What Is Contract Performance?

What is contract performance, and why is its successful management important to both your bottom line and future success? A critical part of corporate governance, contract performance is the process of tracking how well an organization adheres to the obligations outlined in each of its business contracts.

Accurately measuring each aspect of performance against expectation gives any business a truthful and highly valuable snapshot of its day-to-day operations. What’s more, it provides a long-term analysis of strengths and weaknesses, enabling smarter growth and a surer path to success.

But as companies grow and expand their list of partners, suppliers, contractors, and vendors, the complexities of effectively managing those contracts also grows. With that in mind, here’s a look at how to set up a process that meets your unique needs, some basic contract performance metrics to follow, and a look at the many benefits if offers.

Benefits of Tracking Contract Performance

Successfully measuring contract performance provides more than just detailed information on how well a business is meeting its current obligations. It also delivers a host of other benefits, including:

Risk mitigation

Tracking and documenting all activity for every contract — from negotiation to implementation and execution — can provide valuable protection during legal disputes, making it a standard part of risk management today. And, by offering an early warning system to avoid noncompliance or breach of contract, it protects against threats to revenue as well as legal standing.  

Staying compliant

This process also helps organizations meet specific (and changing) legal and regulatory requirements, as well as other rules and standards that apply in a given region or industry (for instance, HIPAA compliance in healthcare). Keeping a close eye on compliance data also helps ensure new contracts are up of date — which can help you avoid costly errors.

Optimizing performance

This process can also help businesses more clearly understand how real performance is measuring up to internal projections and external expectations — on a day-to-day basis, or year over year, or whatever timeframe is needed. And the early detection of major issues or overruns can help sidestep roadblocks to successful project completion.

Identifying areas of improvement

Careful monitoring key performance metrics can help leaders discover and correct wasteful spending. Finding bottlenecks or other trouble areas provides the opportunity to make immediate corrections that will likely result in saved dollars. Pinpointing weak spots also helps you understand what to work on improving, which can prevent underperformance in future contracts and help make them more profitable.  

Preserving market status

In addition to legal penalties, breach of contract can also damage a company’s image. Careful, proactive monitoring helps protect against reputational harm and preserve important relationships. And a high rate of success in contractual fulfillment can attract new opportunities.

Taking control of future strategy

Understanding what makes contracts successful can lead to better decisions when forging new partnerships. It provides a rich variety of information that can be used to more skillfully navigate industry complexities, seek out better business opportunities, and boost the chances of long-term success.

How to Measure Contract Performance

While the exact process varies by industry, geography, local regulations and other unique criteria, the question of how to measure contract performance can usually be answered by following five basic steps.

Step 1: Clearly define each deliverable

First, make sure that each new contract clearly outlines what needs to be measured. What, exactly, is the deliverable? What are the timeframes? The clearer and more concise the language, the better your ability to track what matters.

Step 2: Implement a tracking plan

Before a contract even begins, you should have a clear idea of what you need to monitor, and a mechanism for doing so. This includes a plan for gathering and documenting specific metrics  within each project, and globally. Luckily, technology has revolutionized this step, transforming what was once a laborious manual process into an automated, easy-to-use system.

Step 3. Set up alerts

Make sure to connect major due dates or milestones with ongoing operational updates to detect potential divergences as soon as possible. This includes elements like reminders for deadlines and milestones and alerts for critical risk levels — both of which can largely be automated with technology.

Step 4. Issue updates and reports

True performance measuring should be an organization-wide initiative, involving key stakeholders from all major departments. And they should all be kept in the loop with regular updates and communication — ideally, in easy-to-digest formats like graph-based or scorecard-style reports. Again, technology makes this aspect easy, and also helps manage different levels of access — for instance, an internal executive versus the rep from a new vendor.

Step 5. Review and improve

Each completed contract offers a chance to assess your performance under a specific scenario, and how well operational realities align with larger strategic desires — and then make any needed or desired improvements, or capitalize on any revealed opportunities.

4 Key Contract Performance Metrics

Now, we arrive at the real challenge — namely, understanding the right contract performance metrics to track in the first place.

Traditionally, these metrics fit into 3 broad categories:

•   Complete performance, where all parties fulfill all contractual obligations;
•   Substantial performance, where the main obligations are met but some “non-material” obligations (i.e., not essential to final completion) are not; and
•   Breach of contract, where basic obligations are not met.

And, while it’s still important to track metrics like these, the complexities of doing business today require more granular classifications. The best place to start is defining the key performance indicators (KPIs) that drive your specific plans for revenue, growth, or other operational priorities. The data points that indicate the success of those KPIs then become metrics to be infused in every contract — and these generally fall under the four categories of quality, cost, timing, and reliability.

Quality

Perhaps the most fundamental performance measurement is how well a company adheres to its own agreed-upon terms. What’s the basic success rate for both project completion and non-material components? How often are obligations like uptime, availability and/or incident response fulfilled? If not, what are the details?

Much of what should be tracked here can be found in the contract’s service level agreements (SLAs), which, ideally, will make it clear exactly what defines success. All the same, a legal expert should review each new contract and advise on new or unforeseen areas of risk or responsibility.

Cost

As with most business operations, success really boils down to money spent, money saved, and the ensuing profit margin. So, it’s important to define metrics in a way that truly captures that information. This includes monitoring everything from overall transactions to expenses as percentage of revenue budget.

The idea is to keep an eye on spending to avoid overruns or unexpected loss. Ongoing analysis will reveal larger opportunities for savings, too — for instance, how many projects are resulting in a net gain or loss? Are you incurring unforeseen expenses that may not have been fully accounted for in the original terms?

Timing

Timetables are central to the vast majority of contracts — many of which offer separate reminders of the importance of meeting projected timeframes, especially in industries with strict schedules for production or delivery. In these cases, even slight delays can lead to project termination and potentially breach of contract.

Tracking this type of metric helps ensure the satisfactory completion of any given contract. And, over time, this data can also help identify other useful trends around additional contract performance metrics like contract duration and renewal rates.

Reliability

Successful contract performance requires reliability and responsiveness from all involved parties. While partners should be willing and able to make periodic modifications, the preferred outcome is to avoid them altogether. Even smaller provisions like time limits for answering queries should be treated as high priorities.

How well you do this over time can be measured as consistency. Collecting and analyzing this data delivers an essential view of performance — and that of any other parties — on a project-to-project basis. It provides a baseline for next-tier KPIs like annualized contract value (ACV) and terminated contract remaining value (TRV). And it offers insights into how to adapt to changing trends, new cycle times, supply line issues, and a host of other factors — plus the documentation to use those trends to negotiate better contracts.

Leverage Contract Performance for Growth and Compliance

Sometimes companies are so focused on maintaining high volume that they can start to neglect quality. Measuring contract performance helps eliminate that mindset while adding a host of additional benefits to enhance performance, improve growth, avoid risk, and much more.  

That’s just the beginning, though. It takes an expert eye to really navigate the finer points of this important process. Resources like our free guide to contract management KPIs can certainly help leaders develop this expertise. But ultimately, there’s no substitute for third-party guidance from a seasoned professional.

See for yourself how we can help leverage technology to help you get the most from your contract performance monitoring efforts. Start your free trial of ContractWorks software here.