As the adage goes, “What cannot be measured, cannot be managed.” One of the key value propositions of better contract management is better data. Now, with the use of contract management tools, you can measure and report on metrics like contract volume, contract value, and contract status. Once you have these metrics, you can leverage them to manage contract workflow and approvals, assign work to your team of contract reviewers, conduct resource planning, and report powerful Key Performance Indicators (“KPIs”) to the executive team. Thus, tracking contract KPIs is an important concept to master and implement correctly. But are you tracking the right metrics? Do your metrics communicate value? Are your metrics an accurate representation of the work your contracting team does?
Among a myriad of contract KPIs that a legal department can track, I will focus this article on the main three: volume, turnaround time, and value. Here, I will discuss how to improve upon these KPIs by further process improvement and analysis. To increase the utility of contract KPIs, we need to finesse the way we track them.
1. Volume KPI for Contracts
You probably already know the volume of contracts that your legal department receives on a weekly or monthly basis. To derive true value from this metric, you need to go beyond the mere number of contracts received and apply contract complexity to contract volume.
First, you will need to classify your contracts into levels of complexity, such as “Simple,” “Moderate,” and “Complex.” This can vary based on contract length, quantity of redlines, origin of template, or amount of time to review. Examples of Simple contracts can include renewals or amendments to existing contracts. Moderate contracts can include internal template contracts with minimal redlines or amendments that involve more than an extension of the term. Complex contracts can include those on vendor-paper, SaaS contracts, contracts requiring collaboration between multiple stakeholders, or ones with significant regulatory issues.
While determining the best classification methodology for your legal or contracting department takes some effort and planning, once the baseline is established, this data can help drive intelligent decision-making. For example, you would be able to better manage team workload. Say you have an attorney that is overloaded with 18 Complex contracts and is falling behind. Perhaps your paralegal can take on some of the attorney’s Moderate contracts.
2. Turnaround Time KPI for Contracts
How long does it to take to complete X task? Every manager wants to track a KPI that measures turnaround time. You measure the time from receipt of task to completion of task. Or, in the context of contracts, the time from contract submission to contract execution. Right? Wrong!
Legal review is contingent on the success of several precedent or concurrent phases. The contract management lifecycle includes several steps such as: vendor selection, technical review, commercial review, legal review and negotiations, the other party’s review and approvals, business approvals, and signatures. Depending on when, in the contract lifecycle, a contract is submitted for review, the proverbial clock for the legal review may start earlier than when the legal review actually began. You may also be including time spent obtaining business approvals or signatures in your legal review turnaround time, which may be entirely outside the legal department’s control. This a common mistake that results in an inaccurate KPI.
To correct this KPI, you should develop a methodology to track how long each phase of the contract lifecycle takes so the appropriate stakeholder is responsible for their portion of the deal. A more accurate version of this metric is “time to signature” which doesn’t penalize your contract reviewer for the time a contract sometimes languishes in your e-signature portal. Alternatively, you may just want to track the “initial contract review” KPI which measures the time from contract submission to completion of the first contract review. Contract management tools allow you to create several stages or statuses, each of which can be reported on separately or jointly.
3. Value KPI for Contracts
The meaning of “value” depends on who’s asking. To finance, contract value might be the dollar amount of the final executed contract across three years. To supply chain, contract value could mean the dollar amount of the final executed contract across the current fiscal year or through the product lifecycle, including any associated negotiated savings. But what does contract value mean to legal?
This is something you should decide on and align with your “contract value” KPI. Here, I would argue that the dollar value of the contract doesn’t necessarily relate directly to the dollar value spent, rather the cost avoidance negotiated or risk mitigated. For example, if there was an annual escalator of 3% in the contract, but your contract reviewer negotiated this out, are you counting this as a savings (or a cost avoidance)? If there was a limitation of liability or no indemnification language in your contract, and your contract reviewer rectified this, how is this recorded as risk mitigation?
One approach would be to prepare an ideal term sheet that outlines all the “must-have” and “nice-to-have” terms in a deal. This would, obviously, be specific to your industry and even your company. It can include provisions such as termination period, limitation of liability, auto-renew provision, annual pricing escalator, and insurance limits. Each of these terms could be assigned a certain value and if the reviewer is able to negotiate all these terms as defined in the term sheet into their contract, it receives a high score for “review value.” The ability to negotiate the ideal terms would then help scale the “contract value” KPI. This can be especially important for health plan or government contracts where negotiation ability may be limited or particularly skewed in favor of one party.
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Ensuring that you use the correct contract KPIs can help tell and sell the story of your legal department more accurately. This way, legal review can be seen as the true value-add asset that it is rather than just a cost-center.