November 17, 2022
6 Contract Management KPIs You Must Track for Success
Contract management focuses on ensuring that all parties involved in a contractual agreement do what is expected of them. These parties include you and your clients, partners, employees, vendors, etc. It involves facilitating the creation, execution, analysis, and termination of a contract.
Before creating a contract, it’s normal for you to have clear expectations of what needs to be achieved. For instance, if you’re given a contract for a client’s project, you and the client must have defined responsibilities and set objectives, goals, timelines, and so on.
Now, how can you track how effectively the stakeholders are keeping to their end of the bargain? These are some of the questions contract management KPIs answer.
With contract management key performance indicators, it becomes easier to understand various stages in the contract lifecycle. You’ll have insights into who is defaulting, what is working, and things you need to change. Ideally, the right contract management performance metric for you must fulfill the “SMART” criterion, as shown in the image below.
With this criterion in mind, here are six customer management KPIs to streamline your sales and RevOps contracts moving forward.
1. Duration of Contract
Contract duration defines the span of the contract's validity. The contract stakeholders decide mutually on this duration before even processing the contract itself. It usually appears like the example below:
Without proper management of the deadlines associated with signed contracts, you may end up with unnecessarily prolonged contracts that can take a toll on your business revenue. Similarly, it may lead to poor customer nurturing, missed renewals, and getting to obligations you can't fulfill anymore.
Tracking the duration of contracts helps avoid overpayment of claims or rendering a service beyond the agreed date. Further, getting in sync with the associated deadlines makes managing renewal dates and extensions easier for you.
An effortless way to keep track of your contract’s duration is by using contract management software to capture your data. With a platform like Contractbook, you can automate your contract management lifecycle and monitor critical dates.
Once your contracts are nearing their deadlines, the platform sends every stakeholder an alert. So, you won't have to deal with contracts extending beyond the pre-agreed duration.
2. Efficiency of Contract
The contract management lifecycle is subject to several delays and bottlenecks. Negotiations can stall, communications hampered, and drafting can get stuck in unproductive cycles. Then there are the potential breakdowns in the performance stage, resulting in additional delays.
However, tracking key contract efficiency metrics helps you understand where to direct your efforts. As a result, you can finalize deals quickly, maximize output, and increase revenue in no time.
The first contract efficiency-centric metric is the contract cycle time. The contract cycle time begins at contract creation and ends when you close the deal with your clients.
When you close deals faster with clients, you can seal more of them within a shorter period. Of course, the more contracts you can get, the more your business revenue.
On average, Aberdeen recommends 20 to 30 days from contract initiation to finalizing standard contracts. But note that contract cycle times may vary depending on the structure, contract agreements, and other contractual complexities. For instance, contracts that require collaboration between various departments and external legal counsel can take longer to complete.
You can either keep track of the times manually or automatically. Automated tracking involves using a dedicated contract management system. Manually, you can use a simple spreadsheet like the one below.
Automation also has a role to play in shortening this cycle. For instance, Contractbook helps you manage the cycle systematically. With Contractbook, you can use compliant contract templates for contract drafting.
Plus, you can sign contracts with e-signatures, and automate your entire contract process. You could also use task tracking software to help you collaborate more seamlessly, leading to a quicker workflow. Asana and Jira are two popular choices. So, you might want to read Asana versus Jira articles to pick the best option for you.
Another way to measure efficiency is by analyzing various aspects of your contracts. These include vendors, geographic locations, customers, types, financial values, and other characteristics.
With this analysis, you can better define the origin of particular bottlenecks in the contract lifecycle. Then, you can make changes to elevate the contract structure in the underperforming area.
3. Effectiveness of Contract
Contract effectiveness helps you define whether the contract meets the stakeholders’ expectations. Effectiveness-centric KPIs are necessary to help you attain set milestones and stay afloat in existing obligations and opportunities. To assess effectiveness, you’ll need to consider contract management metrics like the volume of contracts and contract scoring.
You can assess your contract’s effectiveness based on specifics like contract type, program, vendors, locations, etc. This will help you understand how various contracts with similar attributes perform against one another.
For instance, if you have various active commercial contracts, you can compare these contracts to see how they perform relative to one another. You’ll observe details like profitability, revenue ratios, and other performance metrics. With this comparison, you can identify and improve on poor-performing contracts.
Another way to measure the effectiveness of a contract is by listing out contract terms for various deals. Then, assign specific scores based on how each stakeholder has met these terms. In essence, you’re converting qualitative contractual insights into something quantifiable. Then, pick out the terms lacking to address them accordingly.
4. Renewal of Contract
Another KPI to note is your contract renewal rate. This can give you insight into the quality of the contracts you draft. It further signals when you need to revisit your overall RevOps.
Tracking renewal rates is especially important for customers' sales contracts and the success of your SaaS marketing strategy. For instance, if you expect a 60% renewal rate for a particular service and get only 20%, you'll know there’s something wrong somewhere.
To calculate the renewal rate, divide the number of extended contracts by renewable contracts, as shown below. Then multiply by 100.
You can further subtract your renewal rate from 100% to get the percentage of renewable contracts not actually renewed. Of course, you want this to be as close to zero as possible. This metric can also help you determine if you’re mismanaging business relationships or if stakeholders are neglecting the renewal demands.
5. Performance of Contract Obligations
According to a recent Researchgate study, if your team keeps failing to meet contractual obligations, this could hurt the relationship you’re building with your contract’s stakeholders.
However, it is impossible to ensure compliance with contract obligations if you cannot monitor the agreed conditions, deadlines, renewals, and commitments.
Hence, the need to track your contract obligation performance. To achieve this, you need a central record of all your contract milestones. Ideally, you should have a contract repository with comprehensive contract details—including relevant dates and actions. Further, revisit this central register when updating the contracts or signing a new one.
Under these records, create a system that will help you analyze the milestones met and the types missed. This record will further help you keep track of the percentage of contracts that hit their entire milestones and complete the contract lifecycle.
To use this contract management KPI, you need a contract management system that can do the following:
- Help you identify and monitor key milestones in a contract.
- Provide details of whether you met the milestones fully or partially, satisfactorily or unsatisfactorily, etc.
The contract management system should also be able to extract performance data that you can utilize. Fortunately, Contractbook meets these criteria.
6. Value of Contract
Another addition to the list of insightful contract management KPIs is the total contract value, TCV.
TCV helps define the amount of revenue to expect from a contract. It also helps you consider recurring expenses in the contract such as hiring professional freelancers or paying specific service fees. These insights will help identify how much profit is obtainable from a single contract.
The contract value KPI is quite straightforward to calculate. Simply multiply your monthly recurring revenue and contract term length. Then, sum up the result with your one-time fees, as shown below.
Also, changing the contract length, or monthly recurring revenue at any point during the contract duration can greatly affect contract value.
Let’s get practical. Assuming you have two hypothetical customers. The first customer signs up for your basic plan at $50 monthly. And this contract will last for a year.
Then, you have another customer signing up for your premium plan at $3,200. And this will last for two years. However, this second customer also has to pay a one-time $6,000 onboarding fee.
Here’s what their customer contract value looks like.
To make it all a bit easier for you, can use a Contract Value Calculator tool from WallStreetPrep or Calculator Academy.
Tracking your total contract value also allows you to invest, expand, and spend optimally. You can further compare this revenue to your organizational revenue data to see how much the contract contributed to your overall revenue.
Contract management KPIs are necessary to elevate your contract performance and note several key areas to cater to. Observing these KPIs will help you ensure that your contract is executed in due time, meets your client’s expectations, and provides value for your company.
In this article, we looked at six key metrics including: your contract duration, contract effectiveness, and contract efficiency. We also mentioned contract renewals, contract value, and obligation performance.
By tracking these KPIs, you’ll be able to achieve a streamlined contract management lifecycle.