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Best Practices

3 Reasons Why and How to Measure Vendor Performance

May 9, 2018 by Venminder Experts

Managing your vendor’s performance is a key aspect of monitoring. After all the hard work that went into contract negotiations and due diligence checks to onboard a new vendor, it would make sense that managing your vendor performance is a natural step to incorporate into your vendor management program. In fact, at some organizations who believe in the value of vendor management, there are actual Vendor Performance Managers whose sole duty is to manage performance standards.

3 Reasons to Manage Vendor Performance

It’s important to actively manage your vendor’s performance because:

  1. The alternative is the equivalent of driving blindfolded.

  2. Vendor performance itself points back to the contractual language since there should be set expectations of service levels. So, you can keep track if your vendor is holding up their end of the deal. A vendor manager needs some guard rails and the strong contract which sets expectations with regards to turn times will really help both parties in understanding the importance of why the vendor performance can ultimately prove to be a make-it or break-it deal to the long-term relationship.

  3. At Venminder, we often say there’s not a one size fits all solution to third party risk management. And the same can be true of when you apply performance standards to your vendors. So, you have to review them separately instead of making any mass assumptions.

For example, do you really care that Joe the flower guy waters the office plants at various times of the day? Probably not! But you would be concerned if your client is kept on hold for 45 minutes because they need to speak to a vendor who provides a customer facing service.

Overall, the most value you can add is to manage the performance of vendors which may have a detrimental effect on your product or brand. Typically, these could be viewed as your critical or high-risk vendors.

2 Questions to Ask When Determining to Manage Performance on a Particular Vendor

There are really only two questions you need to ask yourself when determining whether you need to manage vendor performance or not:

  1. If the vendor fails to perform, how will this impact my operation and reputation? Examples include service up time, turn times and hold times.
  2. Is the vendor detrimental to my customer experience? If they fail to perform as expected, what harm will this do to my customer?

If the answers provoke the possibility that this would harm the customer experience or cause a negative ripple effect on the organization, you need to monitor the vendor’s performance.

How Do You Measure Performance?

Here are some great ways to measure a vendor’s performance efficiently:

  • Data Driven Reports: Data usually can be the driver of the final decision on how well the vendor is performing as long as you refer back to the contractual language which provides the agreed upon turn time or service level as the basis of the report.

    We’ve seen many vendors never hit the official SLA detailed in a contract simply because the contract was written with unrealistic expectations, and while the vendor performed well and provided great customer service, the official report card based on SLA language would show that the vendor was failing, meaning you’ve essentially set the vendor up to fail. Simple reports are easily configured in core processing or loan origination systems. Ask for historical data on the vendor’s service levels. Do they align with your needs? If not, then you already have your answer!

  • Work Closely with the First Line of Defense: This is an area of untapped business intelligence and often goes to waste.

    From personal experience, our first line of defense was able to tell me of things brewing with a vendor far in advance of any data report. The secret is being able to join up the dots and see where the real-world feedback aligns with where the data is pointing. Nine times out of ten, they are heading in the right direction.

  • Manage Via Communication: Bring the vendors in, schedule a conference call and share the data.

    Most vendors of any worth take immense pride in meeting their agreed upon SLAs. For critical or high-risk vendors which are heavily active at the transactional level, then I recommend monthly score card reports and meetings. Issues should be addressed in a relatively short time frame.

We should add that vendor performance isn’t just limited to transactional performance, it can also come into play at the broader operational level such as a system outage impacting business operations. System outages do occur so monitoring this as part of your overall performance plan can really highlight how consistent the vendor’s control environment is.

How Often Do You Measure Vendor Performance?

Vendor performance as a best practice should be implemented for vendors at the transactional level on a reoccurring monthly basis. For those vendors who are behind the scenes and offer operational support, vendor performance may be less frequent and could be practiced on a quarterly basis. Remember these are not hard rules. Much of the performance you’ll introduce will be based on the vendors existing performance levels.

If you are seeing more issues with a vendor, then oversight in general needs to increase. Vendor performance as a standalone discipline is there to ensure that the vendor performs. The outcome of which may prove beneficial in the sense that they are awarded future volume or, alternatively, you learn that the vendor cannot perform, and the organization needs to review the current vendor line-up.

Measuring performance is easiest when you can look to a vendor list conveniently organized by classification and/or rating. Download our infographic to help with the process.

how to classify vendors

Venminder Experts

Written by Venminder Experts

Venminder has a team of third party risk experts who provide advice, analysis and services to thousands of individuals in the financial services industry.

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