Contract Management KPIs: The Metrics That Matter

As an in-house lawyer, understanding the key performance indicators (KPIs) for Legal functions is crucial for measuring the success of your contracts. In this guide, we’ll explain what contract management KPIs are, how to define them and provide you with examples. We’ll also show you how to use these metrics to improve your contract management processes and ensure long-term success for your organisation.

What are Contract Management KPIs?

Contract management KPIs are measures used by Legal functions to evaluate the performance and effectiveness of their organisation’s contract management processes. These metrics help organisations understand how well they are managing their contracts, identify areas for improvement, and measure progress against agreed benchmarks. Further, using KPIs can help in-house legal teams better communicate the value of their contribution to the overall business. Central to effective contract management is identifying critical activities that require monitoring, measuring and reporting on key performance indicators.

The Legal function must be vigilant in tracking changes in business environment as it affects their ability to execute the terms of a contract effectively. Consequently, using contract management KPIs can provide valuable insights into whether agreements have been successfully executed in a timely manner or which ones may need further attention with regards to risk mitigation strategies.

Definition of KPIs

Key Performance Indicators (KPIs) are a central concept in task management, providing insight into how well an organisation is performing against its agreed business objectives. While metrics track activity and changes, KPIs go further by establishing clear benchmarks that help organisations evaluate their performance over a duration of time. Effective KPIs also possess certain characteristics that make them reliable and actionable tools for decision-making.

KPIs contextualise measurements within a broader framework of business goals and objectives, making it possible to determine whether you’re on track to meet those targets or not.

It’s important to understand the difference between metrics and KPIs when defining your contract management strategy. Metrics are raw data points without context or direction; they simply measure an activity or outcome. On the other hand, KPIs contextualise these measurements within a broader framework of business goals and objectives, making it possible to determine whether you’re on track to meet those targets or not. Effective contract management KPIs should be specific, measurable, attainable, relevant, and time-bound (SMART), ensuring they provide valuable insights into organisational performance while remaining practical tools for driving improvement.

Why are Contract Management KPIs Important?

Improving contract performance is crucial for any business, and that’s where contract management KPIs come in. By establishing agreed upon benchmarks and measuring activity against them, you can identify areas for improvement and make changes to ensure the contract process is delivering maximum value for the business. Additionally, these KPIs can be used to assess risk meaning that Legal can act sooner if there are gaps in the contract management process that expose the business to a high level of risk. 

How to Define Contract Management KPIs

To define effective contract management KPIs, start by identifying your business objectives. Your KPIs should align with and support these goals to ensure that you are measuring the right numbers and metrics. Once you have identified your objectives, determine the most relevant metrics for measuring success in contract management. Finally, set clear targets and benchmarks for each metric to measure progress over time and identify areas for improvement. Let’s go into each step in more detail.

Identifying Business Objectives

Aligning your contract management goals with overall business objectives is crucial in ensuring that your efforts are contributing to the success of the company. By doing so, you can identify areas where inefficient contract management can negatively impact the bottom line and determine specific outcomes that holding the function accountable to contract management KPIs should drive. Here are some key ways to align your contract management goals with business objectives:

• Conduct a thorough review of existing contracts and their alignment with company goals

• Engage stakeholders across departments to understand their contracting needs and how they relate to overall business objectives

• Identify potential risks and opportunities for cost savings or revenue generation through effective contract management

Determining Relevant Metrics

Measuring average time to author a contract tracking the number of contracts requiring Legal review at any given time, and monitoring turnaround times for contract negotiations and approvals are all essential metrics to measure when it comes to effective contract management. These KPIs can help Legal functions identify areas that need improvement while demonstrating their value to senior management.

To gain a more comprehensive understanding of key performance indicators related to contract management, consider measuring:

• Average time to author a contract

• The number of contracts in requiring Legal review at any given time

• Turnaround times for contract approval, negotiation and execution

• Cost per executed contract

• Contract renewal rate

• Number of new contracts executed

• Total spend under management (SUM)

By keeping track of these critical metrics, you can optimise your organisation’s contracting process while ensuring timely delivery on all projects.

Setting Targets and Benchmarks

Establishing realistic targets and creating benchmarks is essential for effective contract management. By setting achievable goals based on historical data or industry standards, you can measure your progress over time. To achieve this, it’s important to adjust targets regularly to reflect changes in organisational priorities or market conditions.

Here are some tips for setting targets and benchmarks in contract management:

• Analyse historical data to identify trends and patterns e.g. average contract time to execution

• Set specific, measurable goals that align with business objectives, e.g. reduce the time it takes for a contract to be sent to a counterparty from X days to Y days in order to speed up overall execution time 

• Establish a baseline performance level to measure progress against, e.g. how long a contract should take to be reviewed by Legal

• Set clear dates and timelines for achieving each target, e.g. how long an average employment agreement should take to be drafted and sent to a new candidate once they have been selected

• Regularly review and adjust targets as needed

By following these guidelines, you’ll be able to establish realistic targets and benchmarks that will help drive success in your contract management efforts. 

Download the Plexus eBook for help in setting KPIs to measure the performance of your legal function.

Examples of what can be measured for a Contract Management KPI

Contract management KPIs are essential metrics for Legal functions to measure and track in order to ensure effective management of contracts. 

Let’s explore some common KPIs to measure the productivity and effectiveness of contracts within an organisation.

Contract Cycle Time

The contract cycle time is a crucial metric that measures the efficiency of a business’ contracting process. The average time it takes for a contract to go from draft to execution provides insight into the overall value a contract brings and costs to the business. This KPI helps identify bottlenecks in the contracting process and allows organisations to make necessary adjustments.

The time taken for contracts to move from one stage to another, such as move from review to approval stages, or approval to execution stages, as well as the time taken for negotiation and revisions with counterparties, are also important KPIs related to contract cycle time. By tracking these metrics, organisations can identify bottlenecks where improvements can be made in order to speed up the entire contracting process while ensuring compliance with business and legal requirements.

Cost per executed contract

Every contract that is drafted and sent for signature carries its own costs associated. This is typically in the form of the cost of resources the business must provide in order to draft. Every person who works on a contract contributes to this overall cost and so monitoring the cost of the amount of stakeholders involved can be a useful metric for Legal to note. 

There is also the associated ​‘costs’ of missed deals due to lengthy drag times as the contract moves from each stage and stakeholder. This cost can cause sales deals dragged out so much that revenue cannot be recognised for an extended period of time, or worse, the counterparty gets frustrated and walks away from the deal altogether. By measuring the cost of contracts as a KPI, Legal and the business are forced to become more aware of the time they are spending on a contract and should be incentivised to move it to the next stage of the process sooner. 

Contract Renewal Rate

The contract renewal rate measures the percentage of contracts that were renewed compared to the total number that expired or terminated in a given period. It’s important to track this metric as it indicates customer satisfaction and loyalty, while also identifying issues in the contract management process if upcoming expiry dates are not flagged early enough to negotiate a renewal. Reviewing % change in renewal rate compared to previous year/​month/​quarter helps identify trends, both positive and negative, and improvement opportunities.

Analysing why certain counterparties opted out of renewing is crucial for understanding what can be improved in order to increase retention rates. Reasons may include forgetting the contract is due to expire and missing valuable time to negotiate a renewal, pricing issues, poor communication, changes within the industry, or better offers from competitors. By addressing these issues head-on, Legal teams can develop effective strategies for the business to improve their contract renewal rate metrics.

How technology can be used to support Contract Management KPIs

One of the main benefits of using contract management KPIs is that they help you identify areas for improvement quickly. For example, if you notice a particular aspect of your operations consistently underperforming, such as missed deadlines or budget overruns, it’s easier to target specific improvements rather than making broad changes blindly. By pinpointing weak spots in your process early on through KPI analysis, you can save time and control resources while also improving results overall.

While it is not impossible to monitor and manage contract management KPIs manually, it is often extremely difficult to gather, analyse and interpret the data the SMART KPI requires. At the end of the day, if you can’t find the data points you need to measure then the KPIs will not be complete or effective. 

Today, most Legal functions are looking towards adopting contract management software. This software captures all the data relating to contracts throughout the entire lifecycle and stores it in-platform ensuring that the business not only has a single-source of truth for all their contracts, but accurate insights can be generated at the click of a button.

How contract management software can help monitor performance

Contract management software is designed to store and easily search for data relating to contracts including contract expiry dates, lawyers assigned for review, contract value and status. This means it makes it easy for Legal to track and easily communicate vital components in monitoring performance such as contract renewal rates, contracts requiring Legal review , and measuring the speed of contract negotiations and approvals. These key performance indicators (KPIs) allow Legal to evaluate their team’s effectiveness in meeting contractual obligations while also identifying areas that require improvement.

By tracking contract renewal rates, Legal teams can determine if their negotiating strategies have been effective. Tracking contracts requiring Legal review ensures that Legal are optimising their time with only high-risk, high-value legal work for the business and are not focusing too much resources towards lower level simple contracts. Measuring the speed of negotiations helps identify bottlenecks, reducing delays during future agreements. Monitoring these KPIs enables Legal to become better business strategists and make data-driven decisions regarding managing contracts effectively.

How contract management software can help identify areas for improvement

Contract management software allows Legal to consolidate and sort data which easily highlights bottlenecks, delays or unclear processes that slow down workflows in the contracting process. This gives Legal the opportunity to improve efficiency in areas that need attention. In some cases, this might be expanding their contract management solution to take advantage of automation in some of thos to swiftly move a contract between stakeholders who are next to review, approve or sign a contract. 

Contract management software also enables Legal teams to, identify areas where common processes can be optimised for better outcomes. For example, rather than relying on the contract executor to remember when a contract is due to expire, contract management software can be used to set up automated alerts for key milestones which they’ve previously required advanced notice to act like when a contract is due to expire and its best to start organising a renewal. These key indicators provide valuable insights into the effectiveness of contract management strategies and drive continuous improvement efforts toward better outcomes.

How contract management software helps Legal make data-driven decisions

Contract management software allows Legal teams to utilise analytics to identify trends and patterns in contracts. This is crucial for in-house lawyers who want to make informed decisions about the status of their function and report effectively how they support overall business outcomes. By analysing data, they can identify areas for improvement and optimise their contracting processes. They are also able to provide valuable insights to the business on the effectiveness of partnerships by calculating ROI on specific contracts or vendors.

Using contract management software to support KPI data to make informed decisions about future contracts can be a game-changer for Legal teams. They can track metrics such as renewal rates, time-to-signature, and cost savings to evaluate the success of their current strategies and adjust accordingly. Data-driven decision-making not only saves time but ensures that every move made is backed by hard evidence in accordance with many businesses’ expectations of their functions and leads to better results in the long run. 

Conclusion

In conclusion, identifying, tracking and optimising to the right contract management KPIs is crucial for achieving success in your organisation. By measuring metrics such as contract cycle time, legal review required, and renewal rate, you can identify areas for improvement and optimise your processes accordingly. Keep in mind that selecting the appropriate KPIs requires a deep understanding of your business goals and objectives, as well as collaboration between different departments within your company.

Overall, implementing a data-driven approach to contract management can help you stay on top of performance indicators and make informed decisions that drive value across your organisation. Remember to regularly review and refine your KPIs based on changing business needs to ensure ongoing success in managing contracts effectively.