Collaborative performance indicators are required when firms work together to serve the same end customer
In recent decades, we have seen a shift from manufacturing to services in industrialised economies, whereby manufactured goods and IT are sourced mainly from low-cost countries. Even among the traditional manufacturers that remain, we see a strong tendency to complement the products with a service package. These companies are looking for competitive advantage via this “servitisation”.
In this game, differentiation from your competitors is defined by the standard of service – in short, the ability to “deliver against promise”. It’s important to remember that “promise” does not constitute the supplier’s idea of what the promise holds, but rather what the customer experiences or perceives.
Collaboration with the supply base is essential if upstream supply partners are to help realise “perceived” value for the end customer. This is especially true in a service-to-service environment where multiple companies need to collaborate closely via a host of linked IT systems and business processes to serve the needs of their customers. One such setting is retail telecom, my home turf, where a dozen interdependent organisations jointly install and operate telecom services. Often, it is the lack of measurability of these kinds of value chain initiatives that means they fall short of the high expectations at the start.
Sticking to, or even worse, falling back on the well-known, adversarial buyer-supplier metrics may seem appealing. However, in networked service environments, “conventional” buyer-supplier performance metrics (such as uptime of servers and cost to serve) and contracts based on the “principal agent theory” are insufficient or even counterproductive.
Instead, at KPN, we have developed and, since 2004, used a concept of collaborative key performance indicators that aims to get suppliers contributing measurably to end-customer value. (Our approach recently won the US Institute for Supply Management’s R. Gene Richter Award for Leadership and Process Innovation.)
First, a set of supplier performance measures is developed that links their performance as closely and directly as possible to the service provided to the end customers, even if this performance is also influenced by other parties, including the buyer.
Second, we draw up a two-way set of KPIs containing performance targets for the suppliers as well as for the buyer. One example is operational and enabling KPIs, where the supplier and customer co-produce. Another is commercial. On the one hand, KPN can sell with and through our partner, and on the other hand increase our partner’s wallet share in our business.
Third, a significant part of the monetary value of the contract is set apart in escrow, from which the contributors to end-customer value are rewarded.
Managing these relationships “strategically” from a desk or with a helicopter view does not work. The value is created on the shop floor. We have found that improvement at the shop-floor level by means of true collaboration, combined with hard measurements and rewards for both supplier and customer, creates an environment of trust and alignment that can withstand any kind of weather.
In the space of four months, end-customer complaints fell from 15 per cent to 9 per cent, and in 16 months to 5 per cent. And internal client satisfaction with our partner at KPN increased from a score of 4.2 out of 10 in 2004 to 6.5 in 2007.
Collaborative KPIs have five principal effects for their users. First, they reduce goal conflicts. Second, they make it easier to measure outcomes. Next, suppliers become less risk averse, and the indicators mobilise operational staff to co-operate and improve performance. Lastly, in combination, these make a more output-orientated contract feasible.
For these collaborative KPIs to work, however, the CPO must show leadership to step out of the savings “straitjacket”. The buyer and supplier also need to trust each other, have complementary cultures and operate in a service-to-service environment. From the supplier’s perspective, their customer must “open up the kimono”, allowing the supplier to co-produce in improving the service. And the supplier must be willing to assume shared business risk with their customer. Lastly, shop-floor KPIs need translating to top-line results via a “KPI tree”.
With the trend towards “servitisation” mushrooming, this kind of measurable collaboration holds the key to the future.
Willem van Oppen (willem.vanoppen@kpn.com) is CPO of Dutch telecoms company KPN, based in The Hague
