Contract lifecycle management (CLM) is essential for growth in today’s competitive business environment. Going by IACCM (International Association for Contract and Commercial Management) estimates, 9.2% of an organization’s revenue is potentially lost due to inadequate CLM. Commercial and contractual issues are cited by IACCM as the primary cause in over 70% of troubled buy- and sell-side relationships.
Similarly, PricewaterhouseCoopers (PwC) observes that 12% of a company’s total annual costs might be committed to contract management and administrative tasks. This includes post-award or downstream activities, which can be broadly grouped into three general areas: service delivery, supplier relationship management, and contract administration.
It is essential to understand how your team can leverage contract management related KPIs. Here’s a primer on post-award metrics that empower contract management scalability.
#1 Tracking Contract performance metrics
Major contract management challenges can often be attributed to inadequate project controls and metrics. Suitable corrective action is difficult to achieve in the absence of such data.
Today’s complex supply chain event flows mandate interconnection and automation of processes. These efforts provide project visibility as well as data sharing, which ensures significant cost and service gains on the CLM front. Disruptions can be avoided by understanding the various types of issues, corrective actions, and overall project cost impact.
A project can be considered successful if the client organization’s expectations are addressed completely. These are typically expressed in terms of scope of delivery, quality, overall costs, and timelines.
Milestone tracking is an effective way of managing timescale elements. Since key deliverables remain the epicenter of effective project planning, tasks clearly indicate the process flow. Milestones are used to identify these key delivery dates. As the project progresses, forecast dates can be compared with committed dates.
#2 Optimize upcoming contract expiries
Contract renewal and extension trends are handy CLM metrics. When combined with suitable CLM automation and analytics capabilities, it enables legal and sales teams to effectively gauge existing partner suitability on a sustained basis.
Renewal metrics enable contract management teams to optimize upcoming contract lifecycles. Ensure that your team is well prepared for vendor contract renewal by building in ample review time. Some of the contract terms to examine with a fine comb include: range and frequency of service, types of support, terms for product delivery or payment, and rates.
Goals for pricing terms, and issues with the previous contract can be addressed during renewal discussions. Renegotiating payment timeframes can be as important as pricing discussions for an organization which is working on cash flow improvements.
#3 Return On Investment (ROI) evaluations
Businesses often associate the value of a written contract as a litigation instrument. However, as per the IACCM 2016 study Maximizing ROI from Contract Management, litigation probability is only 0.007%. This implies that viewing contracts as an investment to stay out of court does not provide the best ROI.
Research advisory Gartner, Inc.’s findings indicate that 80% of a company’s future revenue will come from just 20% of existing customers. Since it’s far more profitable to retain existing customers than convert new leads, top priority should be on customer satisfaction as a contract management KPI. Suitable associated metrics and attributes should be derived based on your organization’s business model.
To use an example, cross-sell and upsell opportunities can be ROI parameters for most organizations. Modern day CLM solutions offer powerful CRM, ERP, CPQ, BI and database integration functionalities, which can be leveraged for such requirements.
#4 Compliance tracking
Detailed risk assessment exercises involve identification of all potential risk categories faced by a vendor’s activity. This includes compliance, reputational, operational, credit, and transaction risks. It should also identify all applicable laws and regulations.
Contract provisions should be based on identified risks at the clause level, as well as compliance with applicable consumer protection laws and regulations. It must contain the right to request information that demonstrates compliance, such as audit and monitoring reports.
Risk-based monitoring derived from risk assessment developed during due diligence is equally important. Documentation of the frequency and type of monitoring should be undertaken for each vendor.
Vendor performance monitoring should incorporate reviews and tracking of complaints by consumers related to a vendor’s activities. Risk assessment should be updated periodically based on these indicators.
#5 Actual project value vis-a-vis initial project value comparisons
Unexpected cost fluctuations are oft-seen phenomena on the project management front. IACCM studies clearly highlight organizational revenue losses of up to 9.2% annually due to insufficient contract management processes.
Ongoing comparisons, bench-marking, and reporting of actual project value vis-a-vis initial project value can be a useful metric to avoid such dilemmas. Timely remediation is often called for in many cases. It might also be necessary to devise new metrics based on evolving needs during the project lifecycle. Popular contract management frameworks supplemented by a capable CLM solution are ideal to manage such requirements.