Getting Results - Performance Measurement

Being successful means getting what you need from your service provider after they start working for you - not just during the procurement phase. Establishing a Performance Management (KPI) Framework up-front will ensure you get what you need from your supplier.

According to a 2002 study by AberdeenGroup, a 26.6% increase in supplier performance was realized by organizations that have formal measurement processes in place for suppliers. The type of improvements cited can have an impact on your company's bottom line and included aspects such as quality, on-time delivery, total cost, contract compliance, lead times and overall responsiveness.

A well-managed procurement process ensures you have the right supplier at the right price, but all too often, the process ends at that point and ongoing performance is left to somebody else. By building an effective performance measurement framework into the contract at the procurement phase, you get the service your company needs to be successful.

With performance measurements spelled-out, your supplier will be in a better position to understand your priorities and the results you need. Performance measurement isn't new, but applying them effectively with a consistent, formal process and building them into supplier contracts of all sizes isn't common practice. As more and more products and services are contracted out, either using traditional contracts, out-tasking or even outsourcing, the need to rationalize performance and ensure you are getting what you need is becoming more critical to your success.

If you are already measured internally or by your clients, mirroring those measurements with your suppliers will help them optimize their performance to meet your requirements. Relying on contract specification simply isn't enough. Effectively implemented performance measurements drive the behaviours you want and result in the performance you need while at the same time making the overall management of the contract easier. Poorly implemented, performance measurement can inadvertently drive the wrong behaviours, focus attention on aspects of the service that aren't critical to your success, and make managing the contract more difficult. While actual measurements may vary, the underlying philosophy for performance measurement will remain the same, which is to influence the behaviours and subsequent results that are important to your success.

You can do this by measuring the output of the service rather than the details and processes by which the output is obtained. Because of the need to measure output, and an underlying need to ensure the management tools used to achieve the results are sound, there are three different levels of measurements.

Each of these measurements has a place in an overall performance measurement framework, however they need to be managed differently.

Measurements

Key Performance Indicators (KPI)
As outcome based measurements, these often trigger penalties or incentives to drive behaviour, and are the most important measurements. Linked to the needs of your core business, they mirror objectives that directly impact your company's success. Relatively few in number, there should be from one single KPI to a handful of KPI's, depending on the service and your specific requirements. They must be outcome or results based, not intermediate process measurements. With such high-level measurements in place, your supplier will clearly recognize what your priorities are, and by setting targets to reach, the results you need will be clear.

Performance Indicators (PI)
The next level of measurement becomes a management tool, however some PI's may roll-up and be aggregated into KPI's. Aggregation can be cumulative results or measuring regional results as PI's and aggregating them nationally into KPI's. Your specific needs and the nature of the service will influence this. Measuring results at a lower level provides an early warning system to help you and your supplier identify performance issues that impact the KPI's. Since supplier performance impacts your own performance, you gain by using PI's and working with your supplier to ensure they will meet the KPI's. As a management tool, you can tie PI's into Management Action Plans. If a PI fails to meet the target, an action plan is provided by the supplier to correct the performance issue, ensuring effective management control is being applied and KPI's are not at risk.

Trends (T)
Trends are managed like PI's, however instead of being cumulative or point-in-time measurements, they are generally comparisons of the change in results over time, either from a specific PI or other measurement.

To develop your measurements, start with KPI's by identifying the key deliverables of the service that impact your company's success. Once you narrow them down, look closely at the deliverables and determine how you can measure the deliverables. This may be quality, timeliness, customer satisfaction scores, or a number of other attributes. If these measures impact the service provider financially, make sure they are as objective as possible.

Reporting

Once you decide which measures to use, establish the mechanism to measure and report the performance results. Where possible, these should be built into the processes and automation used to deliver the service. If your supplier will be measuring these directly, specify the requirement as part of the procurement exercise. At the same time, identify the format and the frequency of the measurements.

With KPI's developed, start looking at sub-measures that support the KPI's. These become the PI's or trends you use as management tools. Where possible, identify this in your procurement initiative to give the supplier an idea of the requirements you have for tracking and reporting.

Finally, in order to make your KPI's meaningful, they have to be measured against a target or baseline. If the target is obvious, for instance linked to an existing company or customer related measurement, all you need to do is identify the targets to the supplier. If they are not clear, or you have no way of knowing what level of performance is acceptable, or even more importantly, achievable for the price you are willing to pay, you may need to develop these over the first year of the contract, working closely with the supplier to develop reasonable baselines and then setting them for the balance of the contract.

Establishing an effective management process around the measurements is important to influence results and maintain a partnership approach with your supplier. As much of the measurement framework as possible should be identified up-front to the supplier as part of the procurement initiative, including the application of penalties for not meeting targets, or incentives for meeting or exceeding targets. The management process includes a mechanism to review and discuss the results of the measurements in a way that provides for a collaborative approach, rather than an antagonistic approach.

Management

To be effective, performance measurements shouldn't be used as a 'gotcha' mechanism to penalize suppliers. The purpose is to implement a mechanism that will reduce the likelihood that suppliers will fail to deliver the results you need. After all, if they fail to deliver, it's already too late. A small management committee should be set-up to review the performance results regularly Include procurement and operational representatives from your company and senior management and operational staff from the supplier.

If you use Management Action Plans as part of your process, these meetings will allow for discussion and agreement of the plan. The committee should look at the results, the reasons they are not meeting expectations, solutions that the service provider needs to implement, and possibly solutions you need to implement within your own company to help improve results. Allow for changes and adjustments to the measurements or the targets throughout the contract life. Performance measurement is designed to get the results you need for your company.

Over the life of a contract, it's likely your company's needs will change. To ensure you can modify the performance measurements to match those changes, it is important to build a change management process into the contract up-front. The reason you contract out a service is to procure an effective, efficient service, delivered by a company who provides that service as their own core business. This allows you to focus on your own core business. As a result of your procurement initiative, you will end up with a company who knows how to deliver and has world-class processes and procedures to make it happen.

By moving beyond the procurement phase and implementing a performance measurement process on a going forward basis, you ensure that your supplier's expertise gets you the results your company needs to be successful at it's own core business.