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Measuring and Monitoring Contract Performance

Measuring and Monitoring Contract Performance

Measuring and Monitoring Contract PerformanceLaleh Hassibi
Vice President of Marketing

Every organization that has a sizable contract portfolio relies on its contract management team to facilitate the swift movement of all agreements from signing to closeout. Therefore, firms need an effective process in place to monitor and measure their in-house legal team's performance with regard to contract production.

Before they can conduct contract performance monitoring, companies need to understand why it's important. They need to know how to monitor the legal team's contract performance; which key performance indicators (KPIs) should be measured, and how to determine the frequency of monitoring and assessment.

In this article, we'll discuss what companies should know about performance monitoring for their in-house legal teams. Plus, we explain why contract management software can be a blessing for the organization.

Why Is Contract Performance Monitoring Important?

It's imperative to have a contract monitoring plan in place for in-house legal teams since contracts form the basis of the organization. In fact, contracts govern up to 80% of all business operations. Thus, smooth contract execution is instrumental in ensuring the success of a business.

Inefficient contract administration can lead to substantial monetary losses in an organization. If there are no checks and balances for contract performance monitoring in the organization, thousands of dollars may be lost.

By monitoring contract performance, companies can improve the efficiency of their legal teams 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.

Benefits of Contract Performance Monitoring for Legal Teams

In the long run, measuring contract management performance is beneficial for the legal teams and the business as a whole. Here's how:

  • Contract performance monitoring elevates the legal team's impression on the company by clearly indicating the work they're doing.
  • It also helps general counsel justify adjustments in budget or staffing by showing the amount of work they're doing in contract generation, management, and execution.
  • Most importantly, it allows seamless collaboration between the legal teams and other departments. By measuring contract performance, companies can set realistic expectations and let other teams know the execution status of the contracts.

How To Create a Contract Performance Monitoring Process

Businesses need to follow a set process to measure contract management. The process should include best practices for effective assessment of the legal team's performance.

Decide What To Monitor

First and foremost, businesses must have a clearly defined goal in order to measure contract performance. What do they want their legal team to achieve? On which contracts should the legal teams focus?

After they've determined what they need the legal team to achieve, it's time to figure out which KPIs to use as measurements.

In addition, 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. In this way, they increase collaboration between different departments in the organization.

Lexion's Wonderful Workflows comes in handy in this regard since it lets all stakeholders work together and see the status of all open contracts. Plus, the teams responsible for contract performance monitoring can also share key metrics.

Provide Required Access by Centralizing the 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 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 a remarkable place to store contracts in one place and organize them through artificial intelligence. Thanks to AI, the legal teams can get quick insights into the contracts and save time.

Set the KPIs Carefully

As mentioned earlier, businesses need to set KPIs to measure the legal team's contract management performance. But how to select these KPIs? Here are some things to consider:

  • Objectives. Do the KPIs tie in with the objectives the company is trying to achieve?
  • Required Data. Which data is needed to measure the legal team's performance against this indicator?
  • 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 businesses 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.

Set 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 them make better and more informed decisions when it comes to contract management. After all, they 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?
  • 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.

Final Words

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.

Click above to download the Playbook

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