3 Steps to Implement Vendor Scorecards

Develop Metrics - Identify KPIs and SLAs

With the help of metrics, scorecards capture and report information about vendors' performance. Let's explore the different types of metrics:

First, you should know there are two kinds of metrics: objective and subjective.

Objective metrics (also known as quantitative) are those that represent things that can be counted or measured. Objective metrics are based on data and established criteria which generate reliable and stable results. Examples include:

• Quantities or volumes
• Capacity
• Time
• Percentages
• Cost
• Defects found

Subjective metrics (also known as qualitative) indicate something observed, experienced or perceived. Subjective metrics are derived from opinions, impressions and judgments. The output is a variable and may change depending on the perspective of the individual, such as:

• Customer or employee satisfaction
• Personal demeanor
• Business culture
• Visual esthetics

While both metric types can be used in a vendor scorecard it’s recommended that subjective metrics are to be used sparingly. A good rule of thumb is to ensure that at least 80% of applied vendor performance metrics are objective and qualitative.

Now that we understand subjective and objective metrics, let's look at some common metric categories and their applications.

Key Performance Indicators (KPIs)

KPIs are metrics used to assess how well a vendor is performing business functions or achieving objectives. KPIs are meant to measure what is most important regarding the vendor's product or service.

A key performance indicator may be expressed as a numerical target, for example, "The network must have 98% uptime.” You may also allow for a range of acceptable values, with a lower and an upper limit; for example, "The call center must pick up all phone calls within 10-20 seconds."

Rather than tracking every vendor action or output, you should measure only those actions, outputs, deliverables or behaviors that contribute to your organization's success.

Service Level Agreements (SLAs)

Service level agreements are different from other metrics or KPIs. SLAs establish firm commitments between your organization and the vendor and describe the product or service aspects and expectations.

These represent "non-negotiable" service requirements that are identified and outlined in your contract or other written agreement. With SLAs, there’s usually a requirement for remedy or a stated penalty in case the vendor doesn’t meet the commitment. In most cases, the penalty is financial compensation, such as a refund, service credit or discount and repeated SLA violations can result in the termination of the vendor.

Establish the Reporting Process and Frequency

After setting up your vendor performance metrics and scorecard, you’ll need to identify who will be responsible for monitoring the metrics and how often the data will be collected and reviewed. In many cases, the vendor will provide data supporting the metrics. Your organization will need to determine the proper intervals for collecting and reviewing this data.

When it comes to how often to collect and review the performance metrics, it's important to consider the duration of the product or service cycle. For example, higher transaction volumes usually mean shorter service cycles and should result in more frequent data collection. If you are monitoring a vendor providing call center services, it might make sense to review metrics for inbound calls on a weekly basis.

Remember, your organization has the discretion to determine how often to collect and review metrics. However, it’s strongly recommended that you review the performance of any critical and high-risk vendors at least quarterly, if not more frequently.

Create a Remediation Strategy

Reviewing the vendor performance scorecard will help you to identify if the vendor has failed to meet any agreed-upon KPIs or SLAs. If your vendor hasn't met a specific contract SLA, you must ensure that the contractual penalties are applied. Furthermore, if a vendor fails to meet performance standards, a remediation plan must be developed immediately. In most cases, the vendor should be able to provide the following details:

• Summary of the issue including duration and impacts
• The root cause or why the issue occurred
• Plan of action for remediation
• Remediation timing

It’s essential to formally document any failed performance as an open issue and track the remediation until it’s resolved. If your organization fails to take corrective action, you’re further exposed to ongoing or expanded vendor performance risk.