Any company that deals with suppliers, vendors, or other external partners does business with them based on contracts that they finalize and implement with mutual consent. This makes it a necessity to have a team dedicated to contract management. The contract lifecycle management involves an extensive list of tasks such as data evaluation, validation, document review, and many more.
Since it is a little complicated business area and requires a significant amount of time and human resources, many firms outsource contract management services to ensure effective results while saving costs. However, many companies also ensure efficient contract lifecycle management using specific key performance indicators (KPIs) to assess the performance of contracts over a specific period.
The KPIs help contract managers determine whether a contract’s objectives are met or not. From contract planning to execution through to renewals, they regularly measure contract performance in order to ensure efficient execution, risk management, and compliance assurance. The best contract management KPIs can be attributed to ‘SMART’ – source
Best KPIs to Assess & Optimize the Contract Management Process
1.Contract Initiation Lifecycle (CIL)
There should be a reasonable predefined time range between contract initiation and sign-off. However, if you are unable to measure the same, you may use an automated contract management system to track contracting processes in real-time. In return, the results can help you detect and address issues that cause delays and improve the CIL process according to your preference. Hence, CIL, as a crucial KPI, is widely considered one of the most important KPIs for contract management.
2.Annualized Contract Value (ACV)
Annualized contract value (ACV) is another key performance indicator that can help improve overall contract management. Using this metric, contract managers determine the average revenue earned per customer contract in a year. Under this KPI, they analyze contract revenues and the requirement of renewal on time. When handling multiple contracts, they evaluate the total profits gained concerning all annual agreements.
You can find and use the annual contract value to compare it against your company’s revenue numbers to calculate how and what is effective your overall business revenue.
3.Contract Quality Audits
Another significant contract management KPI is a quality audit. Need not mention it is vital to maintain consistency in quality and that is what adds value to the relationship between two contracting parties. For example, if a stakeholder becomes unable to match the required quality standards, the other party can raise an issue that can also lead to a contract dispute and you might end up facing a notice of breach.
Many companies, especially those with resource shortages or lack of experience in contract management, usually turn to contract review services to ensure quality in contracts. More importantly, if one aspect of the contract lifecycle management process gets affected, it can potentially affect other areas, further arising other issues in the entire contract process. Thus, contract quality audits help you detect quality issues that can be rectified when identified timely.
Segregation of contracts is an excellent practice businesses follow in order to keep agreements well-organized. Yes, contract segregation is important because it saves your time as you need not sift through piles of files just to find an important document.
Companies manage a substantial amount of contracts, such as;
- Property lease
- Partnership agreement
- Purchase orders
- Indemnity agreement
- Recruitment contracts
- Non-disclosure agreement
- A written non-disclosure agreement
- General employment contract
Each type of contract is different in nature too, varying with the purpose of application. All these contracts and related documents must be segregated, can be divided into the following categories;
- Contract type
- Agreement duration
- Activity status
You can add more according to the kinds of contracts your company deals with. This practice will not only help you keep contacts organized, but also get helpful insights like the number of contracts that are top revenue generators and many more.
- Risk Assessment
When it comes to risk management in terms of contracts, this KPI can be of great use. Contracts are none other than legally bound documents that have strict financial implications. Contract managers keep track of risks involved to eliminate them before they turn into a bigger problem, leading to heavy liabilities. For example, if you miss the very important dates for renewal and cancellation of contracts, it may create legal complications, you might need to pay additional charges (fines), leading to a financial loss.
Whereas by using the KPI, you can ensure all contract aspects are regularly and comprehensively monitored and measured. By having a proper system for risk assessment, you can reduce the risk of loss, ensuring appropriate risk management.
- Non-renewals Percentage
Determining the percentage of contracts with pending renewals is a helpful benchmark that allows you to find which contracts are adding to value loss. Once you find the percentage, you will realize a need to establish a threshold to control damage and take corrective actions.
By using this contract management KPI, you can keep a track of forthcoming renewal dates and contact the customers proactively to ensure timely renewals. One of the best ways to streamline this area is to have a proper system in place for contract management.
- Number of e-Signed Contracts
In the past few years, the acceptance of digital documents and contracts has increased. In today’s remote working era, many companies are experiencing higher productivity and speed in contract execution and lifecycle management with the help of e-signature.
If you use this KPI to find the number of e-signed contracts or parties that use e-signatures, you would know how to be prepared for the future in terms of renewals or contract initiation. Proactive and early execution can leave an impression on the other party that you are already interested and looking forward to a mutually-beneficial partnership.
Contract management KPIs are as important as any other KPIs you might have for other business aspects. Establishing a system to track the same is vital to ensure efficient contract management that can result in healthy business relationships – important for your company’s goals. However, this can only be done if you track them regularly and take appropriate actions according to KPI results.