Are your outsourced vendor relationships contributing to your bottom line? How can you be sure? Regularly testing and assessing vendor performance can give you a reliable picture of how your service providers are measuring up.
As the Aberdeen Group states in Benchmark: Scorecarding Suppliers, “almost all best-in-class firms scorecard. The best of the best are now experimenting with predictive analytics to spot inflection point and KPI correlations that identify capacity issues, lead time variability, financial viability or quality issues long before they would show up on a quarterly scorecard. They are evolving the scorecard into a forward-looking risk management instrument.”
Testing vendor performance will be easier if you have guidelines established from the outset. If you work with a variety of vendors, consider compiling a vendor handbook to define basic guidelines and expectations. You should also draw up a “Scope of Work” document, tailored specifically for each vendor and clearly outlining key responsibilities and service requirements. This will serve as a valuable reference for resolving issues when they present themselves.
Metrics should be measured in three vital categories:
Operational service level metrics measure the operational performance of business processes. These are the foundation of any outsourcing relationship. These are outlined in detail within the contract and typically involve penalties and incentives for vendor performance. Quality, timeliness, and satisfaction examples of operational service level metrics.
Key Performance Indicators (KPIs) are detailed metrics that should be outlined in your contract or the scope of work document. These will include key factors necessary for a successful vendor relationship, including adherence to set schedules, invoice accuracy, adequate employee training, and staffing accuracy. You will also want to periodically evaluate the vendor’s financial stability and business contingency planning.
Which KPIs you choose to measure will depend on your organization and the processes you are outsourcing. It is not necessary to measure everything, only the factors that are most vital to your business goals. You should plan to perform weekly, monthly and year-to-date KPI assessments.
Transformational metrics are related to your overall business outcome objectives. These include process performance goals, project milestones and implementation objectives. To encourage optimal performance, you can offer contractual incentives for vendors who reach these goals and milestones. It’s important to strike a balance; avoid focusing too much on KPI and overlooking transformational metrics.