Top 12 KPIs for contract management

Contract management lifecycle - an introduction

Contract lifecycle management is the process of managing contract documents from creation to completion. It includes activities such as drafting, review, negotiation, execution, and tracking. An effective contract lifecycle management system ensures that contracts are completed in a timely manner, with minimal errors and delays.

KPIs for contract management: why they matter

KPIs for contract management are vital to tracking and improving a company's performance. They provide valuable insights into which of the many activities involved in contract management might be linked to specific negative or positive outcomes. As a result, businesses can identify areas of improvement and take corrective action when necessary, or focus their efforts on those of their endeavors that bring the most value. When used properly, KPIs can also help reduce risk by providing timely warnings about potential issues in contracts or processes.

Key features of a KPI for contract management

There are several key features that make KPIs for contract management useful and actionable.

• They should provide a comprehensive view of performance, enabling a company to better understand its current strengths and weaknesses.
• They should offer an easy way to track individual performance indicators over time. This allows the company to identify trends and make adjustments as needed.
• They should allow for a quick comparison of results across different departments or teams, enabling the company to tailor their responses to any opportunities or issues.

Other key characteristics of usable KPIs include measurability and ownership.

Measurability

Aside from the obvious (the company's ability to measure a KPI at all), it is also best not to set up KPIs if it will be unnecessarily difficult or costly to compile the necessary data. High costs can mean that any optimization improvements made thanks to the KPI will not actually add value to the business, while a harrowing data collection process can result in overlooked or dropped KPIs.

The following question can help determine a KPI's viability:

• What data is needed for the KPI?
• How is the data created, and by whom?
• Is the data usable raw, or does it need additional processing?
• How can it be accessed?
• Who will track the data, and how?
• Are there resources and processes in place that will allow for taking action based on the data?

Ownership

If everyone is responsible for something, no one is. This is true for contract performance, as well. It is crucial to establish ownership for each KPI, which should imply the following duties:

• Collecting and analyzing the data,
• Reporting,
• Improvement of the KPI over time,
• Delivery of the desired performance and value outcomes.

Desired outcomes when tracking KPIs for contract management

When the right KPIs are tracked, businesses should experience several desired outcomes:

• Improved decision-making due to better visibility into performance.
• Reduced risk due to timely warnings about potential issues.
• Increased contract efficiency as the company is able to identify and address pain points more quickly and effectively.
• Improved reporting capabilities, allowing for accurate measurement of progress over time.
• Shortened time to signature thanks to optimized contract management processes.
• Consistent adherence to established standard language.
• Higher value of new agreements and contract renewals thanks to optimized contract management costs and smart prioritization.
• Timely fulfillment of contract obligations by all parties.

Establishing a baseline and setting performance targets

Before a company can start tracking KPIs for contract management, it must first establish a baseline that will be used to assess performance and set targets. One way to accomplish this is using historical data, but sometimes an educated guess or a trial period for new KPIs might be the best available option. It is also important to consider whether performance targets for various KPIs will be affected by circumstances, and if so, if it would not be worth it to establish multiple targets.

Top KPIs for contract management

Now that we have discussed why contract management KPIs are important, let's take a look at some of the top KPIs for tracking in this area.

1. Contract execution rate

This contract management KPI measures the rate at which contracts are successfully executed by tracking the time from contract authoring to contract signing. It is an easily available data point and an effective tool for assessing how well teams and processes are performing.

Its limit is, of course, the fact that it does not indicate what might have gone wrong in a too-long process, or what led to a quick signing. That is where other KPIs come in to supplement contract execution rate.

How to track contract execution rate:

• Track the time from contract authoring to contract signing for each contract.

How to use this KPI:

• Identify general areas of improvement, such as types of contracts that are processed more slowly.
• Compare the performance of different teams or departments to isolate areas for improvement.
• Track changes in performance over time to monitor progress and measure success.

2. Contract processing time

This KPI is similar to the previous one, but it is focused strictly on the time spent on revisions before a contract is finalized. It is an effective tool for assessing how quickly contracts can be processed and approved, without taking into account any delays from outside factors.

How to track contract processing time:

• Track the total time spent on revisions before each contract is finalized.
• Track the number of file downloads and uploads.
• Track the number of changes made to each contract.

How to use this KPI:

• Compare the performance of different teams or departments to isolate areas for improvement.
• Track changes in performance over time to monitor progress and measure success.
• Compare contract processing time to its value to determine whether the effort spent on finalizing the contract provided value.

3. Contract administration time

Another KPI similar to the first two, contract administration time measures the time spent on managing the contract post-signing. It helps assess the effectiveness of contract management processes and teams responsible for enforcing contract terms.

How to track contract administration time:

• Track the total time spent on managing a contract after it has been signed.
• Divide contract administration into smaller processes and track these individually.

How to use this KPI:

• Calculate the costs of time spent on contract administration.
• Identify areas of improvement, such as types of contracts that require more work post-signing.
• Compare the performance of different teams or departments to isolate areas for improvement.

4. Number of contracts per service or product

Monitoring the number of contracts associated with each service or product provides a valuable insight into profitability and ROI. It can provide an indication of how well different services are being marketed or managed.

How to track the number of contracts per service or product:

• Track the total number of contracts associated with each product or service.
• Track the number of existing customers for each product or service.
• Take the individual profitability of each contract into account.

How to use this KPI:

• Compare different services and products to identify which ones are the most and the least profitable.
• Monitor the trends of contract numbers over time to measure progress.
• Use this KPI to assess the performance of your marketing and sales team.

5. Annual contract value

This KPI measures how much money a company is making from contracts over the course of a year. It is an important indicator of profitability and can be used to measure the success of different strategies.

How to track annual contract value:

• Track the overall yearly value of each contract.
• Track the total amount spent on each contract that year.
• Take into account all underlying costs associated with contracts, such as legal and administrative fees.

How to use this KPI:

• Compare the performance of different teams or departments to isolate areas for improvement.
• Compare the value of new and recurring contracts.
• Determine the amount of revenue lost due to contracts that are not renewed.

6. Contract compliance rate

This KPI measures how well contracts are adhered to once they have been signed. It is useful for assessing how well teams are following the details of contracts and ensuring that all parties are complying with the terms of the agreement.

How to track contract compliance rate:

• Track any incidents in which a contract is not being upheld or followed correctly.
• Track missed deadlines and deadlines that were adhered to.
• Track fines, penalties and overpayments.

How to use this KPI:

• Identify specific areas where contracts are more likely not to be followed correctly.
• Assess the overall level of compliance to identify trends and areas for improvement.
• Monitor changes in performance over time to measure progress on contract compliance goals.

7. Contract renewal rate

This KPI measures the rate at which contracts are renewed or extended. It can be used to track customer loyalty and to identify areas where more attention is needed in order to retain customers. The same principles can be applied to vendor contracts, as well.

How to track contract renewal rate:

• Track the number and percentage of contracts that are successfully renewed each period.
• Track the causes of failure to renew a contract.

How to use this KPI:

• Identify customer segments or contracts that may need additional attention in order to renew.
• Monitor how successful different teams and processes are at retaining customers.
• Track changes in renewal rate over time to measure success.
• Determine what percentage of the contracts that were not renewed were cases that could have been avoided.

8. Standardized cause and term variance

This KPI measures how substantially contracts are changed or modified. Any change to approved standardized clauses and terms increases contract risk. It is also likely to prolong revisions, lengthening the contract's lifecycle and increasing costs.

How to track standardized cause and term variance:

• Track the number of clauses and terms that are modified or changed in each contract.
• Track additional costs associated with changes.

How to use this KPI:

• Assess the impact that modifications have on the contract’s overall compliance.
• Monitor changes in standardization over time to measure progress.
• Identify areas where additional oversight may be needed to ensure standardized clauses and terms are not changed or modified without approval.

9. Approaching contract expiration dates

This KPI measures how close contracts are to their expiration date. It is important to be aware of when contracts are expiring in order to ensure that they are renewed on time and, if necessary, renegotiated. The KPI is also a key component in managing risk, as a large number of approaching expiration dates can necessitate additional measures to maintain a revenue flow.

How to track approaching contract expiration dates:

• Track the current status of each contract and note the expiration date.
• Monitor the number of contracts approaching their expiration date.

How to use this KPI:

• Identify which contracts should be renegotiated or renewed before they reach their expiration date.
• Monitor the performance of different teams or processes in order to identify areas that need additional attention.

10. Cost control

This KPI measures how effectively costs associated with contracts are being managed. It can also be used to identify areas where improvements are needed in order to reduce overall costs related to the contract lifecycle.

How to track cost control:

• Track changes in costs for each stage of the contract lifecycle.
• Monitor any additional costs that are associated with any changes to the contract.

How to use this KPI:

• Assess how effectively costs are being managed and identify areas where improvements can be made.
• Monitor changes in cost control over time to measure progress towards goals.
• Identify potential risk factors or areas of concern related to cost management.

11. Contract risk

This KPI measures the amount of risk associated with contracts. It is important to track this KPI in order to identify potential areas of concern and take steps to mitigate any potential risks. Contract risk involves aspects such as regulatory non-compliance, uncontrolled changes to the contract, as well as factors connected to suppliers: their financial situation, for example.

How to track contract risk:

• Track any potential risks that could be caused by the text of the contract.
• Track any potential risks associated with suppliers or other third parties.

How to use this KPI:

• Create a risk score that will reflect the potential impacts of various risks. This does not need to be a complex system - a simple low/medium/high risk evaluation will work. Make sure to track not only the likelihood of a bad outcome occurring, but also the severity of its potential consequences.
• Assess the overall level of risk associated with contracts and identify areas where improvements can be made.
• Create risk mitigation strategies.
• Compare risk score in relevant contract groupings (e.g. per supplier).

12. Contract milestones

This KPI measures the progress made towards fulfilling agreed upon contractual obligations. It is important to track this KPI in order to improve the health of contract relationships and to ensure that deadlines are met.

How to track contract milestones:

• Track the timely completion of contractual obligations.
• Monitor any changes or delays in the timeline for contractual obligations.

How to use this KPI:

• Assess the progress of contractual obligations and identify areas where improvements can be made.
• Identify any potential issues that could cause delays or other impacts on performance.

Increasing the value of KPIs over time

By tracking the right KPIs, businesses can identify areas where improvements need to be made and adjust their processes accordingly. With gained experience in contract management, it is important to make sure that the KPIs used evolve as well.

For example, KPIs should be adjusted as processes become more automated and streamlined. Circumstances might also create the need to add new KPIs to the tracking list. Finally, it is important to optimize KPI tracking, as it can become a time-consuming and costly process. This can be done through better ways for collecting, processing and analyzing data, smarter distribution of KPI ownership, and similar measures.

Contract management software

In order to make the most of KPIs, businesses should consider using a contract management system. This type of software can provide powerful insights into contracts and their performance over time. It can help with tracking KPIs related to cost control, risk management, milestones, and more. Contract managers need a way to track their progress towards goals quickly and efficiently. Contract management software is the perfect tool to do this.

Using the right contract management KPIs

By tracking the right KPIs for contract management success, businesses can gain valuable insights into their performance and identify areas of improvement. This will help them make better decisions, reduce risk, increase contract efficiency, and improve reporting capabilities. With this in mind, it is clear that KPIs are an essential part of any successful contract lifecycle management process.