Key Performance Indicators (KPIs) are measurable values that indicate how effective a company is in achieving key business objectives. In contract management, KPIs help legal counsels and their teams to monitor and evaluate the efficiency, effectiveness, and compliance of contract processes.
Without the right tools, such as a central database with all relevant contract data, legal teams can struggle to demonstrate their impact on the organisation. By tracking these indicators, you can identify areas for improvement, mitigate risks, and ensure that the organisation's contractual obligations are met promptly and accurately.
KPIs are (or should be) linked to the things we find important and which have an impact on the success of our organisation. However, what is important for an in-house legal, is different compared to what is important for the CFO, Sales, CEO, Production… KPIs and how your contract management is set up should cater to a broad range of stakeholders.
The most important contract management KPIs
1. Contract Cycle Time
One of the most critical KPIs in contract management is the contract cycle time. This KPI reflects the total time taken from the initiation of a contract request to its final execution. A shorter cycle time indicates a more efficient contract management process, leading to quicker deal closures and improved client satisfaction.
How to calculate the contract cycle time?
Contract Cycle Time = End Date−Start Date
To accurately measure the contract cycle time, it's essential first to define the stages of the contract lifecycle. The typical stages include:
- Creation: The initial creation of the contract.
- Negotiation: Back-and-forth between parties to finalise terms.
- Approval: Formal internal approvals from relevant stakeholders.
- Signing: The final execution of the contract by all parties.
- Follow-up: Storing the contract and setting reminders for renewals or follow-ups.
Once the stages are defined, identify the start and end points of the contract cycle. The most common start and end points are:
- Start Point: When the contract request or drafting process begins.
- End Point: When the contract is signed and executed by all parties.
The difference between these two points will provide the total contract cycle time.
Shorter contract cycle times are especially important for the sales oriented colleagues. Longer ones are often the root cause for strained relations between sales and legal.
Examples of situations that impact the contract lifecycle
- The information needed from sales to create the contract is not provided or is provided incompletely.
- The routing of the contract from one reviewer or approver to another is handled manually.
- Getting a hard copy signed and returned from a counterparty may necessitate one or more reminders.
- The person in charge of entering the contract record and details has competing responsibilities.
Legal counsels should aim to reduce bottlenecks in the contract lifecycle, streamline approval workflows, and leverage technology to automate repetitive tasks, all of which contribute to a shorter cycle time.
There’s also a win in this for legal. Achieving shorter cycles usually motivates the business to take up the more repetitive tasks themselves (e.g. templating to create the more standard contracts, look up info in the contract repository instead of asking legal if there’s already an NDA in place, ...) and will encourage them to involve legal earlier in the negotiating process if they realise this will shorten the sales cycle.
2. Contract Renewal Rate
The contract renewal rate measures the percentage of contracts that are successfully renewed before their expiration date. A high renewal rate indicates strong client relationships and effective management of contract renewals, while a low rate might signal issues in contract performance or client satisfaction. Legal teams, but also most of the C-level, should closely monitor this KPI to ensure that opportunities for renewal are not missed and that all parties remain satisfied with the terms of their agreements.
Being proactive, meaning taking up the renewal discussions with your clients, not only results in lower churn rates, but is also an opportunity to negotiate contract changes you would like to implement. Be it of a commercial or more legal nature.
How to calculate the Contract Renewal Rate?
(no. of extended contracts / total number of renewable contracts) x 100
- Based on cash flow
(total value of contracts extended / total value of planned extensions) x 100
Generally, a renewal rate above 80% is considered to be very favourable (differs from industry to industry) and indicates that a company is effective with its customer retention efforts.
3. Compliance Rate
Compliance is the beating heart of contract management. The compliance rate KPI measures how well the contracts adhere to regulatory requirements, internal policies, and contractual obligations. A high compliance rate indicates that the legal team is effectively managing risks and ensuring that all contracts are executed within the legal and organisational framework. This KPI is particularly important in heavily regulated industries where non-compliance can result in severe penalties. Regardless of the company you work for, it’s vital to know about compliance rates and how they affect your industry.
How to calculate the Contract Compliance Rate?
Compliance Rate = [(Total contracts – Non-compliant contracts) / (Total contracts)] x 100%
For example, if you have 100 employee contracts and 75 of them comply with a particular regulation, your compliance rate is 75%.
Compliance is a more legal oriented KPI, which will carry more weight in more regulated and ‘contract intensive’ industries.
It’s also an effort more on managing the process of contract creation, negotiation, approval and signing. How can I, for example, be sure that all legal (e.g. IP), regulatory (e.g. ESG) and business (e.g. max. liabilities) requirements are upheld in the contracts?
Next to managing the process, there’s the additional challenge of changing legislation/business and how to implement those in legacy contracts and long-standing relations. This is not only a matter of identifying those legacy contracts which need change, but also in managing and taking up the often rare opportunities to renegotiate or change a contract.
4. Contract Value Realisation
The KPI which will resonate most in most organisations: did the contract live up to what we expected? Did we get what we negotiated?
Negotiating a contract typically takes a lot of time, and putting this in writing adds to that. But it’s only after the contract was signed and initiated, that there’s an opportunity to create value for the business.
Contract value realisation measures the extent to which the anticipated value of a contract is achieved. This KPI assesses whether the financial and strategic objectives outlined in the contract are being met over its lifecycle. By tracking contract value realisation, legal counsels can ensure that the organisation is benefiting from the agreements made and can make informed decisions about future contracts.
From all the KPI’s mentioned above, the Contract Value Realisation is often the hardest to track. Where the other KPIs are easily documented in generic document managing software or spreadsheets, the Contract Value is not a metric that is consistently monitored in most organisations. It helps to have a contract management software that knows exactly what contract data is important and at the same time provide an overview of this data in one centralized dashboard.
Conclusion
KPIs and benchmarking aren't just corporate buzzwords; they’re here to help you make sure your legal team is not just surviving, but thriving (e.i. creating value for the company). So, if you're still managing contracts the old-fashioned way (read: frantically searching for them in a sea of spreadsheets), it’s time to rethink your strategy.
Remember, measuring success in contract management is essential for legal counsels who want to enhance the efficiency, compliance, and overall effectiveness of their contract processes. By focusing on key KPIs such as contract cycle time, renewal rate, compliance rate.. coupled with benchmarking strategies, legal teams can gain valuable insights into their performance, prove their value to the company and drive better business outcomes.
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