Performing a regular evaluation of your key vendors is no different than doing the same for your staff. Each plays a key role in your success, which is why it's so important to have a mechanism in place to align expectations with actual results. And since you probably spend somewhere between 35-45% of your operating budget with vendors, it's simply smart business to use a data-driven process to evaluate the results you’re getting for all of that money you’re spending!
Vendor scorecards are one tool you can use to continually monitor and improve your vendor relationships. A scorecard helps you to:
clarify vendor performance criteria that are most important to you,
share expectations with your vendors, and
evaluate vendors on their ability to consistently deliver value.
There’s no right way to build a vendor scorecard; however, there are definitely core performance criteria that should be included. Here are the five I always recommend:
Service Level Criteria - Your scorecard should include criteria on how well the vendor met pre-established levels of service in areas like quality, delivery and support. Most vendor contracts should include expectations regarding service levels or, in some cases, a formal, documented service-level agreement (SLA). Your scorecard should simply be the tool you use to measure the vendor's performance against these SLAs.
Cost Criteria - Vendors should be evaluated on how well they help you manage costs in two areas. First, does the vendor adhere to the pricing you've agreed to in the contract? And second, is the vendor providing you with new ideas on how to reduce the cost of the relationship going forward? Good vendors deliver a product or service for the price to which they've agreed; great vendors look for ways to help you reduce costs through things like alternative products, better use of technology or better inventory management. Your scorecard should evaluate both.
Ease of Doing Business Criteria - Vendors who are difficult to work with cost you time and money, and frustrate your staff. You should evaluate your vendors on how efficient they make it for you to work with them, including their processes and systems.
Compliance Criteria - Many organizations require vendors to meet certain compliance requirements. Some are internal (i.e. offering 'green' products), while others are external (i.e. requirements from government and private funding organizations). Be sure to include these in your vendor scorecard and require that your vendors track and report on their compliance with these requirements.
Business Advice Criteria - Your most important vendors should bring new ideas to the table on a regular basis. They know what's going on in their industry, and they should know what's going on with your business. The best vendors will look for ways to help you leverage changes in their industry to improve the way you do business. Your scorecard should include these criteria too, with a focus on process (i.e. they meet with you quarterly to discuss new ideas) rather than quantity (i.e. they called you to say hi six times.)
Using a vendor scorecard can really help you align expectations and generate more value from your vendors. To get the most from your scorecard keep these three things in mind:
Keep it simple. No more than one or two measures per criterion.
Focus on your key vendors. There are probably 15-25 that really matter, so focus on getting those relationships right.
Develop a consistent process. Incorporating the scorecard into a regular review process enables you to track performance over time and make better, data-driven decisions.
Does your organization use a vendor scorecard? If so, I'd love to hear more about it.
Tom Rogers is CEO of Vendor Centric. You can reach Tom at firstname.lastname@example.org. You can also follow Tom on Twitter @TRogersCPA.