5 KPIs for 2019 to Increase the Performance of Your Contracts
By David Parks
With 2018 in the books, it’s time to make your 2019 New Year’s resolutions. Besides eating healthier and exercising more, one of them should be improving the performance of your contracts.
Whether they are fixed price, cost reimbursement, incentive, or indefinite delivery, contracts define your client and vendor relationships. They are the backbone of your organization. Building solid contracts and contract management processes is key to the success of your business.
The good news is that given the wealth of data produced by the creation and management of your contracts, lots of key performance indicators (KPIs) are available to evaluate your processes. And if you can measure them, you can optimize them. This enables you to mitigate risk, decrease cost, and increase revenue.
Here are five KPIs you can use to increase the performance of your contracts this year and make good on an important New Year’s resolution.
Editor’s Note: To learn more, download our whitepaper on Contract Management KPIs – Ammunition for Optimization.
- Average Total Number of Days in Contract Lifecycle
From the first meeting to the final handshake, the total number of days involved in a contract varies across projects, contract types, and client or vendor situations. That’s why you should determine an acceptable timeframe for each contract category. Then you should measure the average time it takes to execute a contract from start to finish. This will allow you to generate benchmarks by contract type, company division such as sales or procurement, client or vendor type, or other categories. Doing so will enable you to optimize your contract management processes and decrease the time it takes to produce an executed agreement.
- Average Time to Reach and Execute Contract Milestones
Establishing a set of milestones in your contract management process is key. Examples could be drafting the agreement, a series of internal approvals, negotiation and redlining with the client or vendor, and execution of the contract. You may also have situations where post-execution milestones are reflected, such as when the contract renews or terminates. Whatever those milestones are, you need to define and tailor them to your specific contract needs. From there, you can measure the average time it takes to reach each milestone in your process. You can also set up automated reminders and alerts to avoid missing them.
- Number of Improperly Executed Contracts
Certain contracts may require additional measures of control or compliance such as a higher level of authorization or a different Limitation of Liability clause. In the rush to meet a strict deadline, it’s easy to miss one of these control measures, resulting in an improperly executed agreement. This can expose you to risk by undermining compliance, impacting the bottom line, and producing other undesirable outcomes. Strive to determine when measures are required vs. optional by contract type. This allows you to identify contracts where risk exists, uncover unneeded steps so you can streamline the process, and flag individuals or departments that fail to meet requirements.
- Average Time Required for Overall Contract Approval
Of all the contract process milestones that can be benchmarked, the one that everyone tends to sweat the most is the approval. Sometimes a single individual is responsible for the approval and other times multiple individuals are required. Regardless, it is critical to identify exactly where the approval process begins and ends and benchmark the average amount of time between those two points. This will help you set the appropriate approval time expectations with the client and uncover opportunities to accelerate them.
- Frequency of Deviation from Pre-Approved Contract Language
Anyone drafting agreements typically leverages the most appropriate, pre-approved contract clauses to create documents faster and minimize risk. However, it’s important to know if or when someone errs beyond acceptable ranges. To do so, track the number of instances when deviation from pre-approved clauses and ranges occurs. This KPI helps expose certain contract types, departments, or individuals that cause deviations, or if certain clauses are frequently modified. This insight is useful to identify the need to modify the standard language, or the need to educate certain individuals as to why they must adhere to it.
Takeaway
Contracts contain a wealth of data that can provide you with valuable insights. Dates, numbers and other data points can be used to create KPIs and establish benchmarks for evaluating and improving your contract management processes. Implement these five KPIs and you’re on the way to making 2019 a high-performance year for your contracts.
To learn more, download our whitepaper on Contract Management KPIs – Ammunition for Optimization.