Business seems to be going well, but are your processes really performing as well as you think? Could there be bottlenecks you’re not aware of, or milestones you’re missing? And can you be sure you’d spot the ‘rogue contract’ that could spell serious trouble down the line?
Our Top Ten Key Performance Indicators (KPIs) will save time and cost – and keep you in control.
It’s business as usual, or so it appears. But - unknown to you - a security breach has occurred during a signature approval. Would your processes pick this up, or do you now have a rogue, potentially destructive contract you’ll know nothing about until it’s too late?
The most important metric to a sales-driven company will almost always be how fast deals close – and Contract Lifecycle Management (CLM) software has enabled many companies to make spectacular savings and accelerate revenue by cutting contract execution time.
But as contracts move through approval workflows, it’s also imperative to know if an anomaly or security breach has occurred. The consequences are sure to surface when you least expect them, and the impact could be significant – and costly.
Without these KPIs you’re leaving a lot up to chance
In contracting it’s important to be aware of seemingly small deviations from optimum performance that can have a big impact over time, which can be bad news for businesses that do not have proper controls in place. It’s also important that your system can generate information to support decision-making.
For example, could your system tell you:
• which reviewers and departments are taking an inordinate amount of time with drafts and edits
• which contracts have driven the desired outcomes for your business
• who your best partners have been, and how they have performed against contract terms
• what your next-step decisions should be as contracts expire?
Without the ability to track KPIs such as the ten outlined below, organizations are leaving a lot up to chance:
1. cycle time from contract initiation to signature
2. delay in approvals
3. trends by type, geography, or other characteristics
4. contract volume per customer, partner, program, type, and geography
5. qualitative contract value assessments and scoring
6. historical trend performance analysis
7. contract obligation performance
8. deviation of contract terms from standard clauses
9. percentage of agreements expiring without renewals
10. inappropriate authorization and signature approvals
We’ve set out our “Top Ten KPIs” in more detail below. We offer them to you for guidance only, of course - you will want to add to them and tailor them to suit your own business and contracting goals.
A robust CLM system will track all of your KPIs, and also contain tools to measure other factors, from risk and compliance to contract performance. As a general principle, your KPIs should ensure that contracts are specific, measurable, attainable, relevant, and time-based across the enterprise.
KPI 1: Cycle time from contract initiation to signature
This measurement is fairly straightforward: How quickly are deals closing? Faster closing times mean money in your pocket sooner. This metric is the one most frequently used to track performance of the overall contracting process. Cycle times vary based on type of agreement, scope, and stakeholder involvement within the contract design and execution, and complex contracts can be particularly lengthy and costly. However it’s important to consider these benchmarks as executives establish objectives.
Sophisticated CLM systems should offer efficient contract authoring and review processes with embedded clause templates and libraries, streamlining the process of assembling and negotiating contract terms across multiple divisions or geographies.
One global software developer with more than 70,000 contracts used CLM software to cut contract execution time by 48%. This saved millions for the developer and accelerated revenue.
KPI 2: Delay in approvals
While the first KPI evaluates the time it takes to get a contract from start to finish, it’s important to also understand whether specific sub-cycles are taking longer than necessary. One of the more frequent culprits is approvals. As a contract moves from the drafting stage to reviews by legal, finance, and management, this second KPI can tell a contract manager which reviewers and departments are taking an inordinate amount of time with drafts and edits. Sales directors are particularly interested in any delays in cycle times because it directly impacts overall business performance.
Workflow automation can be custom tailored to streamline review and assign tasks along clearly defined paths, authors, and delegations, providing enhanced visibility into the CLM process.
KPI 3: Trends by type, geography, or other characteristics
When executives have access to information by geography or contract type, they are able to identify where and at what point in the cycle bottlenecks are occurring. These tools can help monitor anomalies stemming from organizational structure or workforce issues across divisions and regions.
KPI 4: Contract volume per customer, partner, program, type, and geography
Monitoring for details such as volume allows for quick contract performance evaluation. The ability to drill down and analyze specific types of contracts augments the understanding of business growth and value drivers, aiding overall business planning.
With this data, teams can quickly identify and track how many contracts are in progress in a region, how partners are performing against contract terms, and how partners stack up against others. Details pertaining to contracts, in addition to volumes per trading partner, can include contract revenue ratios, profitability, and other performance metrics that can be quickly and easily drilled into from dashboards.
KPI 5: Qualitative contract value assessments and scoring
It’s not enough just to measure contracts with quantitative performance metrics; qualitative metrics are also key in judging effectiveness.
Growing organizations become more complex. So do their contracts, which sometimes struggle to scale. Companies need a way to evaluate terms and conditions, clauses, and amendments that are being negotiated or renewed on a continual basis. Further evaluation by region and division can also shed light, as local conditions, rules, and economies may highlight the importance of some terms over others. Organizations need to find ways to balance regional and divisional autonomy with effective and uniform contract standards.
One way to do this is to evaluate contract terms based on attributes, monitor the performance, and then score them.
KPI 6: Historical trend performance analysis
Historical trend analysis offers context for future plans by measuring and tracking results post-execution to ensure they meet current goals and objectives, pinpoint areas in need of improvement, and set realistic growth plans.
The findings can help determine which contracts have driven the desired outcomes for your business, commonalities among your highest-performing contracts, who your best partners have been, and so forth.
KPI 7: Contract obligation performance
Put simply, CLM should help organizations maximize revenue, ensure parties meet milestones, and minimize disputes, chargebacks, and refunds.
Missing milestones can be costly, especially if you face penalties or severe fines for doing so. Missing other contract obligations can be extremely pricey if the business results are not measured or rationalized against the terms contained within the contracts. Overpayments and errors on claims payouts are all too easy to do.
KPI 8: Deviation of contract terms from standard clauses
When managing thousands of contracts that might span multiple business divisions and geographies, it’s vital to ensure that all parties comply with the terms and clauses contained within contracts.
An effective CLM system will monitor and alert administrators if contract deviations occur or if changes to standard clauses are made. It should also project the impact of changing standard clauses on overall business performance.
KPI 9: Percentage of agreements expiring without renewals
As contracts expire, next-step decisions must be made to continue or terminate the agreement. With automated CLM, it’s particularly important to be mindful of auto-renewals. Once an auto-renewal is activated, that contract is legally effective.
With appropriate calendar functions, executives can plan for the expected next action, whether that’s negotiation of terms, amendments for augmented business, or contract termination. This is particularly important for organizations managing thousands of contracts that contain numerous amendments to master agreements.
KPI 10: Inappropriate authorization and signature approvals
As contracts move through approval workflows, it’s imperative to know if an anomaly or security breach occurred during an authorization or signature approval. Rogue contracts can cause significant and sometimes unforeseen consequences for businesses that do not have proper controls in place.
Authorization is necessary to maintain compliance within your organization’s governance and can ensure that managers do not exceed spending authority.
Aggregate spending authority across divisions and percent-to-budget analyses are also available to guide strategic decisions and act as a control.
Whether the signature was digital or signed in ink and scanned, an audit trail is imperative to ensure the approval was accurate and the structure is enforced.
If a signature is found to be invalid or unlawful, risks to the organization include lost intellectual property, lawsuits, and negative impacts to partner relationships.
Does your company take full advantage of CLM?
CLM systems are designed to take the headache out of manual reporting and tracking, freeing you from building tiresome spreadsheets that never quite do what’s needed. They’re used to build relationships, expedite approval processes, and save companies time and money.
Many companies, do not take full advantage of the efficiencies CLM has to offer, however. At the end of the day, evaluating CLM should be based on a company’s ability to make it a strategic part of its operation. These KPIs go a long way toward helping companies make decisions about what they need and getting the most out of the systems they have.
ABOUT THE AUTHOR
Jennifer Hartwell is the Product Marketing Manager at Revitas, Inc. (http://www.revitasinc.com/blog) focusing on Revitas Channel Management and Contract Lifecycle Management solutions for the commercial market.
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