Key Performance Indicators - or KPIs - are held up as critical elements for driving contract success. They bring clarity and discipline to complex situations, allowing both supplier and customer to monitor progress and performance.
But do they? Are KPIs of practical use, or are they in fact a distraction, often contributing to failure?
Pro's and Con's
KPIs are essentially a measurement system and, as with any measurement system, they impact behavior. Their intent is to drive a desired outcome and they can be very effective in doing that. But there are problems that frequently arise, especially as the complexity of the contract grows:
1) what are the real priorities and is it possible to build consensus across the major stakeholders?
2) what is a manageable number of KPIs without them causing confusion?
3) how do we ensure that the things that are left out are not ignored?
4) what process will we follow to update or amend KPIs over time, to reflect changing needs or circumstances?
These problems often become evident in poorly performing contracts where either there are just too many KPIs, or the selected KPIs are being met but are not delivering user value, or the original KPIs are outdated and have not been amended.
Are there alternatives?
I am seeing growing interest in finding an alternative approach, especially when the contract is long-term and / or where there are significant areas of potential change and uncertainty. Two methods that can work are relational contracts and agile contracts.
The relational contract focuses on establishing a robust governance framework where there is continuous communication and evaluation of performance against a clearly defined business goal or objective. In this context, the integrated team may be more focused on qualitative indicators of performance and they manage through more dynamic data exchange. This may involve the use of technology to ensure consistent data flows and early warning of problems or issues, leading to more proactive planning and mitigation. While KPIs may still feature in some way, they are not essential and certainly they are regularly revisited and adapted.
Agile contracts tend to be driven by milestones rather than KPIs. By breaking the contract into short-term components, their continuation depends on reaching specific goals or deliverables. Payment is also tied to those milestones.
In conclusion, KPIs do have a continued role as one method of performance management, but they are not always the best approach. This is an area that would probably benefit from greater research and guidance on leading practices. Do let me know if you have encountered any useful material on this overall topic of the options for managing contract performance.