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Best Practices

3 Reasons Why and How to Measure Vendor Performance

Jun 16, 2020 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. The point being it’s extremely important to actively manage your vendor’s performance.

Let’s start with the why.

3 Reasons Why You Need to Manage Vendor Performance

Here are three reasons why you should manage vendor performance: 

  1. The alternative is the equivalent of driving blindfolded. It’s important to know which of your vendors pose a reputation risk to your organization. Here’s a helpful hint – they all do! With that being said, take these items into consideration to dig even further and help prevent an impact on your organization’s reputation.

  2. SLAs are king: 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 guardrails. 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. There's no one-size-fits-all solution to third-party risk management: The same can be true of when you apply performance standards to your vendors. So, you must 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.

How to Determine Which Vendors to Monitor

Alright, so you know the why, now onto the who:

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

These are: 

  • If the vendor fails to perform, how will this impact my operation and reputation? (Examples include service up time, turn times and hold times).

  • 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 Vendor Performance?

Once you have the answer to those two questions, there are three ways to measure the vendor’s performance efficiently: 

  1. 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. 

Pro tip: Many vendors never hit the official SLA detailed in a contract simply because the contract was written with unrealistic expectations, meaning you’ve essentially set the vendor up to fail. Simple reports are easily configured in core processing 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!    

  1. Work Closely with the First Line of Defense:This is an area of untapped business intelligence and often goes to waste. We’ve seen the first line of defense be able to share 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’re heading in the right direction.

  1. 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, we recommend monthly score card reports and meetings. Any issues should be addressed in a relatively short time frame.

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 vendor’s existing performance levels. If you’re 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’re awarded future volume or, alternatively, you learn that the vendor cannot perform, and the organization needs to review the current vendor line-up.

Do you know what to do if you encounter poor vendor performance? Download the eBook to help.

vendor issues and challenges

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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