Contracts are the foundations of a business. Every department works with contracts, from Sales to HR, to Procurement, they are the DNA of all business operations. they are agreements that determine the rights, obligations and terms & conditions and a set of deliverables for the business, its suppliers, buyers and employees. But in business, every penny has to be accounted for, and you can’t determine the progress and value of your contracts without analysing their metrics, better known as KPIs (Key Performance Indicators).
But what metrics should be tracked, what will help you unlock key insightful data on your contract portfolio? In this article, we will establish how to set and measure the key contract lifecycle management metrics. They're otherwise known as key performance Indicators (KPIs). which measure the performance of departments within a business.
CLM Metrics help highlight departments within a business that require improvement. They enable you to assess the challenges contracts face during the stages of the lifecycle. In all business functions, KPI's help move towards a strategic direction.
But simply setting KPIs against your CLM processes is not enough. Contracts are documents that move with time, they are full of key dates and milestones that lead each party to a goal/objective. CLM KPIs need to keep pace with contracts, they need to be continuously evolving, measuring and analysing to meet the changes in external forces.
Each business and its contract processes will differ slightly depending on its size and industry, and this can make CLM KPIs challenging. But every legal team should assess their current CLM processes, and set meaningful and measurable KPIs to determine overall performance.
To make it easier, we have listed the 3 types of CLM metric categories.
Efficiency
Although efficiency metrics are some of the most challenging to track, they are crucial when it comes to the performance of CLM solutions.
Businesses ought to look at the execution time of an agreement, starting from the request for a contract to when it’s signed and enforceable. Contracting processes often go back and forth, and it’s not uncommon for delays to occur. The quicker this process is, the quicker the transaction process. Simply put, the faster the path to revenue that a business is on, the quicker the profit margins will increase.
CLM efficiency metrics help your team to identify where inefficiencies are occurring within your contacting processes, enabling them to make the necessary adjustments.
Common contract efficiency KPIs can include:
· The contract cycle time is the most common. It analyses the time it takes a contract takes from authoring to signing. The faster the contract process is, the quicker deals are closed and the quicker the revenue comes in.
· Processing metrics help teams establish key indicators such as the number of contract revisions and the processing time. Contract negations often result in back-and-forth negotiations, so the quicker the contract is signed and executed, the quicker businesses can collect the associated revenue.
· Tracking trends by customer, vendor and location helps businesses identify and understand areas when, where and how delays and bottlenecks are occurring during their contract lifecycle.
Process
Process metrics are data driver trackers for both quantitative and qualitative ways to track the performance of a business’s operation. These metrics provide a business with insight and improvements to the operational performance across the entire company. Establishing which metrics best fit the operational performance of the business can enable teams to make better-informed business decisions.
Below are some general process metrics that most businesses use to track performance:
· The number of contracts inputted highlights the total number of new contracts that a business has generated. This number provides an overview of the total number of new customers that a business has secured.
· The number of completed contracts determines how many agreements have gone through every stage of your business's contracting processes. This allows businesses to determine the number of completed deals and spot bottlenecks.
· The number of contracts that are identified to contract errors and mistakes throughout the lifecycle. This metric allows teams to action inefficiencies in their process to avoid the pitfall in the future.
Performance
A business that is performing well, is a business that is profiting well, and the same goes for a business’s contracts. So, identifying agreements that are not being renewed, terminated early or where the counterparty is not meeting the obligations is crucial to protecting and improving the business's financial position.
· The terminated contract value helps teams identify and prevent lost revenue, equipping them with all of the relevant information about financial-related matters.
· The annual contract value is useful as it highlights the financial value that a contract is worth over its lifetime. It can also prove beneficial when comparing rates of revenue from reoccurring contracts against new contracts, as well as lost revenue as a result of contract termination or agreements not being renewed.
· The vendor fraud metrics identifies and unnecessary costs and measured the effectiveness of risk management.
· Contract compliance provides businesses with insights into whether they ought to make changes to their contract management processes.
How a business executes its contract lifecycle management processes determines how successful the business will ultimately be. And all of the metrics discussed will help businesses track and improve their CLM processes in multiple ways.
Like any metrics, CLM metrics identify areas for improvement across the business. They allow businesses to identify areas within the contract lifecycle that are causing barriers to delivery and slowing down revenue generation. Providing teams with insightful information for them to overcome these challenges and turn them into collaborative workflows.
· Improved efficiency: Contract metrics provide businesses with valuable data and insights into the overall performance of their CLM processes, helping them identify bottlenecks and inefficiencies in their processes. By continuously tracking the results, businesses can streamline and improve their processes and overall efficiency.
· Enhanced compliance: Tracking contract metrics allows businesses to monitor their legal and regulatory compliance, reducing the risk of non-compliance and any financial and legal penalties.
· Improved contract visibility: Contract metric tracking creates a centralised view of all contract-related information, making it easier for businesses to monitor and manage their contract portfolio.
· Improved decision-making: Contract metrics equip businesses with the data and information that they need to make better-informed business decisions regarding their CLM processes.
· Mitigated risk: All contracts contain an element of risk, whether financial or operational. Contract metrics help teams identify and mitigate risks, such as non-compliance or contract breaches. By tracking contract performance metrics, businesses can ensure that they are meeting their agreed obligations, thus mitigating any risk associated.
· Continuous improvement: Contract metrics provide continuous information to businesses for continuous improvement. By helping businesses identify areas for improvement across the business.
Contract metrics are a crucial component in the CLM process. They provide businesses with the key information that they need to optimise and enhance their CLM processes, reducing risk and maximising opportunity.
Businesses can track and measure anything, but which CLM metrics should be tracked?
When it comes to KPIs, tracking less will always deliver more value. Some businesses often track every metric and KPI. Although this seems like a good idea, it often causes more problems than it solves. It spreads resources too thin and businesses end up tracking metrics for the sake of it that won’t deliver any value.
So this forces businesses to think about which metrics they should track. It’s tempting to track the industry standard metrics, but every business and its contracts and processes are unique. So it's key to make your KPIs unique by matching them to your business.
Tracking contract data depends on each business's own goals and unique requirements. If the goal of the company is to increase its revenue margin, then it ought to focus on financial-related metrics.
By regularly tracking contract performance metrics, businesses gain valuable insights into the business and contract performance. It allows teams to easily identify areas for improvement across the contract processes, equipping them with insightful and actionable data, and allowing them to make better-informed business decisions.
CLM can be a daunting task, let alone before you try and introduce tracking metrics. But if done correctly, and with the best CLM software in the market, it can bring great benefits for the business. Because for businesses to improve, they must first identify the areas for improvement.
Today, CLM solutions like Summize can simplify this process. Turning the once lengthy task into an automated and collaborative process. The interactive dashboard provides teams with smart, intelligent contract analytics, tracking response times, negotiation cycles, request types, status, owner and much more!
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