Key Performance Indicators in Vendor Risk Management

Key performance indicators (KPIs) help measure, monitor, and manage your third-party vendors’ performance, helping you spot delays, quality issues, and rising costs before they become larger issues. Let's dive into what KPIs are, how to use them in vendor risk management, and examples of KPIs to use.  

What Are KPIs in Vendor Risk Management? 

KPIs are measurable metrics that provide valuable insights into your vendor relationships, allowing you to evaluate both a vendor’s performance and risk levels.  

These metrics evaluate specific aspects of how well a vendor performs contracted business functions, ensuring alignment with your business goals and objectives. KPIs are known as “lagging indicators,” which means the metrics looks backwards to measure the outcome of vendor actions and activities.  

You don’t need a KPI for every vendor action or output – only the outputs, actions, deliverables, or behaviors that are most important to your organization. By establishing and setting vendor KPIs, your organization can better mitigate risks and ensure more reliable and productive vendor partnerships.  

Related Content: Examples of Key Risk Indicators in Third-Party Risk Management 

How to Use Key Performance Indicators to Manage Vendor Performance 

KPIs are guideposts, helping you track vendor progress and ensure the relationship is on the right path. Let’s take a closer look at how to use KPIs to manage vendor performance. 

Here’s a few guidelines to creating vendor KPIs: 

• Know your organization’s goals – Before establishing KPIs, identify the organizational goal the vendor supports. Then consider what specific vendor actions or service levels help meet that goal and how you measure success for it. You could create a KPI for just about anything but focus on what’s most important for your organization. For example, if timely deliveries are operationally important, set a KPI measuring on-time delivery rates.  
• Partner with your vendors – Work with your vendor to develop metrics. Regular communication is key here. Vendors should understand and agree to your organization’s expectations. Schedule periodic reviews to discuss the vendor’s KPIs, address any issues, and identify areas for improvement.  
• Understand your data sources – Validate KPIs through reliable, available, accurate, and timely data. When creating vendor KPIs, know where the data comes from and who provides it. Test the data periodically when possible.  
• Be S.M.A.R.T – Vendor KPIs should be S.M.A.R.T – specific, measurable, achievable, realistic, and time-bound. Set a threshold for each vendor KPI. If a metric falls outside the threshold, your vendor risk management team should reach out to the vendor to understand what went wrong and what will be done to correct it. For example, instead of creating a vague goal like “improve delivery times,” a S.M.A.R.T KPI is “achieve 96% on-time delivery rate in Q4.” If on-time deliveries fall below 96%, you may want to reach out to the vendor.  
• Establish trends and patterns – Once you’ve created KPIs with the vendor, analyze the data to identify trends and patterns. This helps your organization make informed decisions about the vendor relationship. If a vendor consistently falls short of the established KPIs, work with the vendor to develop a plan of action. If a vendor exceeds expectations, recognize their efforts and potentially expand the partnership. Review critical or high-risk vendors at least quarterly and moderate-risk vendors at least one or two times per year.  
  
  Note: Reviewing low-risk vendors’ performance is at the discretion of your organization. Due to the low-risk nature of the vendors’ products or services, it may not be necessary to manage or review the vendor’s performance.  

Related Content: 3 Steps to Implement Vendor Scorecards 

Examples of KPIs in Vendor Risk Management 

When creating KPIs for your vendor risk management program, consider objectives around compliance, risk management, performance, efficiency, etc. Remember to keep these KPIs relevant to the vendor’s product or service. For example, for a vendor that manages customer experience, financial KPIs wouldn’t fully reflect the vendor’s performance or customer satisfaction.  

Here are a few examples of KPIs to use to measure vendor performance: 

Operational KPIs: 

• On-time delivery rate >96%  
• Help desk call resolution rate >98% 
• Average call answer speed <30 seconds 

Quality KPIs: 

• Average customer satisfaction score >4 
• Defect rate <10 
• Order accuracy >94% 

Information Security KPIs: 

• Number of information security incidents <5 
• Incident response time <10 days 
• System downtime <5 days 

Marketing KPIs: 

• Page views >300 
• Cost per lead <$5
• Customer online engagement >65% 

Related: Program Metrics to Measure Vendor Performance

Key performance indicators offer valuable insights into vendor performance, identify areas for improvement, and foster stronger vendor relationships. The key to setting valuable KPIs is to understand your organization’s goals, work with the vendor, and think S.M.A.R.T.  

As you create and implement KPIs, you’ll enhance vendor accountability, mitigate vendor risks, and optimize costs. Ultimately, this data-driven approach leads to better quality and higher customer satisfaction.  

Creating KPIs is only one step to managing your vendor’s performance. Developing service level agreements and scorecards are also valuable tools.

Learn more in this comprehensive toolkit with an eBook, template, and infographic.