Business must rotate 180 degrees from customer relationship management (CRM) to supplier relationship management (SRM) with processes that focus attention on Contract Life Cycle Management (CLM) and procurement. These areas need to get a voice in the business for it to be assured it secures less risk and gets more value from their spend, focus on accountability of the relationship with cost and spend owners. Collectively Performance Based Contracting (PBC) it is about forming a collaborative approach to align the business and supplier performance expectations to achieve mutually beneficial results for all parties.

Driving and facilitating performance measurement for continuous improvement is a tool that’s used for improving various desired outcomes by focusing attention on quantifiable measures and of those outcomes, changes or sometimes lack of change in those measures, and on the processes, productivity and capacity applied to achieve the desired outcome. The success of performance based contracting starts with having and genuine appreciation for the relationship strategies available within the supply chain and using that to align the operational and financial performance expectations for your business.

When considering what to measure, regardless of the size, sector, vertical or your point of difference, in business we tend to be interested in the same general aspects when it comes to performance based contracting:

And many tend to make the same mistakes and have the same common pitfalls to measurement:

Remember metrics record numbers and activity whereas KPIs are drivers for performance improvement. KPIs should be relevant to the business needs, easy to capture and flexible. The relationship businesses have with their supply chain is developed from the initial meeting into a partnership and a synergy of their combined efforts. Relationships can’t be measured in terms of simple financial success and evaluation tools should be used to build on the success and further development of the working relationship.

The key to working well with suppliers and the link to successful performance based contracting is to understand not only your business needs but their needs and requirements, so what inputs are needed to do the job? What inputs are received? What processes take place to deliver the service? What outputs are offered? And what outputs should be offered? Are you doing anything that impacts service? Are you singing from the same song sheet?

Performance goals need to be defined and then translated into quantifiable performance measures.

Our TIPS for Success are:

  1. Establish clear communication channels
  2. Understand both the desired outcomes and the performance measures to achieve these
  3. Have a complete picture of the current situation. Identify barriers and issues to the service level achievement and identify areas for improvement
  4. Agree service evaluation criteria and reporting frequency
  5. Overcoming internal and external stakeholder opposition requires a secure executive mandate, backed up by strong policy and procedure

Performance based contracting requires constant updating and good communication between all parties. Mind reading can be fraught with difficulty so if your business wants successful performance based contracting it starts by contacting an expert, which can guide and help your business to define their specific key performance indicators and then formulate them into performance based contracts.

Vendor Management is proud to be a leading provider of supplier performance management services. Further to this article, please take a few minutes to view our website and see how Vendor Management can help optimise your businesses outsourced supplier engagements, reduce commercial risk, reduce saving leakage and up skill staff. Call us today in NZ on 0800 464844 and ask us about our RISK FREE services.
Cathy has more than 20 years of experience across a wide range of disciplines including Service Delivery, FMCG, IT, Banking and Telecommunications having worked with major New Zealand and dominant global organisations. Outsource management, cost saving and contract management strategies are areas she is both professionally and personally passionate about.