The only way to ensure that your company is operating efficiently is to establish clear goals, along with key performance indicators (KPIs) to determine whether those goals are being met. This is true regardless of which facet of the business you are seeking to manage. With respect to contract management, it may be difficult to identify which KPIs make the most sense to monitor because contracts vary so much from one situation to the next.
Broadly speaking, however, the best KPIs for contract management are ones that are "SMART," meaning they are specific, measurable, achievable, results-oriented, and time-constrained. Thus, irrespective of the type of contracts your company is managing, here are some of the most important KPIs:
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Contracting Cycle Length
Efficiency is crucial to improving profit margins. Unfortunately, the contracting process is often anything but efficient. Negotiations frequently stall, drafting can become a seemingly never ending back and forth, and things often break down during the performance phase, which creates a whole bunch of other problems and delays. As a result, companies should pay close attention to the length of its contracting cycles to determine where improvements can be made, as well as which contracting partners may need to be cut out altogether.
If a company notices that it runs into similar problems with one particular vendor or at a certain step in the process, it has to figure out how to adjust to avoid repeating the same mistakes over and over again. As a company's contracting volume increases, it should get easier and easier for each contracting cycle to be completed in a timely fashion, as experience breeds wisdom.
Contracting relationships that add value are those that involve parties who perform in a timely manner and do so exactly as stipulated by the contract. It doesn't matter if the contracting relationship relates to the provision of different types of goods or services, there must be consistent quality every time. Companies should not have to scramble to make changes or push back its deadlines to accommodate for any inconsistencies.
If a company cannot rely on a particular contracting partner's ability to perform properly, this will obviously cause problems in the short-term, likely delaying any anticipated output. However, it will also interfere with a company's long-term objectives since problems at any point in the contracting process will end up diverting resources. Thus, companies must make its expectations with respect to quality clear and ensure that these are met every single time.
In addition to receiving quality goods and services from every contractual relationship, timeframes must be established for deliverables, and timeliness should be monitored. Full performance is irrelevant if it occurs months after the fact. Consistent and timely performance over the course of a contracting relationship will make it easier to assess whether long-term goals will be met, and if issues are anticipated far enough in advance, the appropriate adjustments can be made.
This is probably the most important piece to monitor. And, cost effectiveness is obviously about a lot more than just a contract's price terms. Every phase of the contracting process has to make sense financially. The length of the contracting cycle impacts costs, performance or a lack thereof impacts costs, and the quality of the good or service delivered impacts costs.
Any contractual relationship that ends up requiring the investment of time and resources that were not planned for ahead of time is not cost effective. Therefore, companies must pay attention to the amount of time and money it is spending for each contract to ensure it is getting maximum value.