Your commercial contracts generate a lot of useful data. But, it is challenging to know what all of the data means. The best way to manage the performance of your contracts is to track the key performance indicators (KPIs) that are most relevant to your profits.
Here are the 8 KPIs you should be using to manage your organization’s contract performance.
- 1 1. Length of Contract Initiation Lifecycle
- 2 2. Delays in Approval
- 3 3. Missed Milestones or Contract Obligations Performance
- 4 4. Agreements Expiring Without Renewal
- 5 5. Vendor Fraud
- 6 6. Annualized Contract Value (ACV)
- 7 7. Order Value Variance from Original Contract Value (OVV)
- 8 8. Terminated Contract Remaining Value (TRV)
1. Length of Contract Initiation Lifecycle
How many days does it take for your company to close a deal? The more time between contract initiation and contract signature, the worse your cash flow is going to be, and the lower your profits will be.
You should focus on making the pre-signing process as efficient as possible. Some ways to lower the length of the contract initiation lifecycle include having clear lines of authority, using electronic signatures, and making someone responsible for tracking the lifecycle for each contract.
2. Delays in Approval
The metric for delays in approval is related to the contract initiation lifecycle. But, it focuses on a narrow issue that plagues companies of all sizes. This KPI measures whether specific sub-cycles are creating a bottleneck in the contract process.
You need to measure and monitor how long it takes a contract to get approved by legal, finance, operations, and management. By tracking this KPI, you can easily find common delays and then work to resolve them.
3. Missed Milestones or Contract Obligations Performance
If you want to maximize revenues, you need to make sure that your company and your partners are meeting milestones. Missed milestones can be costly in terms of both contractual penalties and lost time.
Another issue with missed milestones is that they commonly lead to overpayment of claims and introduce another point of friction into the contracting process. But, until you start tracking contract obligation performance issues, you will never be able to get them under control.
4. Agreements Expiring Without Renewal
Having contracts on an autorenewal cycle can save the organization valuable time. However, it can also hamper the firm’s flexibility if renewals are not carefully monitored. The same goes for contracts that expire without renewal.
You should be tracking the percentage of contracts that expire without renewal to give you a sense of how much contractual flexibility you have and how much of your business is dependent on ongoing relationships.
If this KPI is too high or too low, it could be a sign of future problems.
5. Vendor Fraud
Fraud can be costly and difficult to detect. One of the most common forms of fraud is billing fraud. Vendors may try and pad their bills by small amounts of long periods of time to avoid detection.
This KPI helps you prevent fraud by tracking what is being paid out each month against historical payouts and contractual obligations.
6. Annualized Contract Value (ACV)
The ACV KPI helps you get a sense of the sources of your company’s revenues and makes it easy to see how dependent you are on contract renewals. This metric aggregates the value of all of your recurring contracts.
By comparing this KPI against your other revenue data, you can see how much revenue is lost on contracts that are not renewed or how much revenue you are taking in from new contracts compared to renewals.
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7. Order Value Variance from Original Contract Value (OVV)
The OVV KPI helps you track losses from mistakes. If you have a high OVV, it means that you need to improve things like client communication, contract goals assessment, or contract drafting accuracy. Your OVV value should be less than 5%.
Changes in scope, fulfillment errors, and conditions that should have been discovered are all preventable mistakes that cost your company money. OVV helps you spot these problems so you can fix them before they get out of hand.
8. Terminated Contract Remaining Value (TRV)
The TRV metric is most useful in analyzing service contracts. It helps you see how much potential lost revenue is hidden in your company. It shows you the total amount of money you haven’t collected due to outstanding bills, unbilled amounts, and credit amounts.