How can you measure the ROI of third-party vendor management?

1 Define your objectives and expectations

Before you engage with a vendor, you need to have a clear vision of what you want to achieve and how you will measure success. This means setting specific, measurable, achievable, relevant, and time-bound (SMART) goals and key performance indicators (KPIs) that align with your strategic priorities and stakeholder needs. You also need to communicate these objectives and expectations to your vendor and ensure that they are reflected in the contract, service level agreement (SLA), and scope of work.

2 Track your costs and benefits

To calculate the ROI of third-party vendor management, you need to track both the costs and benefits of working with a vendor. Costs include not only the fees and expenses paid to the vendor, but also the internal resources, time, and effort required to manage the vendor relationship, monitor the quality and delivery of the services or products, and resolve any issues or conflicts. Benefits include not only the direct outcomes and outputs of the vendor's work, but also the indirect value and impact that the vendor adds to your organization, such as innovation, collaboration, customer satisfaction, risk mitigation, or competitive advantage.

3 Use a standard formula or tool

One way to measure the ROI of third-party vendor management is to use a standard formula or tool that compares the benefits and costs of working with a vendor. For example, you can use the following formula: ROI = (Benefits - Costs) / Costs x 100%. This will give you a percentage that indicates how much value you are getting from your vendor for every dollar you spend. Alternatively, you can use a tool such as a balanced scorecard, a value for money analysis, or a vendor performance dashboard that incorporates multiple indicators and dimensions of value and performance.

4 Adjust for qualitative factors and external influences

While using a standard formula or tool can help you quantify the ROI of third-party vendor management, you should also consider the qualitative factors and external influences that may affect your vendor relationship and value. For example, you may need to adjust your ROI calculation for factors such as the complexity and uncertainty of the project, the quality and reliability of the vendor's communication and collaboration, the feedback and satisfaction of your stakeholders and customers, and the changes and trends in the market and industry.

5 Review and improve your vendor management process

Finally, you should use the ROI of third-party vendor management as a feedback mechanism to review and improve your vendor management process. You should regularly evaluate your vendor's performance and value against your objectives and expectations, and identify any gaps, issues, or opportunities for improvement. You should also communicate your findings and recommendations to your vendor and your senior stakeholders, and implement any changes or actions that can enhance your vendor relationship and value. By doing this, you can ensure that you are optimizing your ROI of third-party vendor management and achieving your desired outcomes.

6 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?