Whether your business handles a few important contracts at a time, or has a contract library containing thousands of agreements, the fact remains that those contracts need to perform well in order for your business to thrive. Your contracts facilitate the flow of information and revenue throughout your operation, so it is vital that you confirm their optimal function.
This is essentially what we mean when we refer to contract performance: the efficiency with which these agreements allow data and revenue to flow. Contracts that are not performing well are most often an indication of blockages or bottlenecks within workflows, and remedial action in these instances can create overall improvement throughout the system. The end result of a business operation that is functioning at optimal efficiency is a healthy bottom line, which is ultimately the goal of any business. This is why we need KPIs.
What are KPIs and how are they used?
KPIs are Key Performance Indicators. They are metrics selected to measure progress, and drive development toward goal achievement. Your business contracts and agreements involve a vast amount of information about a wide range of aspects of your operation and its deals. In order to understand how each agreement is performing, it is necessary to sort that information; to categorise and order the data for the purpose of effective analysis. This data analysis then provides actionable intelligence that informs decision-making, governance, and business development.
Key Performance Indicators should be used tactically, in relation to the nature and objectives of the contract. While the purpose of KPIs is to drive development toward goal achievement for each agreement, the overall business goal must be kept in mind when deploying these metrics, so that your Contract Management strategies are kept in full alignment with your business objectives. This also helps to ensure compliance with internal and external regulations and governance.
How to choose your KPIs
There are many recognised Key Performance Indicators within the field of Contract Management, that are widely acknowledged as being useful metrics against which contract performance can be measured. Part of the tactical deployment of such metrics is to whittle down that wide range of options to a selection that is most efficient and productive in terms of your business. This means choosing the KPIs that deliver the most actionable intelligence using the least amount of resources. As with all areas of your business, your objective should be to make the most significant gains while expending minimal staff time, skills, and costs.
Your choice of KPIs should therefore be guided by the SMART principle, which means they should be:
- Time- constrained
With that in mind, the following are among the most important KPIs to consider using in relation to your Contract Management System:
- Contract Initiation Lifecycle
Measuring the time it takes to initiate a contract essentially tells you how long it is taking for your business to close deals. The faster your contracts are initiated, the faster its financial contribution reaches your bottom line. The contract initiation timescale will vary for different types of contract, and the more complex the agreement, the longer it will take. However, the establishment of clear benchmarks for each agreement type allows for this very common, fundamental Contract Management KPI to be deployed.
- Contract Value metrics
It sounds like a statement of the obvious to say that it is vital to measure the value of your contracts as a Key Performance Indicator, but there are several different options in the execution of this type of metric, and your choice will depend upon the type of business you are running.
a. Annual Contract Value (ACV) – This is the yearly revenue generated by each contract. For example, a three-year deal that is signed for $30,000 provides an Annual Contract Value of $10,000. It works by averaging annual values across a range of customers, over one or more years. This is useful for businesses with large ACVs.
b. Annual Recurring Revenue (ARR) – This is the monthly revenue generated by recurring business at a single point in time, making it a more granular measurement that can be used for short term planning as well as long term strategies. It can be particularly useful for businesses with smaller ACVs.
c. Total Contract Value (TCV) – This is the revenue level across the entire contract lifecycle. It is useful in determining which of your customers are the most valuable in direct financial terms, and in setting discounts for those with whom your business has a long-term relationship
- Order Value Variance
In terms of Contract Management methodologies, Order Value Variance measures loss caused by management error. This is an essential Key Performance Indicator, as it provides a summary view of the overall health of your system. It is widely acknowledged that a margin of error that is 5% or less is acceptable in the normal course of business. Any OVV that is measured above 5% is a clear indication of significant issues within your Contract Management System – in communication, drafting and language, or risk management, specifically. The monitoring of OVV within your Contract Management System therefore provides a consistent overview that facilitates troubleshooting on all levels.
- Obligation compliance
If the purpose of a contract is to set out the obligations and responsibilities of all parties, then the measurement and assessment of compliance with those obligations and responsibilities is clearly an important Key Performance Indicator. Instances of non-compliance can result in reputational damage, costly claims and litigation, and the incurrence of fines. These instances can also indicate systemic issues within your organisation that need to be addressed.
- Approvals and authorisations
Workflows, processes, and systems are essential in your Contract Management arena for the maintenance of proper governance, oversight, and compliance with data security regulations. This means that all contract approvals and authorisations should be monitored as a Key Performance Indicator. An erroneous, rogue authorisation or approval can prove costly to your business, as it reduces the control management wields over budgeting and risk management. The thorough monitoring of approvals and authorisations ensures compliance, creates comprehensive audit trails, and allows blockages and bottlenecks within workflows to be addressed in real time.
- Deviation from standard clauses
The use of standard clauses in your Contract Management System is a risk management strategy. It allows for the careful formulation of terms and language designed to minimise risk exposure for all parties, and for these clauses to be standardised across your operation. It ensures compliance with internal and external regulations and governance, and keeps your whole organisation aligned with company values. Monitoring contract clauses for deviation from this standardisation can therefore be a Key Performance Indicator, because it alerts management and contracting personnel to the fact that risk has increased, and that remedial action is required. Should this instance be determined as an exceptional circumstance, it ensures awareness of the risk factors involved.
How does Contract Management Software help?
The very best Contract Management Software packages, such as Symfact, are designed with the need for Key Performance Indicators in mind. This is because the purpose of such packages is to increase efficiency and productivity within your business by streamlining your Contract Library and its administration. While these packages are geared toward the maintenance of a centralised Contract Repository, the tools used for such a task are the same tools that enable the full deployment of your chosen Key Performance Indicators.
- Automated workflows – These customisable processes within Contract Management Software ensure that the agreement in question arrives with the right person at the right time to enable its timely execution and maintenance. This means that its drafting and approvals processes are easily monitored for delays caused by system blockages and bottlenecks, and for erroneous approvals and authorisations. It also allows for the monitoring of contract initiation lifecycles.
- Permission-based access – Through the use of cloud-based platforms, personnel can access the Contract Management System from any internet-connected location, using any web-enabled device – but only with authorisation. This security feature allows for the close monitoring of approvals and authorisations while created a comprehensive audit trail.
- Customisable alerts – Notifications and event milestones that are fully configurable can be used to monitor your Contract Library for workflow issues and delays. This can facilitate the deployment of several Key Performance Indicators in your Contract Management System.
- Customisable reporting – The most important feature in Contract Management Software, in terms of Key Performance Indicators, is customisable reporting, because it can be used to monitor different types of Contract Value, obligation compliance, and deviation from standard clauses, among many other data points. Customisable reporting provides the actionable intelligence needed to fulfil the potential of Key Performance Indicators, taking the raw information and creating opportunities for amended decision pathways and remedial actions.
Contract Management Software helps to facilitate the deployment of Key Performance Indicators through a range of powerful digital tools. Each is intended to be used in ways that are both flexible, and specific to the purpose defined by you in relation to your business needs. In this way, Contract Management Software helps you choose your KPIs, and use them in ways that boost your bottom line.