Today, contract managers and other stakeholders are under tremendous pressure to improve their contract performance, to reduce the overall risks and costs associated with agreements. Whether their company handles a few or thousands of contracts, at any given time, they need their agreements to perform exceptionally well and their business to succeed ultimately. These all too important legal documents, after all, make the flow of information and revenue possible — in just about any company that holds them.
This is why contract managers rely on key performance indicators — or KPIs. Those who measure the success of their agreements against contract management KPIs can better adjust their current contract strategy. As a result, they can drive organizational impact and ensure the company’s profitability.
Now, let’s explore why KPIs are so crucial for modern contract management, what metrics are the most important to the business — and why a contract management system (CMS) helps make that possible.
Top 5 Contract Management KPIs
Generally speaking, KPIs are metrics that are selected and used to gauge progress and meet clearly defined goals. As mentioned above, a number of contracts contain a great deal of information, on a wide array of business deals. So, it is a best practice to sort, categorize, and order this historical data, to analyze and truly understand each agreement’s performance. This provides more actionable intelligence, informing business decision-making and development while ensuring compliance with regulations and governance.
Naturally, contract management KPIs will vary, as industries, companies, processes — and, yes, agreements — are like snowflakes. However, contract managers would do well to review their contract lifecycle management (CLM) and come up with success metrics that are most aligned with organizational objectives. They should use those contract management KPIs consisting of both qualitative and quantitative information around their agreements — and measure contracting results frequently.
Accordingly, some of the common KPIs used to determine contract management success include:
- Contract Risk (or risk management)
- Contract Duration
- Obligation Compliance
- Deviation from Standard Clauses
- Order Value Variance.
Each of these contract management KPIs should be used to measure your contract management ROI altogether.
Contract Risk
Given that contracts are legally bound documents — with so many financial implications — contract risk is one of the most useful benchmarks. Whenever a renewal or cancellation of a contract is missed, it leads to legal complications for the organizations and even financial loss. But the contract risk indicator helps contract managers monitor and measure every aspect of an agreement — and the risk of financial loss — throughout the contract management process.
Contract Duration
The contract duration is decided on by a company and its customer or vendor. But the agreement period is not always observed strictly. At times, the contract may become extended well past the agreed-upon date. And in other cases, the contract might get canceled altogether. It is a best practice, then, to follow one of the basic contract management indicators, like contract duration, and track the days throughout the contract lifecycle. Calculating this duration, in fact, goes a long way in measuring the performance of the agreement.
Obligation Compliance
Given the purpose of an agreement is to make clear the obligations and responsibilities of contract parties, the measurement of compliance with those same obligations and responsibilities is needed for the efficient, effective management of contracts. After all, incidents of non-compliance can lead to systemic issues and all sorts of legal difficulties. Think costly claims and litigation, and the incurrence of fines, as well as reputational damage. As such, obligation compliance lets contract managers know whether the organization needs to improve its contract repository and workflows, for example.
Deviation From Standard Clauses
Because it alerts contract managers to increasing contract risks and the remedial action that is required, deviation from standard clauses is yet another indicator. The use of standard clauses in the contract management process allows for contract terms and language to be formulated carefully, and for clauses to be standardized across the enterprise. It ensures compliance with regulations and governance, both internal and external while keeping the company aligned with its own values.
Order Value Variance
Order value variance — or simply OVV — could be the result of any number of errors, changes of scope, and existing conditions associated with agreements. As such, OVV shows those areas that require the most improvement, like contract goal assessment. In the usual course of the business, a value that is less than 5 percent may be considered completely “acceptable.” However, a margin of error greater than 10 percent may be considered utterly “failing. The latter clearly reveals significant issues within the contract management process, whether they be related to contract drafting and language, or communication.
Setting SMART Goals to Hit Your KPIs
When it comes to overseeing the contract lifecycle, from requests to renewals, contract managers have their fair share of challenges. Without clearly defined contract management KPIs, they struggle to increase productivity, improve visibility, and reduce risk around agreements — and demonstrate the significance of the often-undervalued contracting process. They cannot make the most gains while spending the least amount of time, energy, and money.
Contract managers would do well, then, to select KPIs that offer the most actionable intelligence. The latter is needed to take in raw information, and either amend decisions or take remedial actions. So, it helps to narrow down the wide range of contract management metrics to the most productive, in terms of the business. And it helps if the decisions around KPIs are informed by what is called the SMART principle at the outset. This basically means that the KPIs should be specific, measurable, attainable, relevant, and oh so timely. Typically, smart KPIs for contract management have to do with actual performance measures, like contract cycle time, new account acquisition, geographic market expansion, and overall contract value.
Hit Your KPIs with Intelligent Contract Management Software
However, KPIs for contract management is rather difficult to define — and hit — without the right contract management tools or software in place. With CLM systems, in particular, contract managers can streamline and simplify the contracting process, increasing contract efficiency and effectiveness in departments. And with solutions that are designed with smart KPIs in mind, contract managers can choose and fully deploy their chosen performance indicators, helping to boost the bottom line.
Such systems include powerful digital tools, like an advanced analytics engine that scrutinizes the library of agreements — under a number of KPI lenses — and offers deep, real-time insights. They monitor contract repositories for contract risk, contract duration and requests, obligation compliance, deviation from standard clauses, and order value variance, as well as other data points. With this artificial intelligence in hand, contract managers can make those data-driven decisions and solve practically any contract-related problem.
Are you struggling to define the contract management KPIs that provide the best visibility into the business? Are you looking for a contract management platform that provides current, reliable insights into those smart KPIs? To find out everything you need to know about contract management, read ContractPodAi’s Primer, which includes a handy contract management checklist. And to see how you can start your own legal digital transformation, contact us today to request a demo.
Author:
Sarvarth Misra
Connect with us on Linkedin
