KPIs or Key Performance Indicators form a vital part of the procurement process, dictating acceptable performance and monitoring it throughout a contract.
While they are already commonly used as part of public sector contracts, the upcoming Procurement Act is set to formalise existing requirements when it commences on 24 February 2025.
Why are contract management KPIs important?
The accurate measurement of contract performance is vital in gaining detailed insights into how well organisations are meeting their obligations, with quantifiable and realistic KPIs being the most effective way to do this. On top of this, the use of contract management KPIs has a host of additional benefits:
Risk management: The use of KPIs serves as an early warning system in case of instances of non-compliance with contract terms, poor performance or unexpected results. They can identify such issues before they become major problems, helping to counter any potential for financial loss, reputational damage, or legal issues.
Building relationships: By assessing contract performance those parties involved will be better positioned to build strong, collaborative relationships. KPIs allow for greater transparency and help facilitate unbiased discussions around any potential conflict, increasing the likelihood of effective resolution.
Realising value: A successfully implemented contract, where everyone meets their KPIs, will not only increase the chances of financial gains but will also lead to strategic benefits such as greater levels of innovation and improved customer satisfaction.
Increased social value: Key performance indicators are increasingly being used as a way of boosting and measuring the levels of social value achieved during the length of a contract. Setting KPIs allows such value to become an integral part of any contract, and to be properly recorded.
Continuous improvement: Regular evaluation of the performance of a contract will allow organisations to pick-up vital insights into their processes and discover ways to make them smoother and more efficient. This will help companies to continually evolve, remain competitive and better meet the needs of customers.
What makes a good KPI?
A good KPI for any contract should be:
Specific and measurable: KPIs should target precise contract objectives, such as cost savings, delivery timelines, or service levels. They must be quantifiable, allowing both parties to measure performance objectively, for example, 95% on-time delivery or 10% reduction in operational costs.
Aligned with business goals: The strategic objectives of an organisation, such as efficiency, innovation, or sustainability, should be reflected in any KPIs. For instance, if sustainability is key, a KPI could measure the use of eco-friendly materials.
Time sensitive: Any KPIs should include a clear timeline for measurement, whether that be monthly, quarterly, or annually. For example, achieve 98% service uptime over the next 12 months.
Achievable and realistic: Targets must be challenging but attainable, ensuring the supplier is motivated to meet them but is not overwhelmed.
Relevant and actionable: KPIs should track metrics within the supplier’s control and directly impact contract performance. Irrelevant KPIs dilute focus and are harder to manage.
Create accountability: It should be clearly defined who is responsible for each target. For instance, if a KPI relates to delivery speed, it should be clear which party in the contract is responsible.
Prioritise and incentivise performance: Key performance indicators can be tied to bonuses and gain-share, or penalties to motivate performance. For example, exceeding a cost-savings target could trigger a bonus, while failing to meet quality standards could incur penalties.
What are the most important KPIs?
When looking at service level agreements (SLAs) for a contingent managed service programme (MSP) or permanent recruitment process outsourcing (RPO) solutions, which KPIs are the most important may vary.
For MSP contracts
Overall fill rate: The fill rate KPI is used to evaluate the ratio of successful hires to the total open vacancies filled. The commercial impact of open vacancies in an organisation is high, so measuring fill rates enables employers to assess different recruitment initiatives and minimise the numbers of open vacancies. This is vital from a client perspective. They need contingent workers as quickly as possible, and a high fill rate indicates we are fulfilling our contract.
Adherence to compliance: This measures an organisation’s adherence to applicable laws and regulations – in this case in terms of hires being properly screened in a robust, efficient and timely manner. Clients need to know their workforce is fully vetted and screened and any risk is minimised.
Hiring manager (HM) experience: This KPI is needed to measure that HMs find the process smooth and are confident the candidates presented are of a high quality. Hiring managers are our customers and their happiness is indicative of a successful recruitment process. The most quantifiable way to measure hiring manager experience is via a scoring system, but qualitative feedback can also be collected.
For RPO contracts
Time to hire: Referring to the number of days – or applicable timeframe – it takes from when a potential hire is approached and offered a position to the time they accept it, this is probably the key indicator of success. Setting an SLA ensures the process is efficient, and we are finding the right candidates quickly.
Candidate experience: As an RPO we are an extension of the client and need to reflect their values, culture and employee value proposition. Even unsuccessful candidates need to come away with a positive impression of the organisation.
Hiring manager experience: As above with an MSP solution, tracking the satisfaction levels of hiring managers is essential to achieve success.
How will the Procurement Act change things?
The Procurement Act 2023 is a pivotal piece of legislation, designed to streamline and standardise procurement. The act represents the first time that KPIs have been legislated for in UK public procurement legislation. It means contracting authorities, for contracts worth more than £5m, will have to publish assessment information with respect to at least three KPIs set out in contract performance notices.
Where more than three KPIs are set, details of all those indicators must be published. The only circumstances where KPIs won’t need to be published is if the contracting authority considers that a supplier's performance cannot be appropriately assessed with reference to them, such as if a contract is for a one-off delivery.
This additional transparency is not the only way the act will change how KPIs work within management contracts:
Simplified procedures: Central to the act is the desire to streamline public procurement by reducing the complexity of procedures. This could allow for more flexibility in designing contracts and KPIs, focusing on outcomes rather than rigid processes.
An emphasis on innovation: The act encourages innovation in public procurement, which may lead to KPIs becoming less focused on traditional cost or delivery metrics and more on innovative outcomes, such as digital transformation or process improvements.
Transparency and accountability: The new act enhances transparency, requiring detailed publication of procurement data. This may require KPIs to be more transparent and easily trackable to ensure both parties can be held accountable for performance.
Social and environmental considerations: The Procurement Act emphasises broader public benefits, including social value, sustainability, and environmental impacts. KPIs may increasingly measure contributions in areas such as carbon reduction or local employment, rather than just financial metrics.
Increased competition: By making it easier for small businesses to participate in public procurement, the act could drive competition. KPIs may need to be tailored to fit the capabilities of a wider variety of suppliers, including smaller businesses.
Risk management: With the act promoting better risk-sharing between contracting authorities and suppliers, KPIs may need to reflect shared responsibility for risks, such as market fluctuations or unforeseen disruptions, leading to more flexible, responsive KPIs.
How tracking KPIs will bring about increased accountability
One important aspect of the increased transparency the Procurement Act will bring is that KPIs will be easier to track, creating higher levels of accountability.
The introduction of the act will mean that at least once every 12 months during the life cycle of a contract – and at the end of that contract – the contracting authority must publish information regarding a suppliers’ performance against any KPIs.
Publishing this information will increase visibility across the whole market, allowing common key performance indicators to be benchmarked across similar organisations.
This raises questions for both contracting authorities and contractors, with the former needing to make sure they have resources in place to fulfil these obligations – particularly given the risk of claims if incorrect or sensitive information were to be published in error.
Contractors, meanwhile, will have an eye on reputation management as this extra transparency could open them up to higher levels of public scrutiny. This may lead to bidders becoming increasingly cautious about whether or not they bid for contracts, especially if they have any concerns about their ability to service them fully.
Added to this, suppliers will be able to see their relative performance against competitors, something which will have the potential to inform business development, innovation or continuous improvement strategies.
This change won't be immediate as many public sector contracts will still go through existing frameworks that will not be subject to the new legislation, but as these changes make their way through the procurement schedule they will change the way organisations view performance.
Measurable, objective – and equipped with teeth
In terms of what makes a good set of KPIs, it will be important that they are measurable and objectively verifiable, and that they come with the necessary ‘teeth’ to make a difference should targets not be reached.
These were points which Procurement Act specialist, Alison Walton, Partner and Head of Procurement – Commercial at Muckle LLP, made on our recent webinar looking at the challenges and opportunities presented by the act.
Alison said suppliers are unlikely to be “particularly keen” on KPIs which require opinion from a local authority “without anything that is objectively verifiable in terms of performance”.
She also encouraged the use of market testing and analysing what would be acceptable to the market in terms of KPIs.
“Talk to suppliers about what would make your pricing more reasonable,” she said. “If you put tough KPIs in place, are you going to end up with higher prices.”
The necessity to create KPIs with “teeth” and that can hold suppliers to account if targets aren’t met is also vital.
Alison said: “The KPIs are going to have some teeth in higher value contracts due to the fact they are going to be reported on to the market at large, but in terms of whether a supplier is performing on lower level KPIs are you going to have some kind of service credit system or rectification plan that kicks in when they don’t hit those KPIs?”
What is clear is that the focus of the act, and of contracts going forward, is very much going to be on KPIs, and it will be fascinating to see how suppliers require these KPIs to be drafted.
Listen to our webinar, ‘Challenges and opportunities presented by the Procurement Act’ with Alison Muckle.