When it comes to contract management and assessment of risk, there is often extensive due diligence done on third-parties and strategic risk, yet the internalized processes and procedures of day-to-day contract management are not prioritized. The operational risk of poor contract management can often result in lost revenue and financial penalties.
There are several ways businesses can minimize and mitigate the organizational risk around contract management, one of which is correctly utilizing contract Key Performance Indicators (KPIs.)
KPIs can be used by businesses as an overview to ascertain how well a contract may be performing and the value it provides to the company, and to provide an insight as to how successful the employees involved with the contracting process are at managing the contracts, and whether the contract management system currently in place is functioning efficiently and with the minimum amount of operational risk.
By having this level of oversight and analysis from contract KPIs and their data, businesses can ensure that any areas and processes are prioritized where the operational risk is higher, and fact based decision making is the driving factor behind any steps taken to mitigate and minimize further risk.
So, what KPIs should businesses be looking at to help minimize organizational risk within contract management and establish the smooth day-to-day running of the contracting process?
Although there are no set “rules” around KPIs and businesses can select the KPIs they want to focus on, in order to evaluate contract management performance, it is best to identify the areas where you may anticipate issues arising in the future, either with the processes and procedures within the system itself, or the contract management team you have in place. We have listed below the best KPIs for your business to implement when considering minimizing your organizational risk.
If you want to minimize organization risk, efficiency is the essential foundation on which to build. The contract efficiency KPI can often be a catch all term for various KPIs such as current trends by type, vendor, location etc. However, it can be used as a standalone KPI by incorporating and tracking any prominent trends, Annual Contract Value (AVC), contract cycle time and contract milestones. The combination of measurements of all this data should give businesses an accurate representation of whether the contract management system and the employees involved, are successfully meeting their requirements and obligations in regards to efficiency and reducing the operational risk from delays in the process.
This KPI is a metric used to determine whether all obligations and conditions are being met to the required standards and how many milestones have been missed. If a contract is successful and has been correctly managed, the higher the KPI and the lower the operational risk. If the KPI indicates a low score, then it may be worth implementing contract management software that has trigger notifications, which can improve the efficiency of the process and means your business is less likely to suffer from financial penalties and lost revenue.
Contract Cycle Time
There are often variants in cycle times due to the different complexities a contract may have, however this is still one of the most popular KPIs to implement when you are examining the efficiency of your contract management system, especially during the assessment, negotiation, and approval process. Tracking how long each contract or agreement takes to renewal can give businesses the data needed to analyze how quickly deals are closing and if delays in the negotiation and approval process are having a negative effect on business revenue.
Contract Renewal Rates
When a contract is coming to end, businesses need to decide whether to renew or terminate the contract. If a business wishes to renew a contract, they may want to re-negotiate certain terms and this point in a contract must not be missed as there are often set deadlines and regulations. The contract renewal rate KPI findings will reveal how many contracts have been left to either auto-renew (showing poor management of operations) or been left to expire without renewal. The risk here is financial due to penalties that can be incurred around contract renewals, or the loss of revenue due to poor performance and poor value contracts. A good indicator of the overall health of the contract management operation.
Order Value Variance (OVV)
This KPI helps businesses track the losses incurred from mistakes made during the contracting process. This can often be a useful KPI for businesses as it is indicative of the organizational risk that can occur from poor management of contracts. The higher your OVV the more improvement is needed to avoid costly mistakes, either by changing your staff or improving the process with an automated system like contract management software, such as the solutions available from Symfact.
As most issues regarding operational risk in contract management will arise from the employees, as human errors and mistakes can often occur from manual contract management systems, it is important for businesses to utilize various employee operational metrics to help identify and reduce risk areas. You could include:
- Utilization Rate – This KPI measures how much an employee is actually working, usually used by professional businesses, it can be adapted to measure how much time is spent by your contract management team on the various stages.
- Employee Satisfaction – This can be a useful metric to determine whether the resources are adequate for the current contract management system, overworked employees are not good for operations.
It is important to remember to align your KPIs to your strategy and not just use KPIs to measure data that is irrelevant to your business and it’s aims. KPI’s to evaluate and assess operational risk should be used as part of your overall contract management metrics. By doing this, a business can get a complete overview and insight of the CM system currently in place and not only if it is fit for purpose, but also to help determine the best indicators for the business moving forward.
If having analyzed the data the conclusion is that the current time and resources allocated to contract management are not proving productive or efficient, it may be worth considering implementing contract management software. By automating the process, you can streamline every stage of a contract lifecycle, improving performance, efficiency, and revenue. If you think solution could benefit your business, please contact us here at Symfact to discuss your requirements.