How to Determine Contract Success Using KPIs

How to Determine Contract Success Using KPIs

Many KPIs exist which can shed insight into how well your contracts are doing. They are essential, as they demonstrate just how healthy your organisation is. Therefore, knowing which ones to measure is crucial.

You may be tempted to monitor every part of your process. This isn’t unrealistic, however, as a starting point, you should focus on the most critical areas.

If you’re unsure which KPIs to measure within your contract management process, then this article should help you, we have outlined the most important ones below.

 

Effectiveness of Contracts

Having KPIs in place which look into the effectiveness of your contracts help you keep one foot ahead whilst managing all your current obligations. Doing this will also help you to meet important deadlines. When creating KPIs for your contracts, be sure to focus on contract volume and value, historical data, overall performance and utilisation of contracts.

Contract Utilization. If you want to keep track of cost performance and procurement, then utilising contracts is particularly important. Contract utilisation can be calculated by working out the cost of purchases under different types of contract, including multi-year agreements, single purchase orders and annual contracts. Use your findings to collect money for any unpaid agreements or pending payments from vendors. It will help your organisation to improve financially.

Scoring & Value Assessments. Contract effectiveness cannot just be determined by looking at numbers alone. Data needs to be measurable, and this can happen by looking at the performance and attributes of existing contracts, then scoring them individually.

Quantity of Contracts Based on, Type, Program, Vendor, Customer or Location. Understanding these numbers is useful as it enables you to determine the performance of other contracts of the same category. For example, regions, programs, vendors or unique attributes. Also keep an eye out for profitability, revenue ratios and other performance metrics which can easily be identified.

Renewal Rate. Renewal rate is important, as not only does it provide insight into your businesses overall strength, it also provides insight into existing contract quality. This does vary based on the type of contract or business, or the industry itself. If the reality surrounding the number of contracts being renewed isn’t as impressive as what you’d initially aimed for, then this may be an area to consider. Hopefully, it can help you to either enhance the way your contracts are being executed or to improve your existing agreements.

 

Efficiency of Contracts

If you’re looking to improve profit margins, this is definitely an area you should take seriously. The contracting process can often be very inefficient. Large pauses can exist with regards to negotiations, drafting might seem an endless task between parties, and processes can break down. The result? Constant delays and never-ending problems.

By looking at how long your existing cycles last, plus key trends, you can begin to work out just how efficient your contracts are. If it turns out that improvement is necessary, information from the results can be used to make changes, which will positively impact your business.

Cycle Time Between Signing & Renewal. Being one of the most common ways to track how efficient your contracting process, this KPI will make you realise how long it takes to close your existing deals. High volumes of closed deals are usually indicated by shorter cycle times, meaning better revenue. However, there are many different factors which determine cycle time, including contract structure, agreement type, involvement from important stakeholders amongst other things. Ultimately, cycle time can be used to assist executive teams in making the best decisions possible when it comes to creating goals and company objectives.

Other Trends. Other trends you could look out for include trends based on vendor, customer, type and location. They’re useful in discovering the finer points within your contracts. For example, the times and places where bottlenecks are forming, allowing you to change contract structure, or pinpoint departments which aren’t performing as expected. In particular, the automated reporting feature within contract management software will allow easier tracking of this data across all your contracts.

Data can be acquired from specific contract areas like region, customer or vendor, which can be used to aid better decision making and improve overall company efficiency.

 

Making Your Contracts More Successful with KPIs

KPIs are important in contract management because they allow businesses to determine the success of agreements, which has a knock-on effect on business profits and overall success.

If you’re starting out in contract management, be sure to measure the most critical KPIs as this will be most beneficial in making the most drastic improvements.

Cost performance and procurement are essential as they allow you to work out the purchase cost of contracts, meaning that unpaid or owed money can then be determined.

To work out how effective your existing contracts are, score them on various different attributes.

Renewal date is another crucial KPI to consider as it helps you work out how long your contract cycle will last. Examine the time between signing and renewal to work this out. Often, shorter cycle times result in better revenue. Things like this can also be used to set business objectives and benchmarking goals.

Bottlenecks can be identified by looking at location trends, vendors and customer data. Similarly, opportunities for better efficiency and decision making can also be determined from this.