KPIs for Effective Contract Management
Good contract management is a critical skill for the survival of a business for many reasons. In particular, it is directly linked to the organization’s ability to:
- Effectively control costs.
- Be protected against legal risks.
- Achieve beneficial agreements with customers, suppliers, and partners.
For this reason, the staff is under constant pressure from management. It has to expedite the processing, approval, signing, or renewal of each contract. In addition, it must thoroughly check contracts for potential risks and at the same time ensure their smooth execution.
However, the contract life cycle is highly complex and requires the cooperation of several persons. It is therefore likely that, without the necessary organization, malfunctions and frequent failures will occur. The result?
- An increase in operating costs.
- Procedures slowing down.
- Undermining the ability of the company to achieve its objectives
A modern digital contract management system allows us to plan and monitor specific key performance indicators (KPIs).Key Performance Indicators indicate trouble spots in processes and deviations of the company from the strategic goals of the organization. As a result, we can take the right corrective action in time.
Selection of the Right Performance Indicators (KPIs)
KPIs, to be truly useful to management, must be explicit and reliable. That is, they have to reflect the true picture of contracts in real-time. At the same time, it is essential that they are directly related to the broader objectives of the company.
Furthermore, it is important that performance indicators are specified as to the type, scope, and size of contracts. We cannot, obviously, compare the process of signing a joint confidentiality agreement with the negotiations of a strategic commercial agreement.
Below, we analyze several generals and specific indicators (KPIs), which help us to draw useful conclusions about:
- Performance of the contract management circuit
- Revenue/expense flow
- Increase or decrease in the financial and legal risk of the organization
Customer Contract Value Indicators
Needless to say, measuring the value of a company’s contracts is essential as a key performance indicator (KPI). But there are several different indicators and approaches that we can use depending on the type of each organization.
Total Contract Value
Initially, depending on the type of contract (i.e., whether it concerns products, services, insurance, work, supply, or sale), we define specific indicators that determine the total value of each contract for the company. Then, calculating the total value of the contract enables us to determine tendencies in the firm’s annual revenues.
Indicators relating to the total value of contracts also reveal important information about the risk of the company. For example, we can distinguish which of the firm’s customers offers the greatest benefit to the company. When the value of sales contracts are assembled in a small number of customers, the risk of a sharp decline in the firm’s income increases. This is more common if these customers flee from their customer base or experience financial problems.
Value or Percentage of Contracts not renewed or canceled
Indicators that calculate the total value of customer contracts that are not renewed have multiple benefits for the business.
They can alert management to:
- Issues in customer service.
- Possible customer defecting to the competition, before it is reflected in the firm’s revenues.
Timely information allows management to reorganize its priorities and make quick decisions to solve customer retention problems.
Supplier Contracts Value Indicators
Similarly, concerning the management of supply contracts, the indicators that study their value are directly related to:
- The control of capital expenditure.
- Operating costs.
- The priorities of the organization in the allocation of the annual budget.
Operational Performance Indicators
Overall Average Management Time until Signature
The speed with which the negotiation and signing of contracts with customers are completed is of particular importance. It directly affects the sales cycle, ultimately determining the revenue stream and the growth rate of the business.
Similarly, speeding up the approval and signing of contracts with suppliers gives more flexibility to the organization. At the same time, strategic objectives are achieved within the predefined timeframe.
It is, therefore, important for the company, utilizing historical data, to set a range of acceptable times to complete the negotiation and signing of contracts. It is crucial to always consider the type and size of the contract. In addition, it should regularly monitor the performance of the organization on these indicators.
Average Approval Time
The overall efficiency of the life cycle of a contract arises from the efficiency with which the individual phases of the contract are processed. By using a digital approval system, we know the exact processing times of the approvals in real-time. At the same time, we can predict long delays and distinguish the bottlenecks to which they are due.
Percentage of Digitally Signed Contracts
The great opportunity that is presented to businesses to reduce the time until each contract is signed is now the usage of digital signatures. The use of digital signatures is supported by the global, European and local legal framework, and can reduce the time, and cost of signing each contract to a minimum.
However, the adoption of digital signatures in all of a company’s contracts is not a goal that can be achieved instantaneously.
Therefore, setting targets progressively and frequently monitoring the adoption rate of digital signatures in contracts can help the business accelerate its transition.
Another important category of indicators that can significantly improve contract management in an organization is Compliance Indicators. These indicators in contracts inform us about the smooth functioning of the entire contract life cycle.
Rate of deviation of new contracts from appropriate conditions
Legal department managers, in cooperation with the contract management team, often define a set of suggested terms for different types of contracts. The aim is to ensure uniformity and, above all, to protect the interests of each company.
In a modern contract management system, users can encode key features and terms of the contract. In addition, they can produce aggregate statistics that show the deviation of the company from the appropriate terms.
The increase in the rate of deviation of new contracts from the appropriate terms indicates an increase in financial and legal risk in the segment in which they are observed. Even if the increase in risk is deliberate on the part of the administration, its quantification is a useful decision-making tool.
Average Contract Compliance Rate
By signing a new contract, the parties undertake specific obligations that must be completed within a limited interval of time. Failure to meet the obligations can result in minor to major losses for the company. When late deliveries, quality, and quantity discrepancies are recorded, we are able to know the compliance rate, by contract category and department.
By monitoring these deviations, we can calculate the risk of each contract. In addition, by being aware of how often these obligations are not met, either by us or by the contractors, we discover malfunctions in the company’s processes and control points.
Efficient contract management with Papyros ECM
Efficient contract management requires standardization of procedures, the definition of multiple control points, continuous monitoring, and cooperation between departments. Performance indicators are critical tools for controlling the contract life cycle, but their design and monitoring are almost impossible without the adoption of a digital management system.
By leveraging the Papyros ECM document and process management platform, contract managers in each department can digitize all phases of the contract lifecycle so that all information about the company’s contract performance is centralized and easily accessible to management.