Within commercial procurements and contracts, Key Performance Indicators (KPIs) drive value and objectively measure performance. That makes them highly beneficial for both customers and suppliers, and an essential element of every commercial contract. So, why do so many organisations have a love-hate relationship with KPIs? And why do so many struggle to realise the benefits of KPIs during procurement and contract lifecycles?
Poorly developed and managed KPIs can open a pandora’s box of commercial problems, including over-complicated contracts, worsening supplier relationships and increased costs. In recent years, several high-profile cases, such as HS2 and the procurement of additional ferry services as part of no-deal Brexit planning have exemplified these issues. Yet by embedding five core principles into the development of KPIs, you can make them meaningful and achievable, regardless of sector or size of contract.
1. Put customers at the heart of KPI development
It’s common practice to use anecdotal or subjective experience as the foundation for KPIs. But this leads to metrics that don’t measure the things that really matter. Putting customers at the centre of KPI development, allowing their priorities and concerns to influence the KPIs from the outset, links customer priorities to service targets. This ensures everyone is working to meet customer needs, dramatically increasing the value delivered.
When we supported a major defence organisation with a billion-pound technology and services procurement, we created a KPI working group of service users from across the business. Drawing on the substantial customer intelligence this created, we undertook a needs analysis that identified:
Using these factors and the core principles of criticality, achievability and affordability, we developed a long list of potential KPIs before refining it into a short list over time. This was an efficient way to identify the KPIs that drove value to the end users and the wider business.
2. Model KPIs
Even in the simplest procurements, KPIs are often a subject of contention during tender negotiations. For customers to secure buy-in from suppliers, it’s important for KPIs to be affordable, proportionate to the complexity and priority of the service, and aligned to strategic aims.
KPI modelling lets you develop KPIs that fully consider these factors before you finalise them in a draft contract. For example, we recently supported a Government client by creating a working KPI model that identified the impact of any changes made to a complex methodology. This allowed our client to identify the commercial risks and provided assurance that the KPIs had been set at the right level in preparation for negotiations.
To support our clients with KPI modelling, we use historical performance data to determine how likely suppliers are likely to meet or fail KPIs and therefore clarify the level of contractual risk, and potential liabilities. We then develop a model that shows the implications of any changes being proposed by suppliers, the impact this may have on contract price, and identify any gaps or overlaps between KPIs. This creates clearer KPI differentiation and avoids driving unnecessary cost into the contract.
3. Design KPIs to be flexible
KPIs must be able to adapt to changing circumstances and priorities over time or they risk becoming obsolete. COVID-19 showed how external factors can force a rapid change in performance metrics, but changes in government policy, economic circumstance and competitor landscape are all common issues that require flexible KPIs.
You can achieve flexibility by planning dedicated reviews to assess the efficacy of KPIs, giving you the opportunity to make adjustments where necessary. This can also be an opportunity for a supplier to share critical performance information that can help you refocus your KPIs to cover new areas of importance.
4. Make KPIs easy to manage
Managing and monitoring KPIs requires the contracting organisation to set aside resources and set up governance structures. To avoid wasting time and money, and maintain supplier relationships, KPIs must be as simple as possible to measure, report and agree on.
To achieve this, agree which objective data sources you’ll use to evidence KPIs from the outset. Net promoter scores, reports from industry bodies and third-party indices are good examples. Avoid subjective sources like the programme manager’s opinion. You’ll also need to set out how to calculate results from this data within the description of the KPI as you can often reach several conclusions using the same data, like the Consumer Price Index and Retail Price Index. Agreeing such objective measurement up front doesn’t just make KPIs easier to manage, it can also let the supplier understand their delivery risk, so they can reduce their risk premiums in the contract price.
When it comes to reporting on KPIs, it’s vital to find a format that’s easy to interpret and understand. KPI dashboards and balanced scorecards that summarise information make it easy for everyone to understand the KPI purpose, its basic calculation methodology, the level of performance and the impact this has on the overall service price. Make what the KPIs are saying about the quality of the service focus of reporting.
5. Clearly articulate KPIs
SMART (Specific, Measurable, Achievable, Realistic and Timebound) KPIs are well understood and offer certainty to customers and suppliers. What’s less well known is the related concept of MECE – Mutually Exclusive, Collectively Exhaustive. MECE KPIs remove any overlap, duplication and ‘double dipping’ (mutually exclusive), and measure different elements of the supplier's performance (collectively exhaustive). Using the concepts of SMART and MECE, you can ensure you have the right number of KPIs on any given contract.
To understand whether your KPIs are SMART and MECE, and to establish strong, clear relationship to strategic targets, map them onto a target operating model. This can reveal inconsistencies or issues not immediately apparent, for example where there’s uneven coverage of KPIs across the breadth of service. If you don’t have a target operating model, create one before finalising KPIs.
It’s also important to remember that individual KPIs will be subject to a range of conditions, such as relief in certain circumstances, remedies in the event of repeat failure, price adjustments and prioritisation mechanisms. So, it’s vital to clearly and explicitly outline these conditions alongside the KPIs’ SMART objective in contracts. In so doing, you’ll show how the supplier is able to achieve each KPI, which will limit the amount of risk pricing added to the contract. This will also make negotiations and contract management simpler as you’ll more fairly distribute the balance of risk and everyone will understand it.
Use your KPIs to drive value and build relationships
The key to successful KPIs lies in the approach to their development and implementation, and bringing the right people on the journey. This involves striking a balance between simplifying KPIs and overengineering them. More KPIs with more complexity doesn’t equate to greater control but often leads to higher prices from suppliers. Incorporating a customer-centric approach, carefully modelling KPIs, ensuring they’re flexible and easy to manage, and articulating them clearly will drive real value and provide the foundations of good strategic relationships.