Poor contract management plagues many businesses — it often results in costly mistakes that set the business back and lead to lost deals. In fact, the total contract value, including all the anticipated revenue or payments, erodes by 8.6% on average due to a poor contracting process.
Beyond lost revenue the poor contract management causes:
- Delays in contract negotiations and approvals
- Misunderstandings and communication gaps
- Decline in the quality of deliverables
- Increase in compliance risks
- Unexpected cost overruns.
That’s why one of the most effective ways to measure the performance and impact of a legal team in an organization is to analyze its contracting processes — and specifically, set KPIs around them. Setting the right contract management KPIs helps you answers key questions like:
- Is communication between cross-functional teams streamlined?
- Are legal resources and time being used efficiently and strategically?
- How does the legal team directly and indirectly contribute to helping other teams improve the business’ bottom line?
What are contract management KPIs?
Contract management KPIs are measurable metrics used to track the effectiveness of contracting progress. These metrics cover the entire contract lifecycle from creation to expiration or renewal. Monitoring these KPIs ensures you meet the contract obligations and minimize risks.
We spoke with legal leaders and in-house counsels to understand this matter and have included their insights within the article. Read on to find out why setting KPIs and tracking metrics around critical contract management processes is so important and which key metrics experts recommend you should start tracking.
Why is monitoring contract management KPIs important for the legal team’s success?
Setting and tracking KPIs is an important best practice for contract management, says Joseph Som, President & CEO @ CenterPoint Group | Source: LinkedIn
There’s often friction between legal and business teams — it’s critical for modern legal teams to look at things more holistically to understand why this gap exists.
Often, the answer lies within the contracting process itself. Specifically, it boils down to these things:
- How easy is it for business teams to communicate their requirements with Legal, and how soon do they get a response?
- Is the legal turnaround time too long?
- Is there a misalignment between legal and business priorities?
- Are there tools and processes set that business teams don’t use or are unaware of and lead to inefficiencies?
- Is there a deeper problem within how contracts are managed at an organization?
Setting key performance indicators (KPIs) helps answer these questions by turning them into quantifiable problems. For example, if the average legal turnaround time is 3 days right now, what can be done to reduce that? Which types of contracts can be processed more efficiently or even without Legal review by setting templates?
Monitoring contract management KPIs makes the entire process more data-driven and provides evidence to identify core issues and areas of improvement, solve key legal challenges, and bridge the gap between legal and business by demonstrating the former’s value to the latter. It further ensures compliance, mitigates risks, and improves overall operational efficiency.
How do contract management KPIs set the legal team up for success?
“For example, my average for marketing review is around 1.8 days. Whenever someone's worried about the process and says something like, ‘Do I have to submit all marketing to Legal?’ — I try to stress the partnership again. Here’s why I need to review everything, here’s my experience in why that matters when you want to go public or get acquired, and here’s what standards I’m willing to hold myself to so that you don’t have to worry about turnaround times. More often than not, they’re not upset that you need to be involved. They probably just worry it will be slow, or you’ll have non-legal feedback disguised as legal. So don't be scared of the process, be scared of a flawed process.”
— Ryan Nier
General Counsel, Pinwheel
There’s often friction between legal and business teams — it’s critical for modern legal teams to look at things more holistically to understand why this gap exists.
Often, the answer lies within the contracting process itself. Specifically, it boils down to these things:
- How easy is it for business teams to communicate their requirements with Legal, and how soon do they get a response?
- Is the legal turnaround time too long?
- Is there a misalignment between legal and business priorities?
- Are there tools and processes set that business teams don’t use or are unaware of and lead to inefficiencies?
- Is there a deeper problem within how contracts are managed at an organization?
Setting key performance indicators (KPIs) helps answer these questions by turning them into quantifiable problems. For example, if the average legal turnaround time is 3 days right now, what can be done to reduce that? Which types of contracts can be processed more efficiently or even without Legal review by setting templates?
The first step to eliminating these challenges is to make the contract management process more data-driven and use that data as evidence to identify core issues and areas of improvement, solve key legal challenges, and bridge the gap between legal and business by demonstrating the former’s value to the latter.
The top four contract management KPIs
“If you are a commercial-driven business, the most important thing is to show how fast you are closing deals, what percent of deals are getting closed without any edits, how many litigations you are handling and how much you have saved, and how many templates have you created to support other business units. I don't think there is one key metric that defines the legal team — it really depends on the business.”
— Chief Legal Officer in the Event Tech industry
When you first start tracking key performance metrics for your contract management process, it’s easy to feel overwhelmed due to the sheer amount of data available. However, you don’t have to start tracking everything immediately. We spoke to legal leaders to understand some of the most critical metrics and have outlined 4 important contract management KPIs below.
Also Read: Rethinking OKRs, KPIs, and Goals for In-House Legal Teams
#1 Number of deals/contracts closed
It might be a no-brainer that perhaps the first contract KPI you should start tracking is the number of contracts closed month-on-month.
Tracking this metric will help you understand:
- How many contracts did Legal close throughout the year?
- What were the most and least productive months in terms of volume of contract closure?
- What were the dependencies that were blockers in closing contracts?
- What types of contracts were closed month-on-month, and how many of each were closed?
- Out of the contracts closed, how many had been templatized, and how many were created from scratch?
- Is there scope for further templatization to improve contract closure?
- What is the relation between the number of contracts closed versus the quality of contracts?
#2 Value of deals/contracts closed
One of the most important contract metrics that can prove of significant value to the entire organization is contract value. Finance teams use this information to make forecasts, sales and procurement teams use this to understand the nature of the deals they’re closing and their average deal values, and so on.
For legal teams, tracking contract/deal values helps understand:
- Impact of contract closure and legal productivity on business in terms of revenue.
- Total value of contracts over a period enhanced by number of contracts closed.
- Maximum, minimum, and average contract value to help set up appropriate approvals and automate wherever possible.
- The relationship between contract value and contract term, contract renewals, etc.
- High-value contracts and deals that they should dedicate more efforts to, as opposed to low-priority contracts.
Also Read: 5 Key Contract Reports to Share for C-level Review
#3 Cycle times or turnaround times for contract closure
“One of the revenue leaders I worked with told me, ‘Time kills all deals; you gotta close deals fast,’ and I keep this in mind every time I’m pulled into a sales deal.”
— Sue So, Head of Legal, Hopin
An important contract management KPI for the entire legal team, as well as individual team members, is the turnaround time (TAT) for closing contracts or the cycle times for various contracts.
Tracking TAT helps legal teams understand:
- What was the overall cycle time for closing different types of contracts?
- What was the average TAT for each stage of the contract lifecycle?
- What are the types of contracts that take longer to close and which are closed quickly?
- What is the difference in TAT for templatized vs editable contracts?
- If you have contract management software, how does the tool improve TAT, and is there scope for further improvement?
- How does deal value affect TAT?
- What were the average and individual TAT for different legal team members?
- How many rounds of negotiations do different contract types require, on average?
Additionally, it’s important to factor in the wait times for the legal team at different stages of the contract lifecycle separately. It helps Legal understand the dependencies or stakeholders where contracts often get stuck and figure out their actual TAT for different contracts. Furthermore, it helps identify specific contract approvals or review requests that can be automated through contract lifecycle management software or by setting pre-approved limits.
“Contrary to what business teams might think, legal teams are usually not the ones delaying the contract process. Most times, they are waiting on other teams and stakeholders for review, inputs, or approvals on certain aspects of the contract. It is critical to track these wait times and exclude them to showcase the actual TAT of the legal team. Setting up a process to reduce these wait times will also help Legal reduce contract closure cycle times.”
— Diwyata Burbure
Senior Vice President – Legal Tech @SpotDraft
#4 Risk and deviation analysis
It’s important to measure contract risks and deviations for effective contract management. Contract management lifecycle KPIs that legal teams can track for this include:
- Standard clause variance and deviations
- Contracts without renewal dates that are expiring soon
- Missed contractual obligations and compliance issues
- Missed or delayed approvals and signatures
- Disputes and complaint resolutions, etc.
Most legal teams usually already have these metrics and standards documented, with processes set up for tracking them. Additionally, if you use contract lifecycle management software that offers tracking and automation features, reporting on these metrics becomes much easier and streamlined.
Also Read: Effective Contract Risk Management: Top Tips & Strategies
How to track contract management KPIs as a legal function
Now that we’ve established why it’s so important to track the efficiency of your contract management process and some key metrics you can begin tracking, it’s time to outline how. There are three ways you can track contract management KPIs:
#1 Tracking data manually through spreadsheets
The simplest way to start tracking contract KPIs and relevant data is to set up spreadsheets. But this can be a huge task in itself in the long run, as manually updating these sheets with data can get cumbersome and take away time from other productive tasks. However, it’s still a cost-effective way to begin tracking various legal metrics on a limited budget.
Also Download: SpotDraft’s Contract Tracking and Management Spreadsheet Template
#2 Automating reporting through your contract management software
If you use a contract lifecycle management software, then chances are it already includes built-in analytics and reporting tools to help you track various contract KPIs and metrics. For example, SpotDraft offers instant generation of custom reports as well as a personalized dashboard with contract insights.
“The best thing about SpotDraft is the report generation, which saves us from a lot of manual effort.”
— G2 Reviewer
These tools can automatically collect and analyze data, and pull up the reports you need without having to do a lot of manual work, providing real-time insights into the performance of the legal team.
#3 Using dashboards to track and visualize data
There are various dashboard tools that legal teams can use to visualize their contract management metrics in real-time. These tools help in identifying trends and patterns in data, making it easier to see the big picture and make informed decisions. Before you buy a separate dashboard tool, however, make sure to check if your CLM, if you have one, offers dashboards with relevant metrics already — and if you don’t, see if it might be more prudent to invest in a contract management system instead.
Also read: 8 Top Contract Management Software Platforms
What are the challenges in tracking contract management KPIs
Finding an easy way to measure KPIs is important ~Jason Burgess, Procurement lead | Source: LinkedIn
1. Incomplete data source
Companies often have data spread across multiple systems, making pulling reports an uphill task. A recent report suggests companies have contract data scattered across 24 different systems. You need a consolidated data source to draw any meaningful insights.
Solution:
An effective contract lifecycle management software like SpotDraft centralizes entire contract storage. And it also integrates with all your favorite tools to create a single source of data that you can use to pull out reports.
2. Inconsistent contract clauses and terminology
A lack of standardization in contracts makes it tough to monitor KPIs. Different terminologies across contracts can create challenges in pulling data. For instance, if you are referring to the third-party consultant as a 'contractor' in some contracts and a 'service provider' in others. This can cause ambiguity in data. Also, inconsistent clauses make it harder to benchmark KPIs. As with varying terms, expectations can also vary, such as review time, delivery time, and more.
Solution:
While some contracts may have custom terms, having overall standardized terms for different case processes makes it easy to monitor contracts. You can create standardized templates for different business cases to solve this problem. SpotDraft easily lets you create custom templates that are best suited for your organization.
3. Technology limitations
Not having a quick and easy way to measure KPIs makes the process more cumbersome. If your current process involves many steps to measure KPIs, then you won't do it as frequently.
Solution:
Use contract solutions like SpotDraft with an inbuilt contract reporting console providing a quick summary of all important KPIs. It will make it easy for your teams to track KPIs and consistently improve contract management.
What is the best way to track contract management KPIs
It’s difficult to quantify the value of all the work legal teams do, as many of the tasks, such as advising leadership teams, managing risk, etc., are strategic and complex in nature. However, many parts of the contract management process can, and should, be quantified into easily understandable contract KPIs or metrics that not only demonstrate the value of the legal team but also set them up for success by making the process more efficient.
Implementing a contract management solution that centralizes your contract creation, approvals, execution, termination/renewal, and storage. It is the first step to tracking KPIs as it creates a data source for that and further provides automation features to pull reports.
SpotDraft can help you both streamline contract management for your organization and automate reporting to allow for instant access to important insights on your process. Book a demo with the experts at SpotDraft to learn how.