Contract managers face the challenge of overseeing the contract lifecycle from request to renewal, while struggling to show stakeholders the significance of an often complicated and undervalued process. The goals of reducing risk, increasing productivity, and improving visibility are at the core of effective contract management strategies. However, all too often, the tendency for failure remains high.
Contracts will fail, however the amount of failure deemed acceptable can deeply impact an organization. According to Tim Cummins, President of IACCM, "some level of failure or under-performance is accepted as inevitable. Most organizations don’t even know what that level is – though IACCM research has shown that 10-15% is probably ‘normal’ and certain industries or contract types experience levels of 30%+." (Source: IACCM's "Why Contracts Fail" blog post)
A Real-Life Look at Contract Failure Averages
Here is an example that shows what even "normal" contract failure can cost an organization where Company A purchases professional services on a monthly retainer from Company B:
- Company A has a contract with Company B coming up for renewal of professional services with a $10K monthly retainer ($120K/Year).
- Meanwhile, Company A no longer requires 25% of the services provided by Company B.
- Company A misses the contract renewal date and gets contracted for another year of professional services with Company B.
- The missed renewal for Company A means they are locked into spending $30K/year on services the company doesn’t need.
- Company A manages 500 contracts each year. With an average failure rate of 10%, this would mean 50 contracts fail per year.
If Company A has 50 contracts fail, with a negative impact of $30K/year, Company A just hit their bottom line with a contract failure negative impact of $1.5M for just one year!
This example only scratches the surface on the huge impact contract failures can have on an organization. Beyond payables, contract failures negatively impact risk, compliance, and productivity.
How can contract managers balance contract creation, contract management, and business impact effectively? The key to measuring the success of a contract management program is identifying clear contract management KPIs (Key Performance Indicators).
3 Contract Management KPIs
Contract management KPIs should be specific, measurable, attainable, relevant, and timely (SMART). Since industries, processes, and contracts are unique, KPIs will vary, but it’s imperative for contract managers to review their contract lifecycle and develop success metrics aligned with organizational objectives accordingly. To manage the success of any contract management strategy, contract managers must measure it regularly. Contract management KPIs should encompass qualitative and quantitative information around contract value, incidents, monitoring, and renewal.
Consequently, the 3 most common KPIs used to measure contract management success are contract efficiency, contract effectiveness, and contract risk. Under each KPI are specific areas that should be used to measure the success of a contract management strategy. Below are some examples of measurement that can positively impact your program:
KPI #1 – Contract Efficiency: Performance metrics may include contract cycle time, customer, vendor, or geographic trends, contract value assessments, and missed milestones.
KPI #2 – Contract Efficacy: Performance metrics may include number of contracts per type, program, customer, or vendor, annualized contract value, the remaining value of terminated contracts, order value variance, and historical legacy contract trends.
KPI #3 – Contract Risk: Performance metrics may include standard clause variance, amount of agreements expiring without renewal dates, number of improper signature approvals or vendor authorizations, number of delayed approvals, and disputes resolved.
Contract Management ROI
Contract managers are under increased pressure to deliver contract management ROI with reduced contract related risks, reduced costs, and improved performance. Contract managers who regularly measure the success of their contracts can proactively readjust their contract management strategy to ensure goal alignment drives critical and positive organizational impact.
If your contract management approach is not producing the intended value, leading contract management software can streamline how you measure contract management success and can help you hit your KPIs through risk reduction, increased productivity, advanced visibility, and contract monitoring. CobbleStone has helped thousands manage their contracts better with Contract Insight™, a scalable solution designed to work with organizations of all sizes and in all industries.