Inside Supply Management Magazine

Strategic Contracts: The Performance Management Process

March 18, 2019

(Editor’s note: Inside Supply Management® Weekly recently published “Implementing a Successful Supplier Sourcing Contract” that highlighted why strategic supplier relationships need to use every tool in the contracting tool kit. This article is the fifth in a series that explores each of the 10 elements that craft successful buyer-supplier contracts, as highlighted in the book, The Vested Outsourcing Manual.)

By Kate Vitasek

Under Vested’s Rule No. 3, the parties work together to have clearly defined and measurable outcomes. In the last article, we profiled Element 4, which is how to develop clearly defined metrics for the Vested relationship. In this article, we cover Element 5 — performance management.

Performance management is necessary because many supplier relationships fall victim to “driving blind disease,” or the lack of a formal governance process to monitor the relationship’s performance. The key part of Element 5 is to establish a quality assurance plan (QASP) that outlines how a buyer and supplier will take the metrics agreed on and put them into practice.

A QASP, which sets the foundation for reporting and performance management, answers four questions:

Who is responsible for the data related to the metric?

What is the source of the data?

How is the metric calculated?

How often will the data be collected?

Thus, the parties must agree on how to collect the data and monitor success. In the last article, we introduced the concept of using a requirements roadmap tool to align metrics with desired outcomes. The same tool can be used to add the QASP — which is easily done by adding the last four columns onto the requirements roadmap. (See chart below.)

Once parties agree on measures, they should establish how data will be used. In large strategic relationships, it’s common to invest in automated dashboards with drill-down functionality into process-level metrics for root-cause analysis.

At a minimum, establish basic reporting processes to determine how top-level metrics reports will be used. Regular and frequent communication at performance reviews will ensure all parties are aligned. A good performance-management process help the parties establish the “rhythm of the business.”

The next article in this series covers Element 6, establishing the right pricing model for the relationship.

Kate Vitasek is an international authority on the Vested business model for highly collaborative relationships. She is the author of six books on the Vested model and a faculty member at the University of Tennessee in Knoxville, Tennessee.