engine, your business can map out its processes with performance management at the centre. Use key dates to trigger processes such as performance reviews and risk mitigation activities. 

The Kanban Workflow Engine can be used alongside the Vendor Portal to maximise accountability. Not only will it allow you to automate onboarding processes and encourage stronger performance from the outset, it also allows you to prompt vendors into action. Alert them when attention is needed, downstream compliance and never let poor performance go unresolved. 

Automate and streamline vendor processes with Gatekeeper

If you're interested in finding out how Gatekeeper can support your vendor performance metrics and automate performance tracking, book a demo today.