Overview of Supplier Performance Management, Business Case, and Benefits Management Processes
Introduction
This section provides an overview of key supporting project management processes to cost, scope, and time control, for example, supplier performance management, which was identified by the PCIM methodology research as one of the top five factors that can inhibit effective cost and time control. The chapter also provides an overview of the business case process since the performance requirements for projects from an organizational perspective including cost, time, and technical requirement/scope are set out in the business case. An overview of benefits management is also provided as this is what project controls seeks to protect through effective control. A project that has not been controlled effectively will have its benefits eroded, therefore, project control interacts with the benefit management process.
Overview of Supplier Performance Management
Supplier performance in organizations is part of supply chain management, which is the set of processes and steps that an organization uses to acquire the various resources needed to create its products or projects (e.g., IT systems, buildings, roads, dams, etc.) and services (project management advice, architectural design services, statutory audit, marketing consultancy, etc.). Supplier performance is the flow of the entire set of activities involving the administration and flow of resources required to produce and deliver an organization’s product or project, which is, therefore, important. Consequently, contractors, suppliers, and subcontractors are important for effective project control in organizations involved in projects. This is because many projects and project services are delivered with the help of third parties either delivering an aspect of the project or supplying important materials, technology kit, software system, specialist consultancy service, and so on required for the project. The generic term in business for these categories of third parties is suppliers. These suppliers could be contractors, their subcontractors, professional service advisers, and suppliers of equipment, materials, plant, and so on required for a project. Additionally, the research underpinning the PCIM project control methodology identified nonperformance of subcontractors and suppliers as one of the top five inhibitors to project cost and time control. Therefore, even though this book is not a procurement management or supply management book, for completeness, it is considered important to briefly discuss supplier performance management.
What Is Supplier Performance Management?
Supplier performance management involves the measurement, analysis, and management of the performance of suppliers in an organization. Supplier performance management allows an organization to realize the best value from their suppliers by minimizing costs, managing risks, and driving continuous improvement. Supplier performance management consists of the following activities: developing performance indicators, evaluation of suppliers, data collection, performance analysis, and performance review and feedback.
Developing Performance Indicators
As part of supplier performance, it is important to identify the performance indicators (PIs) and key performance indicators (KPIs) that suppliers need to be evaluated against. In selecting these KPIs, it is important to align the PIs and KPIs with organizational goals and objectives. This is because a lack of alignment of the supplier performance measures with organizational objectives can lead to an incongruence in performance measures of the contractor, subcontractor, or that of the supplier, which may have an impact on cost, quality, and delivery. Additionally, KPIs need to be active; it is not sufficient to just rely on lagging indicators as they only measure historic performance. Active KPIs comprise of leading indicators that can predict outcomes process as well as directional indicators that can be used to measure trends in the delivery of a service so that remedial action can be taken proactively. Table 11.1 shows an example of a KPI table for the suppliers delivering projects for a company.
Evaluation Approach
One of the most important aspects of supplier performance measurement is the design and implementation of an evaluation approach suitable for the organization. It is useful to utilize both quantitative and qualitative evaluation for supplier evaluation. Quantitative evaluation involves computing the actual performance of suppliers in relation to agreed quantitative metrics to measure the performance of the supplier in relation to objectives that are important to the delivery of the service such as delivery quality, responsiveness, financial health, value for money, cost reduction, innovation collaboration, ESG (environment, social, and governance), and so on. The most effective supplier performance measurement approaches are those that do not only rely on quantitative performance data but also utilize qualitative information to provide depth, richness, and context to the quantitative supplier performance data. The qualitative supplier performance data will cover metrics like engagement, culture and value alignment, opinions on satisfaction, self-reflection, improvement ideas, bottlenecks, and so on.
Table 11.1 Example of a supplier performance indicator
KPI | Rationale | Measure | Weight of ranking |
% Bids of opportunity | Measurement of the suppliers’ interest in bidding for projects | =(Number of bids made within a period)/(Number of opportunities within the period) × 100 | 10% |
% Share of projects | Measurement of the suppliers’ contribution to supporting the company in delivering their planned projects | =[(Number of projects to contract within a period)/(Number of projects to contract within the period] × 100 | 15% |
Satisfaction: Service | Measurement of the level of satisfaction of service that is being provided by the suppliers | (Summation of all scores within a period)/(Number of scores within the period) | 30% |
Quality of the project delivered | Measurement of the level of satisfaction in relation to the project meeting the quality specified | (Summation of all scores within a period)/(Number of scores within the period) | 30% |
Satisfaction: Defects | Measurement of the level of satisfaction of impact of defects at handover | (Summation of all scores within a period)/(Number of scores within the period) | 15% |
Data and information about performance should be collected regularly at periodic intervals from suppliers. A successful supplier performance management process will rely on good quality data and information. Once the evaluation approach has been designed, the available information collection method required to gather data from suppliers should be assessed and reviewed. If there is no information collection method available or if not suitable, effort should be made to develop an appropriate supplier performance data collection process and associated instruments such as supplier questionnaire and satisfaction survey. In designing the supplier data collection process and system, it is important to consider tools like questionnaires (web-based or paper), focus groups, system reports, face-to-face or virtual meetings, site visits, and so on. It is always useful to develop supplier performance KPI handbook that will explain the KPIs and how they will be collated and collected to make it clear to suppliers as well as staff operating the process.
Performance Data Analysis
Once there is a mechanism in place to collect performance data from suppliers periodically, the next step is to review and analyze the supplier performance data collected. To analyze the data efficiently, effort should be geared at collecting data that can be analyzed to enable a comparison of suppliers’ performance. One of the ways of doing this is to collect quantitative data and use performance score cards across predetermined themes. The analysis should be objective and include the same category of information for similar suppliers or supplies delivering the same service. It is also important to plan the collection of data from suppliers to cover the same period to enable consistency of analysis. However, this might not be possible as not all suppliers might be delivering to the organization at the same period and so performance data might be collected at different periods and economic contexts. Therefore, it is important that the review and analysis of data cover the key factors that might make the analysis and comparison of contractors not equivalent. The use of software tools for the analysis should help deal with this challenge and aid with normalizing performance data across suppliers over different periods.
Monitoring supplier performance proactively can ensure that exceptions to policies are tracked and personnel and resources are assigned to address the problem quickly. Alerts and notifications can provide up-to-the-minute information to company personnel, letting them know of changes in supplier performance. Having a computer system that can take the analyzed data and present it in a report or visual format will improve accessibility for relevant stakeholders and enable quick and easy review of the information.
Reporting
The supplier performance process is not complete without reporting. The reporting aspect of this process includes reporting of performance internally within the organization as well as reporting and engagement with the suppliers themselves. For the process to be efficient and consistent, it is advisable to design a report that can present the information from suppliers in a way that provides insight in a quantitative way as well as in a qualitative context. The report should be assured for accuracy and quality internally within the organization. The supplier performance report will provide an insight on suppliers’ performance against the agreed PIs and KPIs. Therefore, the performance baseline against which improvements can be measured will need to be defined. The report should be used to facilitate supplier relationship management discussions with the relevant suppliers to enable continuous improvement and addressing of emerging problems. Additionally, the tool that will be used to measure supplier performance should be accompanied by the performance indicator schedule and the scoring methodology so that it can be understood by the supplier and the client staff using the tool. The KPIs should be based on benchmarks from industrywide best practices. Finally, best practice requires that performance data should be collected from more than one perspective to provide a more rounded insight into the performance of the suppliers. Therefore, techniques such as a 360-degree client–supplier satisfaction feedback survey are now collected periodically, analyzed, and reported.
Review and Feedback
As part of the supplier performance management of an organization, it is important to seek active feedback on the operation of the supplier management process from the participants in the process including the suppliers being monitored. The feedback on the supplier performance measurement process, its effectiveness in relation to the provision of insights on the performance of suppliers, and enhancement of positive behaviors among suppliers should be used to improve the supplier performance management process and the experience of all stakeholders involved in it continually (see Table 11.2 for good practices in supplier performance management).
Table 11.2 Good practices in the supplier performance management process from a real-life organization
Background
The author has had the experience of reviewing the supplier performance management process of organizations. A summary of good practices found in some of the organizations the author had consulted with is provided below.
Strategy and vision
• First, there is a need to have a vision document and policy in place to provide direction, consistency, and clear message in relation to supplier performance management within the organization. This strategy was in place in organizations with leading supplier performance management practice and had been endorsed by senior management.
• In support of the supplier performance policy and vision document, a supplier performance management plan had also been developed to guide the implementation of the supplier performance requirements. The plan was developed in detail and provided the necessary direction concerning the implementation of supplier performance management in the organization with roles, responsibilities, accountabilities, timeframe, and effective use of resources.
• A detailed performance indicators schedule was also in place, which was used to monitor the performance of contractors and suppliers. The process for evaluating the performance of the suppliers was documented and explained in detail with the suppliers aware of the process and scoring methodology.
• Supplier performance management was also being carried out within the structure of formal policy, procedure, and vision, which enabled consistency of the supplier performance management process.
Governance
• The team delivering the supplier performance management process was accountable to senior management through a formal organizational structure.
• Senior management had a process for gaining assurance on the implementation of supplier performance process through periodic progress updates and reporting. There was a formal schedule of regular meetings, updates, and reporting regime.
Management information and risk management
• Some organizations had developed a contractor and supplier risk dashboard to consolidate management information. The financial dashboard for key suppliers included share price tracking for the last year as well as for recent previous years (for example, the last three years). The risk dashboard also contained the risk profile of suppliers and contractors, which tracks a supplier or contractor’s share shorting over time as well as the H-score and risk indicator trend over time. The H-score is used to predict a company’s likelihood of bankruptcy by analyzing a company’s financial health using published financial results such as profitability, liquidity, working capital management, debt, and equity.
• The financial dashboard was being monitored by the procurement department with senior management also having access to the supplier risk dashboard.
• There was a supplier management risk framework, which used the dashboard system to trigger alerts if the supplier financial metrics dropped below the required level.
• Regular customer service survey and information on contractors’ performance against the KPIs were obtained and the performance baseline against which improvements can be measured was defined.
• Financial information on supplier organizations from several sources was collated and the information used to track the financial metrics of the supplier organization, which was visible to the senior leadership team and was discussed during management meetings.
• The supplier organizations’ financial metrics were also monitored by the commercial management information team to be aware when the financial metrics fall below a certain threshold so that risk management action can be taken.
• Supplier failure contingency plans were developed for key suppliers that were deemed to be at the risk of encountering financial challenge or collapse.
Overview of the Business Case Process for Projects
This book will be incomplete without providing an overview of the business case process because it is the business case that sets out the justification for the project and what success in relation to the project looks like from a financial, economic, and operational perspective in an organizational view, in essence cost, time, scope, and technical requirement/specification from a project dimension. The project business case is required to enable projects to deliver their intended output and benefits as it facilitates the proper scoping, planning, and cost justification of the project from the outset. The process of developing the business case involves determining the strategic context and carrying out a strategic assessment, making a case for the project and exploring the preferred way forward, that is, the business justification for the project. It also includes determination of the value for money, ascertaining affordability, and funding requirements.
The business case for a project should describe the reasons for the project, the scope of the change from the project, the justification for undertaking the project, the estimated cost of the project, the risks associated with the project, and the expected business benefits and savings. A well-developed business case will enable an organization to understand, influence, and shape the project’s success early in the project’s life cycle (see Table 11.3 for business case good practices). The business case also provides the basis for the project’s postinvestment review plan to verify that the assessment of whether the outcome was successful. A project business case usually contains the following:
• Reason for the project: This should explain the reasons why the project is required in the business options. The various options that have been considered to deliver the required need of the organization should be described with the chosen option indicated, as well as the justifications for its selection.
• Benefits expected: Details of the benefits that would be derived from implementing the project should be included. The benefits should be defined in quantifiable terms. Benefits may also be assessed in negative terms such as what will happen if the project is not implemented. See the section titled “Overview of the Benefits Management for Projects” later in this chapter for more details.
• Risks: The key risks facing the project should also be assessed as part of the business case; this is important so that projects outside the risk appetite of the business are not taken forward.
• Cost estimate: The estimated cost for delivering the project should be included in the business case. The approach for estimating the cost of the project should be robust and free from optimism bias.
• Timescales: The time for delivery for the project should also be indicated, and a summary of the current project plan and the time estimate should be included.
Table 11.3 Business case good practices
1. The project business case should be prepared following the approval by senior management of the mandate and project brief.
2. The business case needs to be backed up with evidence and the assumptions that the business case is based on need to be transparent and available for review.
3. Consideration also needs to be given to the constituents of the investment committee who will make the decision to proceed to ensure that the right people are included.
4. Importance needs to be placed on the committee having the right information to make the business case decision and the assurance process for the information.
5. The ownership of the business case will be the executive requesting the project such as the business unit head. The executive will also be responsible for ensuring that the project objectives, cost, and benefits are correctly aligned with the business strategy.
6. The executive should facilitate the development of the business case by delegating to an appropriate person such as a project manager but the data and information for its development will be provided by the business and the responsibility for the development of an accurate and effective business case sits with the executive.
7. Information from the project brief should be used to develop the business case.
8. Formal approval of the business case is required from the executive to ensure that senior management is committed to the project.
9. During each stage of the project, the business case should be reviewed to confirm that the project remains on track and to check that the business case remains valid within the business context.
10. At project closure, the business case should be used to confirm that the project has delivered the required outcome and that the benefits from the project can be realized as planned.
11. The business case should not just be used as an approval document; it should be a working document and the basis for strategic management, monitoring, and evaluation during and after project delivery (including benefit realization) of the project.
• Sensitivity analysis: Sensitivity analysis also needs to be performed during the evaluation of the business case to test the boundaries of the project by varying the values of key factors and measuring the outcome, highlighting those that may have a high impact on the project outturn when they change (see Chapter 10 for more on sensitivity analysis).
• Investment appraisal: The investment appraisal of the project compared to the investment approval criteria of the company with the do-nothing option as a baseline should also be undertaken and included in the business case. There is a standard financial/economic model that is used in evaluating business cases and this covers the five-case model by considering the following five dimensions:
Strategic
Economic
Commercial
Financial
Management
Overview of the Benefits Management for Projects
Projects are driven by the need to deliver benefits on their own or as part of a program. A benefit is the measurable improvement resulting from an outcome of a project, which contributes toward one or more organizational objectives. The projects and associated program, when completed, will deliver outputs, which will create new capability(ies) for an organization. These capabilities are then transitioned into outcomes, which enable the realization of benefits. These benefits then contribute to the actualization of an organization’s corporate objectives. The management of benefits is usually carried out as a four-step cycle of benefits identification, benefits realization planning, benefits delivery (tracking and realization), and benefits review. These are discussed below.
Benefits Identification
The benefit management process commences during the business case stage of the project (see the section titled “Overview of the Business Case Process for Projects” earlier in this chapter” for more details) by identifying the likely benefits that will result from the delivery of the project. These benefits should relate back to an organization’s corporate objective. Identification of the benefits should be carried out by engaging the key stakeholders to generate the initial list of benefits. Benefits could then be categorized as:
• Value (economic benefits, effectiveness benefits, efficiency benefits)
• Financial impact (cashable, noncashable)
• Corporate objectives they support
• Stakeholder management
• Timeline
• Level of risk
As part of the benefits identification process, how the project will lead to a benefit from the project output and capabilities it provides to an organization also needs to be mapped. The benefits map will show the relationship between the project output, capabilities, outcomes, benefits, and the corporate objectives. Additionally, as part of the benefit identification process, benefit profiles should be developed as a minimum for each of the key benefits identified. The benefit profile describes a single benefit with its attributes and interdependencies. The benefit profile for each benefit will also include the description of the benefit and an operational owner.
Benefits Realization Planning
Once the benefits have been identified, the organization will need to plan for the delivery of these benefits by allocating them to an owner who will be responsible for their delivery. The area of the business affected by the benefit should be responsible for its delivery. A benefit realization plan should then be developed, which will provide a complete view of all the benefits, their dependencies, and the forecast timescale for realization. The benefit realization plan should be developed during the investment phase of the project as part of the investment project plan and revised as more information emerges. The benefit realization plan will be used to track the realization of benefits in relation to the project once the project is completed and in the operational phase such as the development of a new IT system in an organization, with speed of operation and efficiencies expected as a key benefits of the completed IT system project.
Benefits Delivery and Realization
This is when the capabilities delivered by the projects are converted into outcomes and deliver new or improved operations through speed, efficiencies, accuracy, improved quality, and so on. During benefit realization, it is important to measure the benefits. Therefore the metrics that will be used to track progress toward realizing the benefit will need to be defined. The benefits realization plan must be monitored regularly to track the progress of each of the key milestones identified for each benefit profile.
Benefit Evaluation
This should take place at a prescribed time or can be event-driven such as stage gates or when there is an important project event or milestone. It is carried out to ensure that benefits realization is still on track and if not, immediate changes should be made to the benefits realization plan. Benefit evaluation should be carried out for benefits still to be realized and those that have been realized. For realized benefits, it will generate information regarding what has been achieved. The objectives of benefits reviews are to update the benefit realization plan to ascertain that the identifield benefits are still achievable; inform relevant stakeholders of the progress made toward realizing the benefits; assess the performance of the new or improved operations against their original baseline performance levels; and assess the level of benefit achieved against the benefit realization plan.