Vendor performance management: the key to building valuable relationships

For good reasons, organisations everywhere are relying more and more on an ecosystem of vendors to provide them with the products and services needed for achievement of organisational goals.

Such reliance can have can fairly obvious consequences. An organisation is duty-bound, if not actually legally obliged, to monitor and manage vendor performance as a key part of its overall risk management approach."

An organisation might transact with quite a large number of vendors. Practicality dictates that the amount of attention any particular vendor warrants should be proportionate to the criticality the organisation assigns to it. Not all vendors require the same amount of attention.

Increasingly though, regulation in some industry sectors like financial services and healthcare will determine vendor criticality.

The level of attention any vendor needs should drive both the frequency and breadth of performance oversight it will receive from the organisation."

This article discusses the key elements of vendor performance management, covering the following aspects:

• Reasons for the increasing use of vendors by organisations
• Differences between provision of products and provision of services
• Typical vendor criticality factors
• The benefits of vendor performance management
• The vendor performance management process
• Areas of vendor performance that might be monitored
• Organisational behaviours that can affect vendor performance
• Organisational participants in vendor performance management

Reasons for the increasing use of vendors by organisations

A broad variety of benefits can accrue to an organisation through its use of vendors, including:

• Access to Technology: Vendors can provide access to the latest technologies and tools, helping organisations stay up-to-date with industry trends and innovations
• Cost Savings: Using vendors can be a cost-effective way to access goods and services, as they may have economies of scale that allow them to offer competitive pricing
• Expertise and Specialisation: Vendors often specialise in particular areas, allowing organisations to leverage that expertise and experience to improve internal operations
• Focus on Core Business: Working with vendors can allow organisations to focus on their core business activities, without getting bogged down in non-core activities
• Globalisation: With the increasing globalisation of business, vendors can provide organisations with access to international markets and suppliers, helping them expand their operations and reach new customers
• Improved Efficiency: Vendors can help organisations streamline their operations and processes, freeing up resources and personnel to focus on core business activities
• Innovation: By working with vendors, organisations can benefit from fresh ideas and perspectives, leading to innovation and improved business outcomes
• Regulatory Compliance: By ensuring that their products and services meet relevant standards and regulations, vendors can help organisations comply with regulatory requirements
• Risk Management: By diversifying their supply chain and working with multiple vendors, organisations can reduce the risks associated with relying on a single vendor
• Scalability: Vendors can provide flexible and scalable solutions that can be adjusted to meet changing business needs.

Differences between provision of products and provision of services

Providing products is primarily a physical activity concerned with a vendor moving things from one place to another, using its own and/or various third-party resources.

Usually, there are various checks conducted here and there to help ensure that the organisation receives what it has ordered in terms of:

• The right number of
• The right items with
• The right quality at
• The right specification to
• The right place by
• The right time for
• The right price in
• The right condition.

The organisation’s role in product receipt is to check that what it ordered was delivered as agreed and is in a usable condition. Ideally, this would always be the case but there are no guarantees, so some chasing up might be necessary. Contracts for the supply of products typically specify the consequences of delivery shortcomings.

Providing services typically deals with more intellectual/creative matters with little physicality needed, mainly involving doing things that the organisation is unable or unwilling to do itself for some reason.

The organisation’s role in services receipt is testing for compliance with specifications, validating service usability and level of delivery of expected service outcomes, and instigating formal approval of the services.

Despite the differences between the delivery aspects of products and services, the commonality between them lies in the potential effects of vendor delivery failure on the organisation.

Typical vendor criticality Factors 

An organisation can establish any criteria that make sense to it to determine if a vendor should be considered as critical, commonly including:

• Provision of products and services that are essential to the organisation’s operations
• Provision of complex products and services that require special expertise to install, operate or maintain
• Volume of business conducted annually in terms of spend above some limit
• Ease of vendor replacement
• The risk associated with the vendor in terms of delivery / quality track record and its supply chain locations.

The benefits of vendor performance management

There are usually no free rides for an organisation when it comes to managing its vendors. It’s a hard, sustained and likely ever-increasing workload, but the payback from this form of sweat equity is generally considerably better vendor performance than a laissez-faire approach can ever deliver.

Continuous monitoring of vendor performance is known to increase motivation to do better.

This is known as the Hawthorne effect. It is particularly effective when coupled with a positive and remedial approach to dealing with performance issues rather than just a punitive one.

Find out how VCLM software can help you to improve vendor performance

A sample of realisable benefits to an organisation from adopting such an approach can include:

• Better all-round compliance with organisational requirements
• Better supply chain resilience
• Clearer understanding of influences on vendor performance
• Greater vendor accountability
• Improved product or service quality
• Increased cost saving and efficiency opportunities
• Lower costs
• More accurate performance metrics
• More trust and open communications
• Stronger risk awareness and mitigation

What’s involved in the vendor performance management process

Managing the performance of any vendor typically has the following main components:

Generic vendor performance management plan

A standardised approach outlining:

• The mandatory and optional vendor performance elements of interest
• The data that might be captured to describe performance
• The mandatory and optional vendor performance elements of interest
• The values of captured data that indicate the levels of performance achieved
• Responsibilities for capturing and providing performance data
• Frequencies of assessment of different performance elements and conditions determining each frequency
• Potential consequences for vendors of their performance failures

Contractual rights and obligations

An organisation’s right to assess and manage a vendor’s performance – and the vendor’s obligation to willingly and appropriately participate in this assessment – need to be agreed specifically in the contract.

This is irrespective of which party provides the contract governing the vendor’s provision of products and services.

Most commonly, this will take the form of a Service Level Agreement tailored to suit both parties. This will be based on relevant elements of the generic vendor performance management plan, with settings relevant to the contract purpose.

Measuring vendor performance

Some agreed key performance indicators might be continuously measured and recorded automatically by either party using available technologies.

Other KPIs might need to be measured manually, or assessed and categorised in a standardised way using human judgement.

This can be achieved via independent audit reports or user satisfaction surveys.

Monitoring vendor performance

Automated or manual methods might be used to gather, collate, summarise and report in some fashion about elements of vendor performance.

The organisation should compare measurements against benchmarks to derive levels of vendor performance achieved over some period like a calendar month."

Monitoring highlights when action is necessary to improve vendor performance. This might require a root cause analysis to identify the reasons for poor performance and to develop strategies for improvement.

Determining trends

Comparison of performance results across measurement periods and year-to-date will show if a vendor’s performance is improving, static or weakening, allowing appropriate discussions to be held with the vendor.

External benchmarking

Periodic comparison of certain elements of vendor performance against market standards, based on competitor performance, can reveal whether or not the organisation’s assessment of a vendor’s performance as notionally good is realistic.

Dealing with underperformance

Any instance of vendor performance not meeting expectations should lead to honest discussions with the vendor and possibly escalation to its senior management.

This will help to determine the root causes and allow both parties to agree on methods and timing, maybe a formal plan, to address those causes and prevent their recurrence."

In addition, any contractual consequences for performance shortcomings need to be applied when relevant.

Maintaining relevance

Periodic review is needed of:

• The relevance to current circumstances of the vendor performance process itself and how it is implemented
• The performance measures in use and how they are derived or collected
• The values of performance measures used to indicate the performance levels achieved.

In conjunction with any affected vendors, update any contracts that need associated service level agreements adjusted to remain relevant.

Communicating and collaborating

A strong willingness and ability to talk and work together, discuss challenges and agree on solutions, and share useful information all lead to stronger engagement between an organisation and its vendors.

This is critical for building the strong relationships necessary to deliver a shared commitment to improving vendor performance.

Areas of vendor performance that might be monitored

Vendor performance quite often isn’t a black-and-white, did-or-didn’t-deliver matter, although it certainly can be as simple as that at times.

It is usually a much more nuanced and complex, rolling response to cause-and-effect situations that a vendor finds itself dealing with."

Vendor performance is typically based on if and how well a vendor does something or exhibits a desirable characteristic.

Areas of interest that might be monitored include the vendor’s:

• Accountability: Readiness to accept responsibility for its actions and inactions in its dealings with the organisation
• Business continuity planning: Ability to maintain operations during crises and disruptions
• Capability: Availability of sufficient trained staff and other resources, a robust supply chain, effective processes and automation, and performance / quality management systems
• Capacity: Ability to meet the organisation’s volume and timing requirements
• Continuous improvement and innovation: Ability to develop and improve new products and services that meet, preferably exceed, the organisation’s needs
• Communications: Keeping the organisation informed about anything that might affect or is affecting the vendor’s ability to handle current or future orders
• Competitiveness: Meeting the market on pricing while maintaining quality levels
• Compliance: Levels of compliance achieved with contractual and regulatory obligations, and any applicable industry standards
• Data security: Ability to safeguard its own and the organisation’s sensitive data and IP
• Delivery performance: Adherence to delivery timetables and any other Service Level Agreement settings
• Ethical behaviour: Alignment with generally expected integrity, honesty, transparency and professionalism norms
• Financial stability: Ability to meet financial obligations in a timely manner, and continue to operate as a going concern
• Flexibility: Willingness and ability to accommodate changes to agreed processes, or various aspects of current orders placed by the organisation, in an uncertain environment
• Insurance: Types and levels of coverage in place for potential risks
• Issue management: Ability to prevent, mitigate and resolve operational and other issues with minimal delay and escalation
• Quality: Meeting or exceeding the organisation’s order specifications and quality standards, and issuing error-free invoices
• Relationship: Being a preferred vendor, collaborative, trustworthy, accountable for its actions, easy to do business with, and producing high levels of customer satisfaction
• Reliability: Ability to meet commitments, and do what it takes to get a satisfactory result if and when things go wrong
• Responsiveness: Timeliness and completeness of dealing with requests for information from the organisation, managing issues or considering feedback
• Risk management: Readiness for and effectiveness of dealing with actual and potential risks, especially those with potential downstream effects on the organisation
• Supply chain visibility: Ability to understand the origins of the products and services used in the operation of its business, and mitigate the risks associated with those origins
• Sustainability: Alignment with generally expected ESG goals and practices
• Technological foundation: Use of technologies that enhance its ability to manage its operational activities as efficiently and effectively as possible with respect to conducting business with the organisation
• Value for money: Track record in delivery of benefits expected from the relationship.

Organisational behaviours that can affect vendor performance

An organisation’s attitudes, actions and inactions can make a considerable contribution, both positive and negative, to how well its vendors perform.

Do unto others is an effective policy to adopt."

Actions an organisation should take to avoid negatively influencing a vendor’s performance include:

• Act reasonably and professionally: Conduct demand planning to avoid making continual or last-minute requests for urgent delivery to ensure vendors can meet standard delivery schedules and quality requirements
• Avoid frequent changes: Tighten up internal processes that permit or enable incorrect requirements to be passed to vendors, and minimise organisational expectations that original delivery dates should still apply to changed orders
• Be responsive and accessible: Respond quickly and accurately to vendor enquiries, requests, and concerns, and provide timely feedback to enable vendors to make any necessary adjustments
• Clearly communicate needs and expectations: Provide vendors with clear, detailed and accurate information about requirements like quality standards, delivery schedules and performance metrics
• Collaborate: Work closely with vendors to identify and assess opportunities for improvement, share best practices, and drive innovation
• Manage the contract: Ensure both parties comply with applicable contractual terms like payment schedules and minimum order quantities, and comply with agreed processes to avoid disruptions to the vendor’s operations
• Own up to being unhelpful: Admit to, apologise for, and address the causes of any organisational actions that have impeded a vendor’s ability to deliver as required or otherwise caused it unnecessary difficulties
• Participate in services acceptance: Conduct independent testing of delivered services for conformity to specifications in terms of operations and outcomes, usability and robustness, and formally approve for use
• Recognise good performance: Provide considered and fair feedback to vendors on their performance, highlighting areas of excellence and identifying areas for improvement
• Treat suppliers reasonably: Avoid applying undue pressure on, creating unnecessary friction with, or demanding unrealistic expectations of vendors. Impose realistic and proportionate responses for poor performance that won’t further degrade it.

Organisational participants in vendor performance management

Depending on the size of an organisation, and the number of vendors it uses, individuals, teams or entire business functions might play different or overlapping parts in vendor performance management.

Based on common business roles, these participants and their activities might include:

• Compliance team: Checking if and how well vendors and the organisation are complying with all relevant regulations and industry standards
• Contract management team: Checking if and how well vendors and the organisation are meeting their contractual obligations, determining if any contracts currently present unacceptable risk
• Contract owners: Assessing if expected benefits are being realised and value for money is being received from applicable vendors
• Finance team: Monitoring vendor invoice quality and level of invoice disputation, tracking vendor financial health, and determining the organisation’s timeliness of payment to vendors
• Legal team: Determining if any legal risks are associated with vendors, including with respect to changing regulations, persistent issues or pending disputes
• Operations: Checking if and how well vendors are meeting quality and performance standards, and identifying the level of operational issues occurring
• Procurement team: Checking if vendors are meeting their contractual obligations, and the level of contract changes being requested or required
• Risk management team: Assessing vendor risk readiness and level of threat to the organisation
• Users: Providing feedback on the acceptability of vendor delivery timeliness, product quality and services usability.

In summary, different stakeholders play different roles in vendor performance management.

By working together and leveraging their unique expertise, they can ensure that vendors are meeting their contractual obligations and delivering high-quality products or services that meet the needs of the organisation and its customers.

Wrap-up

There’s an old saying that ‘If it’s not in the contract, it’s not going to happen’.

Given the growing importance to an organisation of the use of vendors for so many things, it’s important that the organisation’s contracts with those vendors should precisely specify the performance standards they need to achieve.

However, there’s another old saying that goes ‘Just because it’s in the contract doesn’t mean it will happen’.

That means the organisation needs to implement a comprehensive approach to vendor performance management to help ensure that the relevant requirements specified in the contract are met, and the consequences of not doing so are clear and delivered.

Performed properly, vendor performance management can:

• Help an organisation reveal, respond to and reduce the risks that accompany dealing with its vendors, and enhance the value it receives from them
• Expose any organisational attitudes or behaviour that are or could be detrimental to vendor performance and potentially relationship-threatening
• Provide insights for improving the service track delivery record questions to be used during the vendor selection process
• Guide the inclusion of appropriate vendor performance elements in the contract.

Bob Seger once sang about ‘working on mysteries without any clues’. That’s how it can feel when it comes to undertaking vendor performance management from scratch, or how to make it better than it currently is."

This article provides many of the clues needed to demystify vendor performance management, in the form of guidance that can be selectively followed to meet specific organisational requirements.

Some experimentation might be required, some adjustment of benchmarks, some application of new technologies. The better it’s done, the more value vendor performance management will deliver to both the organisation and its vendors.

If you would like more information about vendor performance management or how Gatekeeper can assist with that activity, then contact us today.