Outsourcing Vendor Metrics
Vendor managers often are overwhelmed with metrics, but these metrics do not always give a complete picture of the outsourcing vendor’s operations. We’ve mentioned a variety of metrics to date, and today we’re focusing on the major categories of metrics vendor management teams should focus on.
In short, there are operational service level metrics, key performance indicators, and transformational metrics.
Operational Service Level Metrics – These are the core metrics of any outsourcing relationship. These metrics are described in detail in the contract and frequently are tied to penalties and incentives for vendor performance. Typical metrics include quality, timeliness, inventory, and satisfaction. These metrics typically measure operational performance of a business process.
Key Performance Indicators (KPIs) – KPIs can be described in the contract or in the business requirements. They are typically very detailed metrics that are necessary for managing a vendor relationship. Examples include schedule adherence, staffing accuracy, and training completion rate. KPIs are reported by the vendor, but do not have contractual penalties or incentives.
Transformational Metrics – Transformational metrics describe overall business outcome goals. They differ from KPIs in that they provide contractual incentives for performance, but also differ from operational service level metrics in that they indicate end-state objectives. Examples include project milestones, process performance objectives, and implementation goals.
The trick for vendor managers is to keep the big picture of in mind when building a balanced scorecard. Many vendor managers, after coming from deep operational mindsets, focus too keenly on KPIs and rarely give praise for operational service level achievements. They completely ignore transformational goals. Project managers who become vendor managers, ignore KPIs, loosely monitor SLA performance, and focus keenly on transformational metrics. Process improvement experts who become vendor managers focus on SLAs, but forget all other metrics…
Successful vendor managers understand that KPIs are leading indicators of operational service level metric performance – and track them rigorously to predict SLA achievement. SLAs are trended to indicate operational performance and consistency. Transformation metrics are reviewed regularly and never ignored. As you can see, good vendor managers use all available data, but realize that they cannot hammer vendors for failure to achieve KPIs. Rather, good vendor managers use KPIs to ensure vendors react early to negative trends and ensure vendors perform.
A good resource to use is Dashboardspy, which provide many, many examples of good metrics and dashboards. Another good resource is Stephen Few’s Perceptual Edge.
How do you use metrics to manage outsourcing vendor performance? Let us know!
Update: We’ve published a more detailed analysis on operational vendor metrics. Please be sure to read it for additional tips on structuring service level agreements and metrics.
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