Measuring Commercial Contract Management KPIs

Management guru Peter Drucker famously said, “What gets measured gets managed.” I would add “and gets optimized,” particularly when it comes to a company’s commercial contract portfolio.

Managing your company’s contracts requires much more than merely organizing your agreements, tracking important dates and deadlines, and ensuring that information is accessible. An effective commercial contract management process should also focus on more robust performance monitoring, reporting, and analysis which enables better contract insight and opportunities to create efficiencies and optimize processes moving forward.

In short, establishing, tracking and reviewing KPIs is a critical component of contract lifecycle management. It’s the way to drive down costs and eliminate bottlenecks that hold up the execution of agreements.

Some of the benefits businesses realize from better reporting and measurement include:

• Mitigating business risk
• Reducing time to contract execution
• Realizing more value from contract agreements
• Staying on top of contract renewals
• Monitoring and enforcing compliance with contract obligations
• Optimizing processes across the entire lifecycle of contract management, and the organization

Having contract management software in place helps a business to track and measure KPIs, but for software to do its job it must be able to access the data it needs.  To better understand, let’s take a deeper look.

Many businesses struggle to capture data across their commercial contracts portfolios. Layering software on top of a disorganized system won’t solve the problem. Rather than spending time and resources trying to integrate software to manage “dirty” data, it’s first necessary to clean up existing data and implement more organized systems for data capture moving forward.

Once those systems are in place, software can then be deployed to extract and analyze data and create efficiencies in the review, negotiation, and management of commercial contracts.

Better Intake Leads to Better Contract Management

When the intake of information at the front-end of a contract review process is done in an ad hoc, unstructured fashion, it leads to incomplete or inaccurate information, which makes it really difficult to move contracts through a company’s legal department in an efficient and effective manner.

Moreover, and just as important, a structured intake process gives a corporate legal department the data it needs to improve its contract review process moving forward. Just as a defect or error at the start of a manufacturing assembly line will derail the entire production process, ad hoc intake instigates and exacerbates inefficiencies throughout the entire contract review process.

An important part of designing an effective intake process is defining rules and creating structure so that as much of the contract management process as possible is standardized and systematized. This type of structure is what allows software to help businesses review contracts more rapidly, organize large amounts of data more efficiently, and increase the volume of contracts that can be reviewed, negotiated, and executed.

However, those who realize the greatest benefits from contract software in the future are those who lay the groundwork for it today by establishing processes that will enable technology to optimally perform. Software requires rules, and if there are no clear rules to abide by, even the strongest supercomputer paired with the smartest software won’t be able to add much value.

Accordingly, before investing too heavily in technology, businesses should attempt to standardize terms, create templates, think through “if/then” scenarios, and evaluate risks associated with their various forms of commercial contracts. We call this process developing a “playbook” for your contracts. It’s not possible to standardize and create rules for 100 percent of contracts—there will always be outliers—but creating a playbook, which can be used to set rules for software, can drive tremendous efficiencies for a business and make corporate legal departments more effective.

Using Software to Track and Measure Contract KPIs

Once a strong contract management foundation has been established by putting the right people and processes in place, and establishing a playbook, software can help optimize results through the tracking and measurement of KPIs.

Identifying which KPIs to track is an important component of developing a contract playbook. Every corporate legal department’s needs are different, so there is no one-size-fits-all approach to establishing KPIs. At Lexitas, we routinely work with our clients to develop and document relevant KPIs that relate to their unique business processes and objectives. Once KPIs are determined, software can be used to pull relevant data and make it accessible via dashboards.

Some of the most common KPIs address contract efficiency (time from drafting to execution), contract effectiveness (number of new contracts and renewals), contract value (annualized contract value), and contract risk (missing renewals, unauthorized changes, disputes).

In many instances, less-is-more is the best approach to establishing KPIs. While there are many things you can track, there is likely to be a small, core set of metrics that really matter when it comes to measuring contract performance.

Having too many metrics in place can make the tracking process difficult and diminish effectiveness, because when there is too much data it’s hard to assign someone the responsibility to track and analyze it. If no one takes ownership, then it’s nearly impossible to create accountability for the achievement of the desired outcomes, and to improve processes and performance moving forward.

Processes and Technology Enable Effective Contract Management

Software plays an important role in creating efficiencies in commercial contract review, as well as other legal processes. But it’s critical that businesses refine their processes in order to ensure that software is effective.

At Lexitas, our Commercial Contracts Outsourcing team specializes in designing and implementing contract lifecycle management systems that help corporate legal departments optimize every aspect of their contract management processes.