6 Reasons You Need Vendor Management Key Performance Indicators (KPIs)

Third-party risk management is all about monitoring and assessing the reliability, quality and performance of our organization’s vendors to ensure they’re the best choice for you at all times. It requires us to constantly monitor our vendors’ performance, and to do this well, we rely on a series of agreed upon performance indicators. The agreed upon performance indicators we use with our vendors are service level agreements (SLAs) written into your vendor contracts. 

Determining What Your SLAs Should Be with KPIs

To determine what SLAs you should be capturing in your contract with a particular vendor, you should look to your own organizations key performance indicators, or KPIs as most call them. Organizations use KPIs to create an analytical foundation for making the best possible decisions. When it comes to your vendors, knowing your organization’s KPIs will give you a head start on writing the appropriate SLAs into your contracts. But, that’s not all KPIs are good for.

If you can match your organization’s KPIs to your vendors’ SLAs, you have a huge win for your organization, and you’ll be able to directly correlate your vendors’ effect on your organization’s SLAs.

Reasons You Need KPIs to Boost Your Third-Party Risk Management Program (in conjunction with SLAs):

1. Improve your enterprise risk management (ERM) program. Enterprise risk management considers all of the different categories of organizational risk to set policy standards and determine the organization’s risk appetite. Map your vendors’ SLAs to your organization’s KPIs to give your ERM program a boost. Being able to see the direct effect the movement your vendor SLAs have on your organization will help you control your vendors. Big win!
2. Increase performance and progress reporting. Every organization needs goals and objectives. Once these are established, your vendors need a succinct way to communicate progress, or lack thereof, toward those. For your organization, KPIs provide insight into performance around quality, delivery, cost savings and customer satisfaction, just to name a few. Coupling your KPIs to the SLA for your vendor gives you a level of reporting that is unparalleled.
   
3. Pattern analysis. Properly operationalized, KPIs will provide insight into business patterns and behaviors that tend to As a result, showing you any that have a cause and effect relationship to one another or to one or more vendors. Pattern analysis and recognition are quantification you need to prove your vendor management program is on the right track. 
   
4. Catch early warning signs. If you’re monitoring your KPIs and your vendors’ SLAs, you’ll be able to see potential problems with your vendors before they occur. Some of the areas you may want to match KPIs and SLAs include lead time, fulfillment time and customer satisfaction. A heads up is always a good thing! 
   
5. Actualization. While KPIs often highlight what’s going wrong, they also can help highlight what’s going well, such as areas where the vendor outperformed expectations. If you see your KPIs moving and your vendor’s SLA performance is steady, that tells you something about how the vendor does or doesn’t affect your organization.  
6. Forecasting. More than anything else in third-party risk management, using SLAs in conjunction with KPIs will give you the opportunity to recognize a course deviation, such as demand accuracy or supplier availability, and give you an opportunity to right the ship before she runs aground. 

Make a habit of regularly checking on your organization’s KPIs and your vendors’ SLAs. You’re not only looking to see how your vendors are performing, but also how your vendor’s performance, or lack thereof, affects your organizations performance. To someone who has never developed a KPI before, all of this might sound grueling. The good news is, after you go through the process once, it’ll be that much easier to use in the future… and extremely helpful!

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