How to Implement Vendor Performance Reviews

A quality vendor performance review provides a tool with which an organization can assesses a vendor against Key Performance Indicators (KPI)’s, Service Level Agreements (SLA)’s and other important success metrics. The goals of a vendor performance review can include:

• Monitoring compliance of contractually agreed upon KPI’s and SLA’s
• Identifying areas where the vendor is not performing to expectations
• Partnering with the vendor to resolve low vendor performance
• Benchmarking the vendor’s performance against similar vendors
• Resolving poor performance trends before they impact productivity
• Partnering with the business owner(s) to ensure they are engaged with and utilizing the vendor’s services

Here are the key questions you’ll need to consider to implement a successful vendor performance review program within your own organization.

Who Should I Include In the Vendor Performance Review?

In addition to the vendor, it’s important to involve the appropriate internal stakeholders in the review process. This should include the owner of the vendor relationship, along with other business owners/users of the vendor’s products and services. It may also require the involvement of representatives from legal, compliance, IT, finance or purchasing depending on the size and complexity of the vendor relationship.

In cases where there is a formal Vendor Management Office (VMO), it should be their responsibility to plan and facilitate the performance review process. When there is not a formal VMO, it will be necessary to assign responsibility to another department such as IT, purchasing, finance or operations.

What Types of Questions Should I Ask?

Vendor performance review questions should align with the type of service the vendor performs. They should also merge specific KPI and SLA questions with generic questions.
Below are four common categories that can be used to help shape your performance review efforts:

1. Vendor Performance — These questions focus on contractually agreed upon requirements such as Key Performance Indicators (quantifiable measures used to determine efficiency and effectiveness of the service) and Service Level Agreements (formal negotiated agreement which defines parameters and responsibilities for the delivery of a service).

2. Vendor Incidents — These questions focus on uncovering any new or ongoing problems with the vendor, and the efficiency and effectiveness with which the problems have been resolved.

3. Vendor Billing — These questions focus on the accuracy and timeliness of billing, and whether there have been any issues related to pricing or costs.

4. Vendor Quality — These questions focus on the overall experience with the vendor and can include criteria related to:

• Vendor responsiveness — speed, completeness and accuracy
• Training quality – the quality of training material used for both the vendor and the company
• Knowledge – Knowledge of the vendor’s core functions to include the vendor rep, customer service, IT and other departments
• Vendor innovation – knowledge and adaptability of its services

What is the Best Way to Collect Feedback?

I recommend using performance review forms, preferably through a vendor management software platform, to support the feedback process. Performance reviews may capture data from:

• Scorecards
• Incident reports
• Action plans
• Internal business owner(s)
• Customer surveys
• Prior performance reviews
• Performance reviews from similar vendors

Should I Use Performance Reviews If We Use Vendor Scorecards?

Scorecards are one piece of a performance review that tracks the adherence of the agreed upon KPI’s and SLA’s compared to the larger picture of the vendor’s overall performance. Scorecards will not capture all incidents or non-metric related issues such as your company’s interaction with the vendor, billing issues or the overall quality of the vendor.

Depending on the frequency of the reporting and the vendor’s services, scorecards should be reviewed weekly or monthly. Performance reviews should be performed quarterly, semi-annually or annually depending on the vendor’s services and their risk level.

How Frequently Should I Conduct Performance Reviews with Vendors?

I recommend performing an initial review shortly after a new vendor has been onboarded, and then establishing an appropriate schedule for ongoing reviews based on the vendor’s risk level.

Initial Performance Review

As a general rule of thumb for new services, the initial performance review should be performed 90 days after the services are implemented. This will allow enough time to determine how the vendor is performing and tweak specific KPI’s, SLA’s and/or implement action plans.

If the vendor is not performing to desired expectations prior to the 90 days, each occurrence should be documented as an incident and used in the performance review. If the incident creates a risk, it should be addressed immediately with the vendor by creating an action plan with a SMART (specific, measurable, attainable, relevant, time-bound) goal that will be monitored by the Vendor Management Office (VMO).

Ongoing Performance Reviews

Ongoing reviews should be performed according to the vendor’s type of service and the impact of the service if the KPI’s or SLA’s are not met. The frequency of the performance reviews should be set initially with the business owner and the vendor. The review frequency should never change if the vendor is not performing; instead incident tracking and action plans should be utilized for any performance issues between reviews. Here are some suggested review frequencies:

• Annual Reviews — IT, HR, facility, non-customer impacting vendors
• Semi-Annual Reviews — Back office, indirect customer-impacting vendors
• Quarterly Reviews — Customer impacting and high-risk vendors

What’s the Best Way to Get Started?

Performance reviews are a perfect way to partner with the vendor for a successful relationship, and to hold the vendor accountable for their performance. If you have not been using performance reviews, it’s a good time to start as they will help you assess the vendor’s overall performance, make improvements, and ultimately negotiate better contracts with more defined SLA’s and penalties.

The best way to get going is to start small and expand from there. Two good places to start are with your more strategic and/or high-risk vendors, and with vendors whose contracts are coming up for renewal. By starting small you can go through the process a few times, and make refinements before you roll vendor performance reviews out to a broader audience.

The bottom line is that there is no right or wrong way to do this. The important thing is simply to get started!

Gavin Mac Carthy is Founder and Partner of VendorRisk, a software company that helps organizations manage their vendors & contracts through a cloud-based vendor management platform. You can reach Gavin at gavin@vendorrisk.com.