How to craft KPIs that boost Service Provider Performance

Your guide to setting service contract KPIs that achieve corporate objectives

“I’m not sure if my service contractor is really doing what they say they’re doing.”

“How do I prove the success of my service contract?”

“What options do I have to enhance my service provider’s performance?”

When these and similar statements are made, it is likely that your contract does not incorporate appropriate and effective Key Performance Indicators (KPIs) to encourage a high standard of performance.

Service contracts typically contain minimum performance standards that reflect operational requirements. This means they often omit measures that reflect the underlying behaviour you’re seeking from your service provider.

KPIs are a key gauge of a provider’s performance and a key driver of provider behaviour. Ideally, KPIs align with strategic corporate objectives and are developed from the top down.  This is quite different to minimum performance standards which are typically developed from the bottom up and tend to be more operational in nature.

This article provides information for owners of service departments, contract managers and procurement professionals who are responsible for the development and management of service contracts.

It should be noted that KPIs are not by themselves the panacea for good contract management but form part of a contract managers’ tool kit embedded in the contract. Well-formed KPIs can play a key role in performance management frameworks when combined with effective risk and reward mechanisms, pricing models, service delivery models and scope of services.

The importance of KPIs

KPIs in service contracts measure the provider’s performance against specific behavioural criteria. As such, KPIs are not minimum performance standards or detailed service levels. Instead they exist alongside these detailed descriptors to support the achievement of contract objectives.

For example, a KPI contained in a print services contract may be “to assist the client migrate its customers to electronic forms of communication”. This provider would achieve this by identifying ways to encourage consumer adoption of alternative methods of communication, monitoring conversion rates and holding the consumer to the new electronic channel.

Correctly selected KPIs not only align with strategic corporate objectives but also lead to the identification of more systemic opportunities in the contract or the relationship. In this example, the ability to modify service delivery (adoption of electronic forms of communication) during the term of the contract, reflects the fact that service contracts exist in dynamic markets where technology is often bringing new ways to improve services.

To further incentivise the service provider, rewards and penalties are often attached to KPIs, where poor performance results in a reduction in fee, contract length or the availability of work; whereas good performance may result in fee increases, contract extensions or the awarding of additional services.

It should be remembered that each party enters a contract with inherently conflicting objectives. Providers will always seek to build profits while clients are generally trying to manage down costs and ensure quality service delivery. Good KPIs will align the provider’s objectives with the client’s, making it more lucrative to work with the client’s corporate drivers than to concentrate solely on managing revenue up or the cost of delivering services down. Good KPIs may also seek to reduce rework, complaints (either internal or external) and risk, therefore benefiting both parties.

As an example, in an environment where safety is paramount, KPIs can be used to drive the appropriate behaviours – “be relentless in providing the safest working environment”. A provider may be otherwise ‘cut corners’ to decrease their costs and as such increase their profit. Good KPIs would penalise poor safety performance (or reward good performance) by more than the provider would be otherwise be rewarded for cutting corners. As such, the provider will act to ensure and improve safety, which in turn helps the client achieve its desired result of a safe working environment.

There is an old saying in contract management that ‘what gets measured gets done’. KPIs provide an avenue to encourage providers to display certain behaviours or focus on particular aspects of services. For example, in IT service contracts, platform availability is extremely important. KPIs reflecting platform availability will align the behaviour of the provider with the requirement of the client.

What are KPIs

KPIs can be tangible (for example, reduction in costs) or intangible (for example, provision of innovative services). Regardless, several key elements are required for a KPI to provide an incentive for a services contract. These elements are:

A measure

The measure provides the focal point for service delivery. The measure needs to encourage the right behaviour and be in the control of the provider. For example,

for a cleaning contractor to provide a high level of service, a good measure might be the number of complaints of unemptied bins each morning. Whereas a bad measure might be the hours the cleaner spends on site, which does not necessarily correspond to high levels of service. In short, the measure is the scale along which the provider’s performance will be assessed.

A source of data

The source of the data is the vehicle used by the client and the provider to track the KPI. In the example of the cleaning contract above, the source of data would be the number of complaints registered with the property help desk regarding unemptied bins. When possible the data source should be an existing repository and gathered automatically.

An agreed frequency for capturing data

The agreed frequency for capturing data outlines the period of time over which the KPI is assessed. In the case of the cleaning contract, this might be the number of unemptied bin complaints each month.

A rating system

The rating system outlines how the client and provider will judge the performance. In the case of the cleaning contract, the rating system may be ‘no more than three complaints per month’. Other examples of rating systems often used in service contracts include pass/fail criteria and assigning a ranking from one to five on the performance of services.

Getting the relationship between these four elements right is essential to ensuring that the KPI is meaningful and encourages the required behaviour of the provider.

KPIs should be SMART:

  • Specific: clear and unambiguous
  • Measurable: with clear criteria for determining success
  • Attainable: providing the ability to succeed
  • Results oriented: worthwhile and leading to an outcome
  • Time based: focused and with a deadline for performance.

Aligning KPIs with performance management frameworks

KPIs are one part of the performance management framework of a contract. KPIs provide an ability to align service delivery with your contract strategy and critical success factors (CSF). It is therefore important that your current state, future objectives and CSFs are well defined, prior to developing your KPIs.

A simple process flow for this is demonstrated below:

How to select KPIs

The CSFs are a good starting point for selecting KPIs. Each KPI should be considered an indicator that points to the achievement of the CSF. Once a range of indicators has been identified it can then be reduced down to the smallest number of KPIs that will allow for the achievement of the contract objectives to be assessed. Focus should be given to those indicators that best fit the definition of a KPI above.

KPIs should be selected with input from all stakeholders, including contract managers, end users, procurement professionals and other relevant shared service departments (such as corporate finance or HR). Obtaining stakeholder input means balancing the needs and desires from all stakeholders without compromising key operational outcomes.

KPIs are agreed between the two parties to the contract and re-evaluated as circumstances change. Although the client should develop KPIs prior engaging with the market, clients should be prepared to discuss the specifics of the KPIs with the provider during contract negotiations and beyond. KPIs that do not have the buy-in of both parties can be as detrimental to a contract relationship as poorly designed KPIs or those that don’t reflect the current objectives of the contract.

KPIs and contract performance

KPIs for service contracts point to the overall performance of the contract, they do not cover every single aspect of the contract; they provide an indication of performance in key areas. KPIs should be nominated by the client, agreed with the provider and retain the flexibility to be altered to reflect changing needs of the relationship with the provider and objectives of the organisation.

To be meaningful, KPIs need to encourage providers to work towards the client’s corporate objectives. This is achieved through incorporation into the contract’s performance management framework.

When combined with effective contract management and supplier relationships, meaningful KPIs provide guidance to the client and provider on the effectiveness of service delivery as well as the contract’s success in meeting the strategic corporate objectives of both parties.