KPIs to Measure Your Contract Effectiveness and Efficiency
There are countless KPIs you could implement to evaluate your contract management performance, so identifying which indicators best help illustrate the health of your organization is key. It can be tempting to measure every aspect of your process, and there’s no reason you can’t get to that point over time, but it often makes the most sense to start by measuring and working to improve the areas that really move the needle.
Here are a few KPIs to consider implementing to measure the effectiveness and efficiency of your contract management process.
Focusing KPIs around contract effectiveness will help you stay ahead of opportunities and on top of existing obligations, and assist in successfully meeting key milestones. When you are establishing KPIs for your contracts, you should focus on examining contract utilization, value, volume, overall performance, and historical data.
Effective Contract Utilization
This KPI is of particular importance for procurement and tracking cost performance. Determine the effectiveness of how you are utilizing your contracts by tracking the percentage by value of purchases made under simple purchase orders, annual, and multi-year contracts.
Results from this KPI can be used to avoid overlooking unpaid vendor dues, as well as collecting on any outstanding unpaid agreements, leaving your organization in better financial standing.
Qualitative Contract Value Assessments and Scoring
Complex organizations must look at more than just specific numbers to understand the effectiveness of their contracts. One way to turn qualitative information into measurable data is to evaluate contract terms based on attributes, monitor performance, and then score them.
Number of Contracts Per Customer, Vendor, Program, Type, and Geographic Location
Drilling down to contract volume specifics will provide you the information needed to understand how certain vendors, regions, programs, and unique contract attributes are performing against others of its kind. A few of the details you will want to look for concern revenue ratios, profitability, and other easily identifiable performance metrics.
Contract Renewal Rate
Renewal Rate can provide some insight into the quality of your contracts and the strength of your business as a whole. This can vary greatly depending on the industry and type of business and contract, but it’s something worth monitoring. If you’re expecting 50 percent of your customer contracts to be renewed but only 25 percent of them are actually renewed, this could be an area of opportunity to improve your contracts or how they are being executed.
Contract efficiency is one of the most fundamental elements of contract management, and is crucial to improving profit margins. Unfortunately, the contracting process is often anything but efficient. Negotiations stall, drafting can become a seemingly never-ending back and forth, and processes break down during the performance phase, which creates a plethora of additional problems and delays.
Implementing KPIs that examine the length of your contracting cycles, identify important and notable trends within your contracts, and give you insight into more than just quantitative data will help you understand whether or not your contracts and processes are efficient. And, if they are not, the results discovered in this process will give you the information necessary to make changes that will lead to positive impacts on your business.
Contract Cycle Time from Signature to Renewal
This KPI helps you understand how quickly deals are closing, and is the most common metric to track the efficiency of the contract management process. Results showing shorter cycle times indicate a higher volume of deals closed, which means accelerated revenue for the company. However, it is important to understand that cycle times vary based on the type of agreement, structure, key stakeholder involvement, and other varied complexities of the contracts. Findings using this KPI help the executive team make educated decisions when establishing company objectives and benchmarking goals.
Trends by Type, Customer, Vendor, Geographic Location
Trend focused KPIs help you understand the intricate details of your contracts. Examining these areas allows you to identify where, when, and how specific bottlenecks are occurring in the contracting cycle so that you can make decisions and changes to improve the structure of your contracts in specific departments or locations that are underperforming. Utilizing contract management software with automated reporting makes it easy to track these KPIs and run regular analysis on the details of your agreements.
Drilling down to the specific issues commonly found within certain types, customers, vendors, or regions provides the data needed to make decisions around improving company structure to create a more efficient workplace.
By strategically implementing and monitoring KPIs throughout your contracting process, you put yourself in position to identify strengths and weaknesses and make key adjustments where needed. To read more on getting started with KPIs, download Using KPIs to Measure Contract Management Performance.