Lizzy Painter
Contract Management KPIs – Measure Contract Lifecycle Management Performance
According to data collected by World Commerce & Contracting, effective contract development and management has the potential to save companies an impressive 9% of their annual revenue on average. However, despite this significant opportunity for improvement, many organizations continue to experience value leakage years later. This persistent issue highlights the critical importance of implementing and tracking contract management KPIs to measure contract lifecycle management performance.
Contract management KPIs, or key performance indicators for short, are quantifiable metrics that help businesses assess and monitor their progress toward specific goals related to contract performance management. These indicators cover various aspects of the contracting process, from drafting and negotiation to execution and renewal. By monitoring contract lifecycle management metrics, organizations can gain a comprehensive understanding of their CLM performance, pinpoint bottlenecks, and take proactive measures to enhance their processes.
The importance of contract management KPIs lies, in that by using them, an organization can obtain a clear picture of the organization’s contract management health. They often serve as a foundation for setting benchmarks, identifying trends, and measuring progress over time. Moreover, these metrics enable cross-functional collaboration and alignment, as teams from legal, procurement, finance, and other departments can work together to achieve common goals and improve overall contract performance.
Given the potential for substantial revenue savings when an organization has effective KPIs in place, companies should strongly consider prioritizing putting into place and tracking contract management KPIs. By doing so, they can identify areas of value leakage, optimize their CLM processes, and potentially boost their bottom line.
Key Contract Management Metrics to Track
To effectively measure contract lifecycle management performance, organizations must track a variety of contract management KPIs across different categories. These key metrics include contract efficiency metrics, which assess the speed and effectiveness of the contracting process; contract process metrics, which evaluate the overall performance of contract management workflows; and contract performance metrics, which measure the value and outcomes of executed contracts.
In the following sections, we will explore each of these categories in detail, providing examples of specific KPIs and how they contribute to contract performance management.
Contract Efficiency Metrics
One of the most important groups of contract KPIs is contract efficiency metrics, which are essential for assessing the speed and effectiveness of an organization’s contract lifecycle management processes. These KPIs identify those areas where bottlenecks occur, enabling teams to optimize contracting workflows and improve overall CLM performance.
Contract Cycle Time
Contract cycle time measures the duration from the initial contract request to final execution. This metric is crucial for understanding the efficiency of the entire contracting process and identifying potential delays. To calculate contract cycle time, simply determine the number of days between the initial request and the contract execution date.
For example, a pharmaceutical company may track contract cycle time to ensure that research and development agreements are executed promptly, allowing clinical trials to commence on schedule. If the contract cycle time exceeds the target duration, the company can investigate the cause of the delay and take corrective action to improve efficiency.
Contract Processing Time
Contract processing time focuses on the time spent on specific stages of the contract lifecycle, such as drafting, negotiation, and review. This granular approach helps pinpoint specific areas where inefficiencies may exist. To calculate contract processing time, measure the duration of each stage individually.
For instance, a medical device manufacturer may monitor the time spent on contract review to ensure that legal and compliance teams thoroughly assess each agreement without causing undue delays. If the review stage consistently takes longer than expected, the company may need to streamline its review process or allocate additional resources to improve efficiency.
Bottleneck Analysis
Identifying bottlenecks is crucial for optimizing contract lifecycle management performance. By tracking the time spent in each stage of the contracting process and comparing it to benchmark data, organizations can pinpoint specific stages where delays occur most frequently.
Consider the case of a biotechnology company whose bottleneck analysis reveals that contract approvals often stall due to the need for multiple signatures from various stakeholders. To address this issue, the company could implement an electronic signature solution and establish clear approval workflows to expedite the process.
By tracking these contract efficiency metrics and conducting regular analyses, organizations can identify opportunities for improvement, streamline their contract management processes, and ultimately enhance contract performance management.
Implementing contract lifecycle management software can further support these efforts by automating data collection, providing real-time insights, and enabling more efficient collaboration among stakeholders.
Contract Process Metrics
Contract process metrics provide valuable insights into the overall performance of an organization’s contract management workflows. These KPIs help identify areas for improvement and ensure that the contracting process is running smoothly and efficiently.
Number of Contracts
Tracking the total number of contracts managed by an organization is a fundamental metric. This KPI provides an overview of the workload and helps determine if the current contract management system can handle the volume effectively. It also allows organizations to monitor trends and plan for future resource allocation.
To calculate this metric, the company would simply count the total number of contracts in its system at the end of each quarter.
To illustrate, consider the example of a software company that may track the number of contracts managed each quarter to assess the growth of their business and ensure that their contract management system can accommodate the increasing volume.
Number of Completed Contracts
Measuring the number of contracts that have been successfully executed within a given period is another crucial metric. This KPI indicates the productivity and efficiency of the contract management team. Comparing the number of completed contracts against the total number of contracts can reveal potential bottlenecks or inefficiencies in the process.
To calculate this metric, a firm counts the number of contracts that have been fully executed and signed by all parties within the given month. The firm then compares this number to the total number of contracts in the system and can identify potential issues in the contract finalization process.
For example, a consulting firm may measure the number of completed contracts each month to evaluate the performance of its contract management team.
Error Rates
Monitoring error rates in contracts is essential for maintaining the quality and integrity of the contracting process. This metric tracks the number of errors, such as missing clauses, incorrect information, or non-compliant terms, found in contracts during the review and approval stages. High error rates may indicate a need for better training, improved templates, or more stringent quality control measures.
To calculate this metric, a company counts the number of errors identified during the review and approval process and divides it by the total number of contracts reviewed. This percentage can help the company assess the effectiveness of its contract creation and review processes.
For example, a financial services company may track the error rates in their contracts to ensure accuracy and compliance with regulatory requirements.
Contract Performance Metrics
Contract performance metrics focus on the value and outcomes of executed contracts, helping organizations assess the effectiveness of their contract management strategies. These KPIs provide insights into the financial impact of contracts, supplier performance, and compliance with contractual obligations. Key contract performance metrics include:
Contract Value
Measuring the total value of contracts is essential for understanding the financial impact of an organization’s contract portfolio. This metric can be broken down into various categories, such as contract type, department, or supplier, to provide a more detailed analysis. Tracking contract value helps organizations identify high-value contracts, prioritize resources, and make informed decisions about future contract negotiations.
To calculate this metric, the company would sum up the value of all active supply contracts in their system. This information can be used to identify the most significant suppliers and prioritize contract negotiations accordingly.
For example, a manufacturing company may track the total value of its supply contracts to assess the financial impact of its procurement decisions.
Renewal Rates
Monitoring contract renewal rates is crucial for assessing customer satisfaction and loyalty. This metric measures the percentage of contracts that are renewed upon expiration, indicating the success of the organization’s products, services, and relationships with clients. High renewal rates contribute to stable revenue streams and lower customer acquisition costs.
To calculate this metric, the company would divide the number of contracts renewed by the total number of contracts up for renewal in a given period. This percentage can help the company identify any issues in their service delivery or customer relationships that may be impacting renewals.
A software-as-a-service (SaaS) company may track the renewal rates of their subscription contracts to evaluate customer satisfaction and retention.
Compliance
Ensuring compliance with contractual obligations is essential for mitigating risks and maintaining strong business relationships. Compliance metrics track the percentage of contracts that adhere to specific requirements, such as delivery deadlines, quality standards, or regulatory guidelines. Non-compliance can lead to financial penalties, legal disputes, and reputational damage, making it crucial to monitor and address any issues promptly.
To calculate this metric, the company would divide the number of contracts in full compliance by the total number of active contracts. This percentage can help the company identify any areas where compliance issues may be occurring and take corrective action to mitigate risks.
For example, a construction company may track compliance with safety and environmental regulations across their project contracts.
Best Practices for Measuring CLM Performance
To effectively measure and optimize contract lifecycle management performance, organizations should follow these best practices:
Set SMART Goals
Establish Specific, Measurable, Achievable, Relevant, and Time-bound (SMART) goals for contract management performance. These goals should align with overall business objectives and provide a clear direction for improvement efforts.
A technology company may set a goal to reduce the average contract cycle time by 20% within the next 6 months to improve responsiveness to customer needs and accelerate revenue recognition.
Regularly Review Metrics
Conduct regular reviews of contract management KPIs to assess progress toward goals, identify trends, and spot potential issues early. These reviews should involve key stakeholders from across the organization to ensure a comprehensive perspective.
A healthcare organization may hold monthly meetings with representatives from legal, procurement, and finance to review contract management metrics and discuss any necessary adjustments to processes or resources.
Leverage CLM Software
Implement contract lifecycle management (CLM) software to automate the collection, analysis, and reporting of contract management KPIs. CLM software can significantly reduce the time and effort required to track performance while providing more accurate and timely data.
A global manufacturing company may deploy a CLM platform that integrates with its ERP and CRM systems to provide a unified view of contract management performance across all business units and geographies.
Continuously Improve Processes
Use insights gleaned from contract management KPIs to identify opportunities for improving and optimizing processes. This may involve streamlining workflows, automating manual tasks, or providing additional training and resources to team members.
For example, a professional services firm may discover by tracking KPIs that contract approvals are a significant bottleneck in their process. Based on this insight, they may implement an electronic signature solution and establish clear approval workflows to expedite the process.
Communicate Performance
Share contract management performance with stakeholders across the organization. Transparency builds trust, fosters accountability, and keeps the focus on continuous improvement.
For example, a financial services company may distribute a monthly newsletter highlighting key contract management metrics, success stories, and areas for improvement to keep all employees informed and engaged in the process.
Following these best practices and leveraging the power of a contract management KPI dashboard, allows organizations to effectively measure and optimize their contract lifecycle management performance, facilitating improved outcomes and a stronger competitive advantage.
Leveraging CLM Software and Dashboards to Enhance Contract Performance Management
CLM software and, specifically, contract management KPI dashboards play a crucial role in managing contract operations and enhancing them by providing organizations with powerful tools to optimize their processes, gain real-time visibility, and make data-driven decisions. These technologies offer a range of features that enable teams to streamline workflows, automate manual tasks, and monitor key performance indicators (KPIs) across the contract lifecycle.
So, what is a contract management dashboard? Such a dashboard is a centralized source of truth and knowledge that consolidates data from various sources within your contracting operation and your CLM solution. The goal of a dashboard as described is to a) provide a comprehensive overview of key metrics and to enable stakeholders to monitor progress, identify trends, and make informed decisions based on actual performance rather than assumptions or gut instincts.
Benefits of CLM software and dashboards:
- Real-time visibility and data: CLM software automatically captures and aggregates data from across the contract lifecycle, providing teams with real-time insights into KPIs such as cycle times, compliance rates, and contract values. CLM dashboards offer a visually compelling and easily accessible way to monitor this data, allowing teams to quickly identify and address any issues or bottlenecks.
- Automation and efficiency: By automating manual tasks such as contract creation, approval workflows, and deadline reminders, CLM software reduces the risk of errors and frees up team members to focus on higher-value activities. This automation streamlines processes and improves overall efficiency in contract management.
- Analytics and reporting: Advanced analytics and reporting capabilities within CLM platforms enable organizations to identify trends, benchmark performance, and make data-driven decisions to optimize their contract management processes. Within the CLM system, the dashboard provides a centralized location to access and analyze these insights, facilitating collaboration and informed decision-making among stakeholders.
- Improved collaboration and communication: CLM software fosters better collaboration and communication among stakeholders by providing a shared view of contract management metrics. This ensures that everyone is working towards common goals and enables cross-functional teams to make informed decisions together.
When designing a contract management dashboard, you want to ensure that it includes a variety of metrics that encompass the entire contracting lifecycle such as total number of contracts, average contract cycle time, and the rate of contract compliance with specific contracting standards.
CLM software solutions and dashboards empower organizations by allowing them to proactively manage contract performance by providing the tools and insights needed to identify issues early, drive continuous improvement, and ensure that contracts are delivering maximum value to the business.
Conclusion
Enacting and then measuring KPIs for contract management is essential for companies wanting to optimize their contract management function. By tracking key metrics on contract efficiency, processes, and performance, teams can gain a comprehensive understanding of their strengths and areas for improvement.
Introducing a contract lifecycle management solution provides real-time insights into performance, encourages collaboration between stakeholders, and enables data-driven decision-making. To effectively measure and optimize contract management performance, companies should adhere to best practices such as setting SMART goals, regularly reviewing metrics, using a CLM solution, continuously improving processes, and communicating performance to stakeholders.
Effectively measuring and optimizing contract management performance remains a key competitive advantage in the world of business. Organizations that prioritize contract management KPIs and take a data-driven approach to continuous improvement will be well-positioned to succeed in an ever-evolving business environment.
