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In many cases, an SLA is not very successful
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In many cases, an SLA is not very successful

Put an end to entrenched mistrust in contracts.

The theme of the Contract Management Day of the Dutch Association of Purchasing was ‘Building Relationships that Work.’ As a speaker, I had the opportunity to explain how ‘Winning with the right KPIs can contribute to this.

Unfortunately, it remains true: most people become unhappy with the KPIs in their organization. This was once again evident during the Contract Management Day on March 16, 2017, attended by 350 people. About 60 percent of the participants in the pre-conference poll indicated that performance management and KPIs often do not work.

Unfortunately, it remains true: most people become unhappy with the Key Performance Indicators (KPIs) in their organization.

Peter Geelen

Effective and efficient

The dissatisfaction with KPIs stems from the failure to facilitate smooth collaboration between departments in organizations. The cause often lies in conflicting KPIs. For example, sales aims to maximize sales while logistics aims to minimize inventory.

As I argue in my book, KPIs can indeed work. The condition is that they are well aligned with the customer value chains. In that case, they serve the interests of customers. Unfortunately, this is often not the case. This is because they are internally focused, such as departmental goals. “A customer forces you to be effective, the internal organization forces you to be efficient,” I said during the Contract Management Day. This statement resonated with the audience, as evident from the reactions on Twitter.

Outsourcing and customer chains

When it is already challenging to act together in the best interest of customers within the organization, this becomes even more apparent outside of it. This is particularly true when collaboration occurs between different organizations. Many companies face this situation when they outsource activities, such as a warehouse. In such cases, they naturally want the collaboration to proceed as if it were still a single organization.

Customers should not be aware of how things are organized behind the scenes. However, in practice, this often proves to be disappointing. After outsourcing an activity, a tightly sealed contract is typically signed, such as a Service Level Agreement (SLA). This contract solely focuses on the relationship between the two parties and usually does not take into account the end customers. There is a high likelihood that they will be affected by this.

Essential link

An SLA that solely establishes the customer-supplier relationship is often not successful. This leads to an “us vs. them” mentality. The only one benefiting from such a contract is the lawyer who drafts it. Therefore, I consider this a poor idea. 

In a collaborative relationship, such as after outsourcing logistics, the starting point should always be the end customers. What values can they expect? What results do we want to achieve for customers? An outsourcing partner remains an essential link in the customer chain. KPIs and contracts should be aligned accordingly.

Drawing conclusions

The message about collaboration in the supply chain resonated during the conference. Nine out of ten attendees recognized the story, as revealed by a post-event poll. Now, let’s hope they also draw conclusions from it and improve their collaboration, with KPIs that actually work!

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