Consistent and clear management of vendor performance is a key priority for organisations that are increasingly relying on external parties to provide key services like IT, Facilities Management, HR, Finance and Accounting, Legal Services etc. Traditional contract management and purchasing tools are often not sufficient to meet vendor management needs in this area. Organisations where vendor performance management is necessary tend to have some of the following characteristics;
- Multiple Outsourcing Contracts – these organisations will have a variety of outsourcing contracts. In some cases there will be multiple contracts with the same providers across multiple geographies
- Robust Service Levels Agreements in place – effort and time was spent upfront agreeing and documenting key performance indicators on sourcing deals
- Significant percentage of Opex spend is on third party service providers
- Non-performance by one or more third party could have a significant impact on business continuity and revenues
- Regulatory requirements are in place requiring extra levels of supervision around some service providers.
In these environments the discipline of vendor performance management has emerged as a significant activity that sits somewhere between Procurement and Operations. Procurement are interested in vendor performance management because:
- Ongoing performance management of vendors keeps them ‘on their toes’
- Poor performance by vendors may trigger penalty clauses which impact on the commercials.
- Poor performance by vendors is a key input to any potential renegotiation with that vendor.
Operations team are interested in vendor performance because;
- Performance levels will impact the quality of ’service’ which is delivered. From an internal perspective many of these service will have an ‘owner’ within the client – usually in operations.
- Effective monitoring of provider performance drives good behaviours
- Performance information is a vital ingredient to ongoing service reviews.
Performance management is usually undertaken by ongoing measurement against KPIs. Some organisations spend time and effort developing KPIs but then fail to monitor them. It is our view that KPI tracking is essential in all organisations that use sourcing extensively. A sophisticated approach to vendor performance management will include the following aspects;
- Regular reporting on all KPIs – preferably by the vendor
- Online dashboards with visibility of performance by vendor, by contract and by division
- Summary reports on each vendor performance which can be downloaded and sent to team members
- Ability to weight each KPI in an SLA
- Ability to produce a single score against every SLA and aggregate that to a score per vendor
- Ability to produce reports at SLA (contract), vendor and divisional level which can then be analysed.
- A single online tool to drive effective reporting by vendors and performance analysis by clients.
Vendor performance management does not need to become an activity in spreadsheet control and e-mail. Modern vendor performance management tools facilitate an approach which will give you very clear visibility of vendor performance at low cost. Some of these vendor performance tools will sit very nicely along your legacy procurement tools and ensure that you do not need to undergo major system overhauls!
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