In a recent issue of our newsletter, we reported that the B.C. Auditor General for Local Government (AGLG) released a number of useful reports and topic papers in early 2016, based on audits of operational procurements at the municipal level, as well as a review of current literature. Of particular relevance to all procurement professionals, regardless of sector, is a booklet entitled “Improving Local Government Procurement Processes Through: Procurement Policy Enhancements, Procurement Performance Metrics and Reporting, and Vendor Performance Management.”
While the entire document is useful for all procurement organizations, in this article we focus specifically on Part 3, “Management of Vendor Performance,” which addresses key elements and best practices for assessing vendor performance.
The AGLG report suggests that the level and approach to performance management should be dictated by the volume and nature of the government’s contracts, and it should be determined before going to market. The report strongly recommends that organizations have a vendor performance management framework with four key elements:
- Vendor performance policy
- Processes and procedures
- Automated systems that assist in monitoring, evaluation and reporting vendor performance, and
- Reporting and feedback mechanisms
Such a framework aligns an organization’s corporate objectives with its vendor performance program. Staff can then develop specific policy, with procedures to support the implementation of the approach, guiding internal procurement professionals and ensuring fairness and consistency in how vendors are treated.
While it takes time and resources to develop robust and meaningful performance metrics for different types of contracts, without such measures, it can be exceedingly difficult to demonstrate value for money, identify and reward the high performers in future competitive processes, and ensure continuous improvement of the procurement and contracting functions.
As there is no one-size-fits-all template, a common question that arises is: “How much is too much” for measurement purposes? Keep in mind that for each key performance indicator, someone has to evaluate, track and report on how well each vendor is meeting that contractual requirement. Remedies and incentives need to be invoked, corrective action needs to be taken where warranted, and defensible documentation must be retained in the contract file (or centralized system).
For local governments – and, we suggest, for all procurement organizations – the AGLG recommends “assessing the complexity, risk, financial threshold, agreement type and other characteristics of the procurement.” Most organizations focus on evaluating their strategic suppliers first, and then gradually roll out the process to other, less-critical sources of supply, as time, resources and strategic objectives dictate. So, start small. Start with the most strategic suppliers, and select just a few of the most meaningful metrics.
A key theme throughout the AGLG report is ongoing communication with the vendor community, and we suggest that this is particularly important for measuring vendor performance. The more they understand about the purchasing organization’s expectations – in specific and measurable terms – the more precisely they can price the project or contract, and the easier it will be to objectively document deficiencies and hold vendors accountable. In particular, if there are financial remedies tied to performance expectations, the RFx and the resulting contract should be crystal clear about this, to avoid legal and other challenges.
For the contract to be crystal clear, the issue of vendor performance evaluation must be addressed during the procurement planning phase, so that appropriate contractual provisions are included. Remember, performance expectations should be SMART: specific, measureable, achievable, results-based and time-bound.
Finally, do keep in mind that service level agreements and key performance indicators are expectation-management tools. The purpose is to keep performance on track, so remember to celebrate the successes, as well.
The final pages of this important resource provided by the AGLG include a number of sample performance evaluation templates. These may provide a useful starting place for shoring up the vendor performance management processes within your own organization.
If this topic resonates with you, and you or your staff could benefit from a more in-depth analysis of performance management frameworks and service level agreements, join us online for PSPP 201, which begins April 24, 2017.
Reprinted from The Legal Edge Issue Mar 16, 2016