Every organization that has a sizable contract portfolio relies on its contract team to facilitate the swift movement of all agreements—from signing to close. If you want to close deals faster, you need an effective process in place to monitor and measure your in-house legal team's performance.
You need to know how to monitor contract status, which key performance indicators (KPIs) should be measured, and how to determine the frequency of monitoring and assessment. And of course, you need to “know your why.”
Let’s talk about everything your company needs to know about measuring contract performance and how contract management software can help you automate this process.
Why is it important to monitor contract performance?
Contracts form the basis of your organization. According to Cotrill Research, contracts govern up to 80% of all business operations. Thus, smooth contract execution is instrumental in ensuring the success of your business.
Inefficient contract administration can lead to substantial monetary losses in an organization. For example, if there are no checks and balances for contracts across your company, thousands of dollars may be lost due to simple miscommunication that a well-developed monitoring strategy would have caught.
By monitoring contract performance, your company can improve the efficiency of your legal team and save money by minimizing errors, improving productivity, and finding room for improvements. More importantly, contract monitoring activities help identify non-compliance.
When businesses fail to adhere to contract terms and conditions, it can result in significant financial penalties, loss of business, and even legal action. KPMG reports that poor governance practices in contract management lead to a loss of 40% of the contract's inherent value.
Why legal teams need a contract performance monitoring strategy
In the long run, measuring contract management performance is beneficial for legal teams and businesses on the whole. In-house legal teams shouldn’t operate in a silo, and contract monitoring helps your elevate the legal team's impression on the company by clearly indicating the work you’re doing. When your legal team can point to specific metrics related to contracts, it helps to contextualize your work as it relates to other departments.
Measuring performance also helps general counsel justify adjustments in budget or staffing by showing the amount of work you’re doing in contract generation, management, and execution.
But perhaps most importantly, it allows seamless collaboration between the legal teams and other departments. By measuring contract performance, you can set realistic expectations and let other teams know the execution status of your contracts—without a million “check-in” emails.
How to create a process to measure contract performance
Want to prove your worth to the business? Set a process in place for measuring contract performance. This process should include best practices for effective assessment of the legal team's performance.
1. Decide what to monitor
Businesses also have a goal for growth. How can the legal team help move the needle? What does the business need their legal team to achieve? Which contracts should you focus on? Consider the following areas to see which measurements would have the greatest impact on your business.
- For some organizations, time is one of the most important indicators of a contract’s success. How long does each stage of the contract negotiation process take? Are there stages where certain contracts are consistently tied up in review for longer than expected?
- Next, think about cost. Does the time spent drafting, negotiating, redlining, and finalizing make sense within the legal team’s budget? Or are resources being wasted on ineffective solutions that slow down contracts and, ultimately, the deal pipeline? Are high-value contracts receiving the most attention, or are contracts with low ROI taking up too much time?
- Quality and consistency help teams across various departments know 1) what to expect from other departments and 2) the standard they’re being held to. The easier it is for teams to generate professional, compliant, and cohesive contracts, the better your organization will communicate with external stakeholders as a whole.
Additionally, businesses should decide who will monitor the contract performance. For instance, they can involve the finance teams if they want to monitor the contract spending. This way, they increase collaboration between different departments in the organization.
Instead of relying on outside metrics, your legal team will benefit from measuring your own impact. Lexion's Workflow solution comes in handy in this regard since it lets all stakeholders work together and see the status of all open contracts. Plus, with automated reporting, your legal team can share key metrics that impact the entire organization’s performance.
2. Align your KPIs to business objectives
After the business has determined what they need the legal team to achieve, it's time for you to figure out which KPIs (Key Performance Indicators) to use as measurements. Curious about selecting these KPIs? Here are some things to consider:
- Objectives. Do the KPIs tie in with the objectives the company is trying to achieve? For example, if your business is focused on growth, what specific measurement would indicate that legal is helping to achieve these goals?
- Required Data. Which data is needed to measure the legal team's performance against this indicator? Legal teams could track the following data in order to optimize workflows: how many contracts are generated and completed each month, the average contract value, the average timeline for each contract (and does it differ by type?), terminated contracts, etc.
- Responsibility. Who will measure this indicator? Who will track the data leading to KPI measurement?
- Frequency. How often will the business track the aforementioned data? How often will it be updated?
When legal teams measure KPIs based on these factors, they'll be able to collect proper contract analytics. Then, they can convert these analytics into actionable strategic information.
3. Provide visibility by centralizing information
For a contract monitoring plan to be successful, it's important that all involved parties have access to relevant information. Suppose a business wants to monitor contract compliance. It needs to make sure the documents, compliance guidelines, and other relevant information are available in a central repository.
All teams who are actively involved in contract management or assessment should have access to this information. This practice will make it easier for the company to prove compliance during audits.
Lexion's intelligent repository is one such place to store contracts and organize them through artificial intelligence. Thanks to AI, your legal teams can do a quick search and get instant insights into your contracts.
4. Set a risk tolerance threshold
Companies often overlook the importance of setting a risk tolerance threshold. An unfortunate example in this regard is Robinhood, a company that lost $70 million to unmitigated risk pertaining to regulatory non-compliance.
Businesses shouldn't have a zero-risk policy either, as that can incur losses and open opportunities for competitors. Instead, they should set a threshold that allows their legal team to operate within a certain risk level.
Doing so will help you make better and more informed decisions when it comes to contract management. After all, you need to weigh the risks and rewards of every decision made by the legal team. Here are two things to consider when setting this threshold:
- Impact. What impact will this risk have? Consider reputation, commercial, and monetary risks. For example, if the legal team misses the deadline for contract renewal or termination, what impact will that have on the company? (Yes, we’re biased, but Lexion can help you catch autorenewals too.)
- Probability. How probable is this risk to occur? Assess probability both qualitatively and quantitatively. The qualitative approach will depend on the legal team's confidence, while the quantitative assessment is dependent on previous incidents.
Stay ahead of the competition with contract performance monitoring
Contract performance monitoring and measurement are vital in today's business world because of the complex legal landscape. Businesses must create a contract monitoring plan that involves all stakeholders and sets KPIs to ensure their legal team is operating efficiently.
For more information on how to improve contracting with the right metrics, click below to download the Playbook. And if you’re ready to learn more about Lexion’s AI-driven reporting, schedule a demo.