Like any business discipline that aims to optimise processes and to deliver favourable outcomes, contract management can benefit from having clear Key Performance Indicators (KPIs) in place to provide evidence of the level of achievement of those aims.
However, due to the nature of contract management and the broad range of activities it includes, it can sometimes be difficult for managers within a business to draw a direct link between those activities and particular positive or negative outcomes.
For example, several different contract management actions, such as negotiation, are carried out with the intent of reducing overall contract risk.
If certain risk mitigation work is carried out and a negative outcome still occurs, how is that best represented in KPI reporting?
Equally, if the same risk mitigation work is carried out and the negative outcome doesn’t occur, should that be scored differently?
We’ll explore these and other questions in this article and list some of the KPIs that we believe to be crucial for measuring contract management effectiveness.
So, where to start?
Work backwards from desired outcomes
As highlighted above, looking at desired outcomes of contract management is an important first step when it comes to setting meaningful KPIs.
These desired outcomes should include things like:
- Minimal time to signature
- Minimal changes to agreed contract language
- Minimal avoidable business risk
- Best possible value from contract agreements
- Best possible value from contract renewals
- Adherence to contract management processes
- Optimisation of contract management processes
- Working with consistently reliable vendors and counterparties
- Maximum compliance with obligations by all parties.
With these outcomes in mind, it's important that the definition of every contract management KPI covers exactly how it links to a specific outcome and how it contributes favourably to its improvement.
Additionally, since KPIs are also used to show progressive and regressive performance, a baseline for comparison purposes needs to be established, and performance targets need to be set.
This might mean pulling some historical data, starting with an educated guess or running the new KPI for a trial period to establish its merits.
If necessary, multiple targets could be established for a single KPI, to cater for readily identifiable circumstances.
If say a contract's page count provided a general guide to the duration of contract reviews, a relevant KPI could be established with different review time targets for small, medium and large contracts (as determined by different page count limits).
Performance targets should be regularly reviewed to ensure the KPIs remain relevant and meaningful. Targets that prove over time to be too easy or too hard to reach should be fine-tuned to provide better indicators of performance.
It sounds obvious, but a key element of any KPI is its measurability, and this raises questions like:
- What data is directly needed for this KPI?
- What data is needed to support it?
- Who creates this data?
- How is it created?
- How does it need to be manipulated to have meaning?
- How is it accessed?
- How much effort is required to produce the data?
- How is the data tracked and updated?
- What mechanism is in place for taking action from the data?
The organisation's process maturity and technological capabilities with respect to contract management play a big role in answering these questions.
Care should be taken to ensure that, where possible, minimal effort is required to extract and compile the data for a particular KPI. Over time, if data is hard to pull together then it can end up being dropped or overlooked.
Making individuals or teams responsible for the reporting of the KPIs as well as the actual performance is vital to ensure responsibility is taken for:
- Delivery, or not, of the desired performance and value
- Collection, collation and analysis of the required data
- Consistent measurement and reporting
- Enhancement or retirement of the KPI as circumstances dictate.
Once the above elements are in place, it becomes a case of following through and acting on the results and performance recorded in the KPIs.
This is the ultimate point of the exercise- the KPI results must be acted on, otherwise the data collection and assessment effort is just a waste of time.
Examples of Contract Management KPIs
Now we’ve established some ground-rules around contract management KPIs, we can look at some specific examples.
Contract risk is consideration both before and after the point of signature.
Naturally, a lot of focus will be placed on mitigating risk during the pre-signature phase as part of commercial negotiations and legal review.
However, when considering contract management KPIs the main focus needs to be on the post-signature period and monitoring risk on an ongoing basis.
In terms of the contract lifecycle, this means measuring risk in relation to the contract start-up, operation, renewal and close-out stages.
For these stages, there are two types of risk that are relevant:
- Contract-related, such as regulatory non-compliance, uncontrolled contract changes and implementation schedule overruns
- Supplier-related, such as financial difficulties, high staff turnover and service delivery failures.
The Contract Risk KPI will require that a scoring system be created that can record the relative potential impacts of different risks. This could be as simple as a traffic-light system or high/medium/low scheme to broadly split overall risk.
Or it could be more granular with detailed scales and tight definitions to give a more thorough view. Again, it will depend on the amount of expertise and resource available in the business to deploy in this way.
This KPI relies on:
- A checklist of potential risks that need to be regularly assessed for contracts and suppliers
- A list of potential risk mitigation suggestions for various types of risk
- A method of assessing risk likelihood and impact
- A method of recording risk assessment outcomes per contract and per supplier
- A method of aggregating risk assessment outcomes over multiple contracts and suppliers
- A method of reporting risk assessment outcomes.
Value of Contracts Under Active Management
The total value of contracts under management will always be an interesting data-point. While it can be sliced in any number of ways, it is not in itself a valid KPI.
Instead, it’s worth looking at the proportion of contracts that are under “active management” and then splitting that further by contract importance.
How a business defines “active management” will depend on the maturity of its contract management processes. Considerations will include things like whether a named contract manager has been assigned to it and the regularity of formal contract reviews.
Similarly, a way of defining contract importance is also vital for this KPI and that too will vary from company to company. Considerations here will include contract value, strategic importance and availability of alternatives.
Ultimately, this KPI is a risk management measure, which reveals whether contract management activity and resource is being adequately focused on the most important contracts.
It’s expressed as a percentage and calculated as:
Value of Managed Important Contracts / Value of All Important Contracts
As an alternative, if not all a business’s important contracts have values attached to them, it can also be expressed by using the number of important contracts, rather than the value.
This KPI relies on:
- Definitions of both active management and contract importance
- Assignment of values for both attributes in every important contract.
- A method of reporting the KPI at aggregate and split levels.
Time to Signature
This is an efficiency measure designed to help optimise the pre-signature processes and reduce the overall time taken to move from contract initiation to signature.
Firstly, it requires identification of all the different phases of activity that lead up to the signature. These might include activities such as:
- Preparation of the procurement specification
- Management of an RFP process to obtain offers from suppliers
- Technical and commercial negotiation of the deal
- Commercial and legal review and negotiation of the contract
- Management level review and approval of the deal
- Board level review and approval of the deal
Once a comprehensive list has been compiled of these different activities, the next step is to look at putting appropriate Service Level Agreements (SLAs) in place for each of them. This is effectively deciding what an appropriate/acceptable amount of time is for each of these phases.
If this hasn’t been measured before then canvassing the various teams to gauge previous performance is a good place to start.
Once you have a full list of phases and their SLAs, you will be able to work out how long a particular contract should take to go through the phases that are appropriate for it.
You now also need a method for recording the time taken for contracts to complete their various processes. This could be by using a dedicated contract management software, with an inbuilt workflow engine, or by something more manual such as a spreadsheet.
Once you have this, you then have all the tools and processes required to record and optimise time-to-signature for your incoming contracts.
This KPI can be expressed as simply an overall number, with the aim being to keep it as low as possible. However, this could mask differences in the types of contracts that are being processed.
For example, a complex contract managed flawlessly could still take longer to get to the signature stage than a simple contract managed badly.
Instead, it will be best to track both the overall figure and the overall figure as +/- vs the expected SLA time.
This will give you better context for deciding whether performance is trending positively or negatively.
You’ll not only be able to see the overall figures, but will also be able to:
- Break it down by type of contract
- Review each phase’s specific performance vs SLA
- Address performance of specific personnel or teams that consistently fail to meet SLA deadlines.
This KPI relies on:
- A method of recording the time it takes for a contract to pass through every stage of the process from initiation to execution
- Establishment of SLAs governing each activity transit time
- A method of identifying every internal individual and external party involved in each measured activity
- A method of collecting all relevant information for reporting purposes.
Contract Administration Time
This is another efficiency measure, designed to identify whether contract management resources are being deployed appropriately post-signature.
Similar to the time-to-signature KPI, it needs to be established what is an appropriate level of engagement for each contract and then what is the actual amount of engagement.
Using this spectrum of performance it should be possible to then identify contracts that are requiring a disproportionately large amount of administration as well as others that may be under-serviced and could therefore be a risk to the business.
Over time, the total amount of contract administration time should be recorded (and a cost applied to it) as well as its level relative to the expected amount of time.
While it will require regular sense-checks, here the aim is to try to keep the actual figure as close to the expected figure as possible as it denotes that the “right” amount of resource is being deployed to manage contracts on an ongoing basis.
If the actual figure is higher than the expected one then it implies that there may be issues with certain contracts requiring extra work. If it’s under, then it could be that certain contracts are being neglected.
How much of this is scheduled administration (eg. Quarterly Business Reviews) and how much is ad-hoc, avoidable work (eg minor contract queries)?
This KPI relies on:
- A timesheet system to record hours worked
- A coding system to record where the time was spent
- A calendar system to show all pre-scheduled activities (eg. Quarterly Business Reviews)
- A method of designating hourly costs that doesn't inadvertently reveal salaries of the individuals performing the contract administration activities.
There are several KPIs relating to renewals that can be tracked to improve performance, reduce risk and generally remove any surprises.
- What percentage of contracts are renewed? A headline figure that will need to be tracked over time.
- What percentage of renewed contracts followed a mandated renewals process? This is a measure of how closely company policies are followed and should be as close to 100% as possible
- Of those that are not renewed, what proportion are regrettable/avoidable? The closer to zero the better for this measure. It will give an indication of whether business relationships are being mismanaged or whether renewal processes are being neglected.
This KPI relies on:
- A method of recording if a contract was configured for auto-renewal, was actually automatically renewed, was renewed with explicit approval, or was terminated
- A method of selecting the desired contracts for reporting renewal statistics
- A method for determining whether a specific contract not being renewed was regrettable or avoidable
- An approach for reporting renewal statistics.
This is a measure of the ongoing health of contract relationships and to what extent the obligations agreed are being met.
Depending on what the milestones and obligations are, this will also have a direct impact on business revenues so is vitally important to monitor.
It will require a central record of all contract milestones and their associated dates and actions. It will also require a robust process to make sure that all obligations are added to the central register as and when new contracts are signed.
At an aggregate level, this KPI tracks what percentage of milestones are hit by their agreed dates. Over time, action should be taken to ensure this number moves to be as close to 100% as possible.
Beneath this aggregate figure, there should be the opportunity to drill down to see what kinds of commonalities there are between milestone types that are consistently missed and for remedial action to be taken.
It should also be possible to track what proportion of contracts complete their lifecycle and hit 100% of their milestones.
This KPI relies on:
- A method of identifying every individual milestone to be met in a contract
- A method of recording whether or not a milestone was met, fully or partially, on-time or late, well or poorly, plus any commentary about lack of success
- A method of selectively extracting milestone performance data for reporting.
Contract Consistency and Language
In an ideal world, a business’s standard contracts are accepted without change by all contracted partners. In reality of course, this doesn’t happen as negotiation and legal review results sometimes in comprehensive changes.
Reviewing and agreeing these changes takes time, costs money in the form of legal fees or salaries and delays realisation of the expected benefits from contracts.
So it’s in a business’s best interests to monitor the extent of these changes and to then take mitigating action to reduce the amount of changes required.
This KPI is best calculated at a high level by looking at the volume of contracts with non-standard clauses as a percentage of total contracts signed.
Over time, the aim should be to take mitigating action that gradually reduces that percentage to being as close to zero as possible. These actions can include:
- Re-writing standard clauses based on previous necessary changes to try to make them more likely to be accepted first-time
- Drafting a library of acceptable alternative clauses that can be used as appropriate during legal review
- Choosing contracted partners, where possible, with similar characteristics to existing agreeable partners.
Whether performed manually or via automation, this KPI relies on:
- The existence of a set of preferred standard clauses, possibly accompanied by a set of acceptable alternative standard clauses
- A method of categorising the intent or subject matter of each standard clause
- A method of identifying each standard clause
- A method of determining if a group of words in a contract can be classified as a clause, as distinct from a heading, a definition, a preamble and so on
- A method of identifying a numbered or unnumbered subject clause for reporting purposes
- A method of categorising the intent of any particular clause in a contract
- A method of checking if the subject clause has a category matching any standard clause
- An approach for handling a subject clause with an unknown category
- A definition of what 'difference' means when comparing two clauses
- A method of determining any differences between two clauses with the same category
- A method of determining if the subject clause is different from the standard clause
- A method of reporting any differences between the standard and subject clauses
- A method of reporting the grade of differences between the standard and subject clauses
- A method of reporting the deviation from standard of an entire contract
- A method of logging the outcomes of this compliance-with-standards check for later on-demand reporting and analysis.
The KPIs above should provide a strong basis for improving contract management performance over time.
They can be adapted as required to suit different businesses and be reported more or less frequently depending on the amount of internal resources available to support the process.
There’s no point initiating a heavily manual process that requires huge amounts of effort to produce the data, if that leaves no time to actually implement remedial actions.