Contracts are the often invisible lifeblood of any company. From sales to procurement to HR – they’re tightly weaved into all business operations. Contracts determine the rights and obligations for the company, employees, customers, suppliers and partners. But how to make sure they deliver the value they should and could? In this article we take a look at how to set, measure and monitor the most important contract lifecycle management metrics (or CLM KPI-s) for your company.
The legal function is evolving from being a protector of the business and a cost centre to the role of business enabler, helping the organization to meet business objectives and drive profit and growth. The more efficiently a contract lifecycle is managed, the better it is for your business performance – it can help increase revenue and mitigate organizational risks. Suboptimal contract terms and conditions combined with a lack of effective contract management can cost companies an equal to 9 percent of annual revenues.
But as they say – you can’t manage what you can’t measure.
What are contract lifecycle management metrics (CLM KPI-s)?
A Key Performance Indicator (KPI) is a quantifiable measure to evaluate the performance of an organization, employee, etc. over time. This helps understand how effectively a company is achieving their key business objectives. You can use KPIs on multiple levels – from overall company performance to team, process or employee levels.
Also, there are strong KPIs and soft KPIs. Strong KPIs focus on real business needs, can be measured very accurately and need no other metric to qualify it, e.g. the number of deals completed. Soft KPIs rely more on people’s experience, e.g. employee or customer satisfaction. Strong KPIs tend to be taken more seriously, as the soft KPIs act more as nice-to-have indicators.
And just setting the right contract lifecycle management metrics is not enough. It has to be an ever-evolving process of measuring, analyzing, and improving both your KPIs and the processes they describe.
What are the most important KPIs in contract management?
Each legal department should assess its contract management practices and set meaningful measures to optimize the process. Of course, contracts and agreements vary greatly and this makes identifying contract management metrics quite a challenge. A good starting point for KPIs is the SMART criteria – it should be Specific, Measurable, Attainable, Relevant and Time-bound. This way you’ll get tangible data to make informed decisions about your contract management processes.
Here are the 4 most important contracting areas that are applicable for the majority of organizations. Find out which KPIs you can use to measure your performance.
#1 KPI: Contract Efficiency
If contract efficiency sounds like an oxymoron, you’re not alone. Often the contracting process seems like an endless back-and-forth with delays piling up. But examining the trends can help you improve and speed up the process, close deals faster and accelerate revenue.
Contract efficiency KPIs might include:
- Contract cycle time from drafting to signing: it’s the most common metric to track in contract management, and for a fairly straightforward reason. The faster you close your deals, the faster you collect the payments. Saving time saves money and accelerates revenue.
- Processing and collaboration metrics, e.g. contract processing time, number of revisions, number of uploads and downloads, etc. Yet again, the less you spend time on processing and back-and-forth, the faster you collect the revenue. You don’t want to spend more hours on processing the contract than is the eventual contract value.
- The number of contracts delegated from legal to business units: increasing the number of contracts owned by business departments should be the #1 KPI for legal departments.
Remember to differentiate contracts and agreements by contract value, type, structure and other complexities. Examining trends by contract type, customer, partner, geographic location, etc. helps you spot specific bottlenecks in your contract workflows. Using document creation and approval software with automated reporting helps you track these KPIs easily and regularly.
#2 KPI: Contract Effectiveness
While being efficient is about doing things right, being effective is about doing the right things. Effectiveness KPIs help you stay ahead of obligations and opportunities and meet key milestones.
Contract effectiveness KPIs might include:
- Effective contract utilization: make sure your costs are under control by tracking the value of purchases made with simple purchase orders, annual, and multi-year contracts. This helps you avoid missing unpaid dues and collect on unpaid agreements.
- Qualitative contract value assessments and scoring: in complex organizations, you can’t just look at separate specific numbers. The evaluation has to be more dynamic than this. One way to measure contract effectiveness based on qualitative information is to evaluate contract terms based on attributes, monitor performance, and then score them.
- Number of contracts per customer, vendor, program, type, or geographic location: this helps you understand how certain groups or partners are performing against others of that kind. Focus on easily identifiable metrics like revenue ratios and profitability.
- Contract renewal rate: this helps you evaluate both the quality of your contracts and the strength of your business. Sure, this can vary based on the industry, business and contract type, but if you expect 50% of your contracts to be renewed and only 25% do, it’s an area of improvement.
#3 KPI: Contract Value
Contract value can make or break your company’s financial success. Measuring and tracking your contract value KPIs helps you understand how contracts are affecting your bottom line.
Contract value KPIs might include:
- Annualized contract value (ACV): this KPI combines the value of all recurring contracts and is most useful if you have a large volume of long-term auto renewing agreements. You can also compare the rates and revenues of recurring contracts and new contracts, as well as lost revenue from contracts that are not renewed.
- Contract obligation performance: this helps you avoid missing corporate milestones (and costly penalties and fines), and also errors resulting in overpayments.
- Historical trends and performance analysis: tracking historical contract data helps you set future plans. You can figure out what works and replicate it – or what doesn’t, and improve the process. For example, pinpoint your highest-performing contracts, best partners, and so forth.
#4 KPI: Contract Risk
These KPIs help you minimize organizational risk and remain compliant with industry standards. They particularly indicate if you need to improve your contract management practices.
👉 Discover more best practices in contract lifecycle management that helps legal teams drive contract efficiency and mitigate risks.
Contract risk KPIs might include:
- Variance in contract terms from standard clauses: unauthorized changes or incomplete execution of an agreement can put your business at risk. If too many terms vary from standard, it can also mean inefficiency – wasting time and extending cycle time. You can use your contract management software to track compliance and set alerts for variance in terms.
- Number of agreements expiring without existing renewal dates: missing a renewal can cost a lot for your company. Set up upcoming renewal date alerts on your contract management software, so you don’t miss out on opportunities.
- Inappropriate vendor authorization and signature approvals: organizations have authorization policies for a reason. They limit the risk of overspending, and minimize potential security issues. Using digital contract signing and a document approval workflow software gives you transparency and helps ensure compliance.
- Quality/percentage of annual complaints resolved: complaints about existing terms are inevitable, but you can use them to avoid similar issues in the future. Track the number of complaints that were resolved without negative impact on the business. Then look at how they were resolved, and when appropriate, use the same solution in the future terms.
How to set up CLM KPI-s for your business?
As the previous section illustrated, you can basically measure just about anything. But should you, really?
When it comes to KPIs, less is always more.
This forces you to think long and hard about the contract lifecycle management metrics that are truly “key” to achieving your business objectives. It might be tempting to just use the common industry KPIs, but remember – your business and its goals are unique, and so should be your KPIs.
To help you decide which KPIs to prioritize, we asked legal professionals from different sectors and countries about how they define contract effectiveness, what metrics they measure and where they see the biggest value of a contract management software for achieving contract effectiveness.
Understand your business
Almost all experts agree that setting the right KPIs should start with understanding your business, its processes, people and goals. Even companies of the same size and field have different histories, challenges, and goals. Effective contract management can look very different for different businesses.
Otto Lindholm, the Counsel in Dottir Attorneys reminds us that a contract itself is never the central point of any process. It’s a tool to efficiently support other processes. “A contract is always just a piece of the puzzle. When optimizing the contract lifecycle, focus on the bigger picture, different organizational processes and the stakeholders involved at different points in time. Once you’ve mapped those out, think about the most efficient way to integrate them on a process level.”
Alex Herrity, a Senior Manager for Global Legal Solutions in Adidas also emphasizes the needs of the users: “an effective contract management process is designed around the needs of its users. Those needs are different depending on the users’ roles and the stage of the contract lifecycle.
Setting up the right procedures is setting your business and people up for success. “As a rule of thumb the process must be easy to use, avoid unnecessary data input but ensure relevant data is captured in a standardised way,” says Alex. “That promotes direct process efficiency and later efficiencies in linked processes, e.g. reporting, search and retrieval, renewal and statistical analysis.” Inese Lazdovska, the Head of Legal in Mintos also underlines the need for clearly defined roles.
Contract lifecycle automation is the key to efficient contract management and reporting
When it comes to using a contract lifecycle management software, all surveyed lawyers emphasized the need for automating contract creation and focusing on the contract approval process.
Alex Herrity says that document creation is the key-value point in contract management, because that’s where the most amount of time is spent: “If you can reduce the amount of qualified lawyer time spent with templating, automating or even self-service, you can demonstrate clear cost savings. You can either cut your headcount or deploy that saved time to more valuable projects.”
Colin S. Levy, a legal tech thought leader, recommends using a contract management system alongside tools to automate the drafting and reviewing of standard templates: “When it comes to contract management KPIs, automated reporting is the key to accurate measuring.” Inese Lazdovska adds that you should automate whatever is reasonable to automate: “Automating document workflow reduces operational risk, facilitates scalability and helps you work faster in general.”
If you don’t know where to start, Otto Lindholm recommends removing the most obvious obstacles that slow down the process of contract execution. “For example, digital contract signing is the lowest hanging fruit available.”
Take the most out of your contract lifecycle management software
Automating your contract workflow is the key to improving contract lifecycle management metrics – it makes your contracts standardized, comparable, trackable and measurable. An effective CLM software with an inbuilt workflow engine like Avokaado gives you the tools to both track AND improve KPIs. This way you can
- Increase productivity by automating the contract lifecycle management process in the first place.
- Track, monitor and improve contract lifecycle management metrics to detect bottlenecks, manage risks better, meet deadlines and maximize your contract value.
However, many companies don’t take the most out of their CLM software. Automating your contract workflow should help improve contract lifecycle management metrics in all key contracting areas.
- Improve contract efficiency. The KPI of contract efficiency is crucial – and the easiest thing to monitor and improve with contract lifecycle management software. If you don’t evaluate productivity, you run the risk of spending far more time on contracts than necessary, sometimes labor time that exceeds the value of a contract. Using firm-wide smart templates and digital approval/signing reduces both time spent and potential errors. All in all, you execute contracts faster. In Avokaado you can create a centralised clause and template library accessible for your entire team and other relevant parties 24/7.
- Keep your collaboration aligned internally and externally. Use a shared workspace for collaborating on documents at every stage of a document lifecycle. Using transparent and organized internal and external workflows eliminates back-and-forths in email inboxes. With Avokaado, your team is aligned to negotiate the terms, co-draft documents with stakeholders, manage approvals and execute contracts by signing digitally at any device. All steps are tracked and visualised on the mobile-responsive dashboard.
- Minimize contract risk. Using standardized terms and approval workflows, and monitoring compliance with your contract management software is the key to managing contract risks. If too many terms vary from standard, you might need to improve your contract management practices. It also helps avoid subsequent complaints or negotiations. Using digital contract signing and a document approval workflow software also helps you avoid inappropriate vendor authorization and signature approvals.
- Track your KPIs on a centralized dashboard. Contract lifecycle doesn’t end with signing the contract. A good CLM software should give you a centralized overview of the progress, upcoming deadlines, document statuses and unfinished tasks. In Avokaado, our centralized dashboard is all about efficiency and enhancing cross-department collaboration (e.g. the number of templates created by business operation, the number of approved or delegated templates, average cycle time, etc.)
👉 Here you’ll find everything you need to know about automated contract lifecycle management.
To wrap it all up
Setting and implementing contract lifecycle management metrics doesn’t have to be rocket science. Remember, less is more and the main focus should be your unique business objectives.
What doesn’t hurt though, is data-driven contract lifecycle management software. With the right tools you can:
- identify the most important contract management KPIs for your business;
- set and measure the KPIs;
- automate your document workflow;
- standardize the document creation process;
- use digital document approval and signing;
- monitor your contract management KPIs effectively.
Ready to implement and improve your contract lifecycle management metrics?
Start with your first document workflow in Avokaado