Contracts have evolved from being static documents to high leverage assets that minimize risk, maximize opportunities, achieve compliance, and generate revenue. This is of special relevance today, as technology-powered upstarts disrupt traditional business titans with never before seen competitive advantages—especially on process scaling, cost efficiency and sourcing fronts. In such scenarios, contract management ensures greater streamlining as well as audit preparedness, in addition to sell-side and buy-side savings.
Effective contract management calls for a multi-disciplinary approach—functions and business groups must unite to drive optimized contract lifecycles. Adding to these endeavors is the range of CLM solution functionalities due to advances in automation, machine learning and artificial intelligence. This trend is highlighted in the International Association for Contract & Commercial Management (IAACM) Benchmark Survey 2018. More than 60% of this survey’s respondents highlight that automation initiatives are now a priority for their organizations.
Companies must define corresponding key performance indicators (KPI) for four key contract terms—total cost of ownership (TCO), reliability, quality, and innovation. While establishing KPIs for a contract, the focus should be on examining contract utilization, value, volume, overall performance, and historical data.
Here’s a quick lowdown on five pre-award metrics for Contract Management effectiveness.
#1 Contract approval turnaround times
Approval processes are significant pain points for businesses during contract creation. It is common knowledge that approval processes often result in stalled deals and delayed projects. This is where stringent monitoring of contract approval turnarounds and process lead times is of essence.
Since contract approval lead times vary across organizations, it is imperative to be process- and department-specific while measuring these metrics. Aspects such as routing, e-signing and other functions that streamline the approval process are key for meeting basic contracting needs.
Meeting contract approval turnaround times (or turnaround time reduction wherever possible) results in higher efficiency overall, as well as cost optimization. Constant monitoring, along with optimal management of lead times is the metric that legal, contract management and supply chain professionals should stress upon during contract management optimization.
#2 Supply chain risk profile
Pre-award phase is critical from compliance and risk management standpoints. Risk evaluation at this phase of contracting must center around financial, operational, transactional, and regulatory aspects.
Financial stability of the supplier must be assessed thoroughly as part of these KPI monitoring processes. Most Contract Management solutions provide functionalities to mandate financial documentation as part of the contractual management. It is possible to conduct a realistic profiling of the partner’s financial capability as part of this stage.
Governance frameworks might be called for in the case of relationships fraught with regulatory or legal risks. Examples of such use cases include contracts which involve technology, intellectual property, information security, and supply chain finance.
#3 Legal and business operation costs
The manpower intensive nature of manual contract management processes can often prove costly in contractual management. Since attorneys and non-attorney legal employees must work on contracts, this is an essential cost metric to track as part of CLM.
A Goldman Sachs study indicates that CLM can provide up to 20% reduction in man-hours. Better collaboration levels among legal, sales, HR and corporate teams translate to higher productivity levels.
Research firm Aberdeen Group estimates that CLM can result in a 20% man-hour saving for the same sales activity. Adding to these benefits are the cross-sell, up-sell and savings opportunities. Minimal revenue leakages result due to shorter quote to cash cycles.
#4 Deviation from standard clauses
Compliance to organizational objectives can be clearly gauged by checking the percentage deviation from standard legal clauses—especially on the policy front. Using these deviations as a metric is useful to prevent value leakages in contracts.
Draft review by legal teams during authoring stages is the first step towards ensuring minimum deviation from standard clauses. Matching with approved templates is an essential factor for contract deviation reporting. Lack of attention at this stage can result in contracts with detrimental non-standard clauses. These introduce financial and compliance risks. Measuring deviations at the onset itself is a helpful preventive step.
#5 Compliance rates and reports
In contractual lifecycles, the term ‘compliance’ relates to all regulations and internal policies that span the agreements which a company and a counterpart enter into. It highlights various requirements such as industry specific regulations and laws governing the business operations, as also the internal operational and quality guidelines such as the maximum reaction time in case of issues, service level management, delivery time, and special discount offers.
Organizations with a clearly laid out contract compliance process have a savings of 80% more than those without processes or poorly defined processes, according to an Aberdeen Group LLC research report. It remains a key component in providing further guidance and insights into processes, and results in saving costs through better negotiations.
On the other hand, a silo-based approach to partner reliability usually leads to contract governance gaps, overlapping monitoring programs, and increased execution costs. Essentially, companies must adopt a proactive approach towards uncertainty management and monitoring of relevant contract lifecycle developments. This will ensure a definitive edge for the business, in terms of cost control as well as brand reputation.