There are two reasons why performance measures don’t guarantee performance.
In this article, I offer a solution to developing performance measures that actually drive performance. Click here to read the first and second articles discussing the two reasons. In this article, I offer a solution. What follows is an excerpt from The Contract Professional’s Playbook.
Solution: Establish a Baseline
Baseline values have to tie to current capabilities (industry, supplier, and/or customer) so that both the customer and the supplier will understand the starting point at contract signing. Over time the values are informed by the customer’s business strategy in order to set future goals/improvement targets. If there is no historical data available, a common approach is to negotiate improvement targets but set a baseline using three months of data (after a successful transition and assumption of service) to start from.
For instance, let’s say the parties agree to set a baseline and increase from that point by 10% per year until the 99% on-time delivery desired target is met. If the initial process capability is 87% on-time delivery, then the supplier could invest in automation and process improvements to increase that baseline by 10% per year. Year one is 87%. Year two would become 95.7%, and year three would cap out at the desired 99.0% target. This is a much fairer (and more realistic) method of obtaining the desired outcome than expecting a supplier to make dramatic improvements from day one. In this fashion, the assumption of service stabilizes the process under the supplier’s control and then they begin immediate year-over-year improvements.
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