In any successful organization, measurement and evaluation are at the heart of growth. How are things going — really? That’s the core of vendor performance management as well. How well are your vendors serving your needs? Are your suppliers delivering the top-tier ROI you expect? It all boils down to this: are you getting what you’ve asked for, and what you deserve? 

Vendor performance management, when done well, transforms your supplier relationships. Let’s explore why supplier performance evaluation matters. As well as what criteria to include and how to conduct the process with excellence, from start to finish.

The purpose behind vendor performance management

First, it will help to understand why the evaluation process is important. Then, define what you’re aiming to achieve.

Far too often, the importance of vendor evaluation is overlooked. According to Helen Huntley, vice president of research at Gartner Inc., 54% of businesses will renew a contract with their current supplier without requesting bids from other vendors. 


As Joanne Spencer, Gartner Senior Director Analyst, explains:  

“Relationships with strategic vendors are increasingly key to business performance. When managed badly, large strategic vendors can become complacent, slow moving and intractable.”

It makes no difference what industry you’re in. From small nonprofits to large international corporations, vendors play a key role in success. Thriving organizations treat them accordingly — as key contributors who share a stake in growth.

The benefits of vendor performance evaluations

The purpose of vendor performance management mirrors the purpose of internal performance reviews. As employees, we’re most likely to improve when we identify our shortcomings. Likewise, knowing where we thrive and which skills are most valued by our business can motivate us to new heights. In the same way, vendor evaluation can lay the groundwork for a stronger partnership. Alternatively, it can serve as a sign that it’s time to reconsider the relationship and look for a new supplier.

Vendor performance management is also a key part of smart financial management. Your organization should regularly review and confirm your vendors are meeting your needs. Verifying the vendor relationship remains a wise investment is all a part of due diligence.

Finally, vendor performance management is a critical aspect of strategic sourcing. Your organization has invested precious time and resources into choosing the ideal vendor. Vendor reviews close the loop, verifying that you’re getting what you need and want out of the investment.

Establish KPIs

So, now your team is on the same page about why vendor evaluation is important and the role it plays in a thriving organization. The first step of effective vendor performance reviews is establishing key performance indicators (KPIs).

Your organization’s unique processes and needs will dictate what criteria you apply, explains Carolyn Brown in Inc. For example, she says, 

“For a business owner who is looking for a shipping company, the biggest concerns might revolve around what is that supplier’s on time delivery track record, how many trucks they own, how many accidents have their drivers reported and what certifications do they hold.”

Let’s use a financial services organization to illustrate. When they evaluate third-party software it’s a component of their financial wellness program. Their criteria generally includes data security, uptime, effectiveness in feature delivery and more.

No matter what type of vendor you’re evaluating, there are a few key qualities that you should look for:

  •     Value for your investment (ROI)
  •     Quality
  •     Delivery
  •     Service
  •     Commitment to growth and feedback
  •     Partnership mindset
  •     Complaint history
  •     Financial and operational stability

Augment this list with further KPIs specific to your needs and the vendor’s services. 

vendor evaluation score

Quantify performance: Establish your supplier scorecard

It’s tempting to give a vendor the boot because their shipment was late last month — but one recent mistake shouldn’t cancel out 11 straight months of right-on-time delivery. Conversely, a rockstar customer service team can’t make up for frequent downtime in a software service your clients rely on. This is why a supplier scorecard is important. To establish equity and ensure a diplomatic, fair evaluation.

Your scorecard can take many forms. Again, Carolyn Brown explains in her Inc. article, 

“You can craft a survey where you ask your own employees to answer questions and to rate suppliers and vendors. Review how many corrective actions you had to issue a supplier or vendor, how many products you had to scrap or return because the supplier or vendor failed to meet specifications, or how many customer complaints you received due to a bad part or service from a vendor.”

Select your vendor performance management system

Just as important as the metrics themselves are the method in which you’re gathering them. Workplace inefficiency comes with a hefty price tag, so resist the urge to settle into the dangerous “this is the way we’ve always done it” trap. The way in which you conduct due diligence can make or break the performance review.

You’ll need a system that is secure, streamlined and organized. Evaluation data can be sensitive and needs to be stored safely. The system you use should be simple and allow for collaboration, paving the way for accurate and timely responses from your performance evaluation team.

You’ll want to choose a method that allows you to create a side-by-side historical supplier scorecard comparison too. If a company received a 10 in quality last year, but just a five in your latest review, this change in score should trigger a crucial conversation. Similarly, if a supplier was on thin ice during their last evaluation, but they have taken steps to correct and improve their service, your organization can maintain the relationship with confidence.

If you’re still using hard-copy binders and forms, forwarding version after version of an Excel spreadsheet or chasing down team members for their responses, consider a secure, innovative cloud-based solution.

Concluding the vendor performance evaluation process: Act on the results

When your evaluations are complete, it’s time to make a game plan for your next steps. So, based on the vendor scoring, how do you decide which vendor relationships to maintain and which to change?

If the data indicates that there is significant room for improvement, it’s time to decide. Consider sending out a request for information (RFI) to your current vendor as well as their competitors. This is a good way to gather preliminary information, while also giving your existing supplier the opportunity to address your concerns. After evaluating the results, it may be time to end the contract and select a new vendor that better fits your needs.

If the vendor review shows that things are going well, report the good news. Thank your vendor for serving you with excellence. Invite them to join you in thinking strategically about how you can take things to new heights. And carry on with confidence.