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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.

Benefits of managing vendor performance


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 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: 

Vendor Performance Tracking and Measurement

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?”

Organizations 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” 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 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.

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 performance measures


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.

If best practice is to define, agree and implement measurable KPIs, what should they be?

Here are some examples:

KPI Type Products Services e.g. IT
Quality Operational failures, administrative errors Resolution of issues based on priority level, % of coding errors.
Delivery Late delivery, breakages, loss in transit System availability or uptime, defect rates, change requests completed on time
Innovation Product design improvements, cost savings in materials Proposals for system improvements, better speed
Risk Risk Financial stability, compliance with laws, reputation Cyber-security requirements upheld, no breaches,
Cost Frequency of price increases
Customer Service Customer satisfaction, handling of complaints and escalation of issues, communication

Success is likely when the evaluation process, criteria, and timing 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.

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 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.

If you're also interested in Contract Management best practice, you can download our free ebook via the link below. 

Download Your Free Contract Management Guide >>

Ian Bryce
Ian Bryce

Ian writes on a variety of topics, bringing together his own knowledge and experience with that of industry experts.

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