Regardless of the team size or the organisation, using and following up on contracts can be time-consuming and can cause unnecessary risks to the organisation. In worst cases, this can lead to monetary and legal consequences with an even higher outcome for business operations. However, you can use some contract performance metrics to help optimise your operations and reduce risks associated with poorly managed contracts and terms.
How using contract metrics can help you drive efficiency and decrease risks
When defining metrics to use for managing contract performance, the metrics should fall into the same priority as the organisation’s other ways of measuring performance. Too many, and you can lose oversight; too few, and you can risk only seeing parts of what you can manage and control. Additionally, it helps set clear expectations for those assigned to measure, follow up on the metrics, and implement tools to help bring them to life without too much manual intervention.
Our take on the Key Contract Performance Metrics to focus
How you should manage these metrics depends on the size of your organisation, your team, and the complexity of the agreements. Teamwork is essential to driving this efficiently, and alignment with the involved people/teams is important to consider when setting up these contract performance metrics.
1. The time it takes to complete a contract
Some contracts are, in their nature, more complex to negotiate and work through with the supplier, and this takes time. If you are in an organisation where these contract needs often occur, a good idea would be to track the cycle time, how long it takes, and how much effort is spent on this. A more complex contract can require the involvement of more people from your organisation, and using the tracked cycle time can additionally provide you with insight for later optimisation and planning. Tracking these efforts can help you get more data to support adding a more structured platform to help your business going forward.
Considering measuring with these two areas:
- Defining time spent within your categories and suppliers will give you better insight into where most time is spent and can also help you optimise work in these areas.
- Measuring per contract type will allow for better planning and resource management. For example, an NDA should not take longer to finalise than a Master Service Agreement (MSA), and a renewal, with a well-structured process and contract, can take a shorter time than when it was first negotiated and signed.
2. Contract template and clause deviation
When dealing with suppliers, you cannot always push using your standard contract template and clauses. This will often depend on your company’s purchasing power and size compared to the suppliers. For example, even a decent-sized company will not easily be able to push the use of their standard contract templates when negotiating and signing an agreement with Microsoft. If your company already has a set of defined contract templates, you should enable a way to track the deviation of these contracts and know for which suppliers and agreements these are not in use. Doing this will help you understand potential risks and areas for additional scrutiny.
This often requires a platform that can help you with this work, and they come affordable. When starting to track like this, you should add tracking of deviations down to a clause level. Doing this will bring clause differences into the light for easier contract management and set yourself up to better track potentially risky contract areas. Defining standard clauses and, from there, which ones can be deviated from and which are crucial for your business will provide you with an even more efficient way of working with your contracts. Involving relevant “clause-owners”, like your Legal and Quality teams, can help smooth the process around your contract creations and require less interaction with all departments. Some contract platforms today have features that can help define clause variations and even initiate clause approval workflows to the right people when these cases arise. And who wants to have their Legal department say “yes” to using a simple clause for every contract you do?
Tracking contract and clause variants can also help you build up better reporting capabilities for areas with higher risk for your organisation. These areas could be impacted by macroeconomic changes or regional conflicts, where you could have a production stop if you do not intervene quickly enough. Imagine looking through hundreds of contracts for particular details when you are in a rush. And now imagine getting the needed information with a “push of a button”?
3. Contract Activation
Procurement must remember a step after negotiating and signing a contract: Contract Activation.
Contracts and contract documents should be and are typically aimed at being utilised from day one after signature, but when they are not correctly activated in the business and made available to be seen and used by the organisational users, value will be lost, and anticipated contract spending will naturally be reduced. We have often seen that contracts end up in a contract repository with structured access restrictions - of course, rightly so - and are not integrated into the procurement process and made available for the users. Eventually, a supplier might also not want to work with you in the future if you can’t help ensure the contractual value is going their way.
Doing this will not get you the expected value out of the contract as users don’t know the existence of the agreement unless you have a system that allows for, e.g., catalogues where the user doesn’t need to worry about contract details - this is, however, only a fractional number of organisations that only buy defined products and not services or similar needs. Most often, organisations will have various needs for engaging with suppliers on projects and service offerings where contract details are necessary when collaborating with a supplier, and these particular details or documents would be preferred to be made available in an easy way for your organisation.
Bringing visibility of contracts and related documents to your organisation is crucial to driving the proper activation of contracts. So ensure you have a defined process for activating your contract documents in your procurement processes and, through that, empower your organisation even more. You can do this through a contract document management solution to work in tandem with your procurement process and where your users are.
4. Spend under Management
How well are you in getting your spending to the proper contracts? Having contracts in place and activated in your procurement process is part of having spend under management. This requires communicating the contracts to your organisation so they can start using them, but it also requires some follow-up.
Driving usage and follow-up can be a time-consuming task, and just because you in Procurement have made the contract, it doesn’t mean that you should be driving the usage of the contracts as well. You can make the contract or contract elements available for the organisation, but specific departments often use the particular contract. A way to help control and manage the contracts would be to assign daily owners from those departments to help push the usage and follow up with you. This will, in turn, also provide natural ownership and can help identify areas of supplier collaboration that are not working well.
An area often overlooked by organisations when managing contracts is how well the buying organisation lives up to the contract terms and agreements. This could include following up on negotiated spending associated with the contract, compliance with payment terms, and general usage of the contract. When entering an agreement, both parties are responsible for upholding the different parts, so what are you doing to do your part following the contract?
Calculating Spend under Management
(Total Managed Spend / Total Spend) x 100
Example:
If your total company spending is ten mEUR and your spending associated with negotiated contracts is five mEUR, your managed spend is 50%.
More spend under management can help you drive more efficiency, lower the risk of working with third parties, and provide more value to the business. Remember, a negotiated contract being considered under management could also come from within the organisation. Ensure it’s activated and tracked using company contract templates and clauses to help drive risk management and contract performance.
5. Supplier Performance and Business Rating
In the same way, the buying organisation is responsible for upholding their part of the agreements; procurement additionally needs to ensure proper monitoring of the supplier’s responsibilities. This area often causes lost value in working with the suppliers and can be reduced by implementing simple metrics and structured follow-up and management of the contract. Now, each side is typically interested in maintaining a good relationship and carrying out what has been agreed upon. Still, each side of the table deals with systems, people and processes, so a collaboration can never be fool-proof.
Two key metrics can help you evaluate if the business relationship and agreements can be considered compliant and come with a good performance. These metrics are:
How well are they performing to the agreed terms?
The supplier should adhere to several topics depending on the contract and agreement. Usually, these focus on delivery times, quality, timing, and specific payment terms. These are typically the easiest to follow up on using your procurement systems. However, the terms can also concentrate on certain SLAs and deliverables. This makes some agreements more challenging to manage and measure, requiring an adequately structured process and, in the best cases, a tool to assist in this work.
How is the supplier perceived in the business?
An area that has yet to be seen that much in the Procurement world - at least with features built into procurement platforms - is continuously following up on and measuring how the business stakeholders and users perceive a supplier. You might have negotiated the best deal in your career. Still, once the agreement is put out there for your organisation to use, the supplier falls short of communicating clearly or perhaps delivering a slightly poorer quality of service. A traditional way of following up on supplier performance will be to look at quantitative data like spend, adherence to payment terms, and delivery times, all of which are measurable in your system. However, gathering feedback and ratings from your business can, in most systems, only be done through diligent and continuous manual follow-up, or it ends up receiving feedback long after the service or interaction has been delivered, which is naturally filled with some bias - as human beings are typically not good at remembering in this way. Imagine you needed to provide feedback to a supplier collaboration three months after delivery. Would you react mainly based on facts and immediate experience, or would you rely more on memory and potentially form a flawed perception?
In P2Connct, we’ve incorporated a natural supplier feedback step at the end of an ordering cycle, prompting users to assess their supplier experience based on five dimensions. This feedback, collected when the experience is fresh, offers additional insight into how the organisation perceives and works with the supplier. It aids in continually enriching supplier performance evaluation and identifying problematic collaborations. Moreover, the feedback and ratings enhance performance dialogues with the supplier, using real examples to optimise the partnership. On top of having the input used for improving supplier relationships and follow-up on agreements, it provides an additional piece of information for other users that need to work with the supplier, thus also addressing the social notion of seeing a colleague describing their experience with the supplier - just like we would see in our private lives on various rating platforms, however, now defined in a business setting.
6. Expiration terms and follow-up
The last crucial part of the contract life-cycle is at the time of expiration or renewal. When working with contracts - simple or complex - the time when they are supposed to be in effect has an expiry date. This is why being able to track when a contract is up for expiration or renewal is so important, being it from a perspective of contractual coverage but also from a resourcing point of view so you don’t end up having to allocate all of your employees at the same time or rushing the work needed.
Expiring agreements typically take three forms, each of which should be duly noted for follow-up. To manage these contracts using a platform, scheduled notifications and reporting should be used for all forms of expiration.
- Expiration on a specific date:The contract will self-expire on a specific date and must be taken up for negotiation and renewal by either party. Planning for potential negotiating and renewal is required depending on the contract or agreement type.
- Auto-renewal:Auto-renewal: These are contracts that will be automatically renewed and extended into a new period without any notice or upfront negotiation. We always advise our clients to review contracts before auto-renewal to ensure the contract elements are still relevant to the organisation, adequately utilised, and the supplier performs as expected.
- Termination of contract with notice:The agreement must be terminated within a specific time before expiration. This form will differ from auto-renewal as the agreement will not necessarily be renewed for a whole period but instead prolonged for shorter intervals. Examples are often seen in contracts with services being delivered every month. Ensuring a contract is terminated and duly deactivated (opposite of activated) is equally essential for Procurement and the organisation. This can entail removing the agreement from being used in the procurement process and not being seen by business users. Additionally, a good practice is to evaluate the deal with the primary business users and, if relevant, also include the supplier in this evaluation. This won’t only be a way to optimise future agreements; it can also help strengthen the collaboration with the business as well as the external reputation of your company.
Leverage technology to support your contract compliance
While there are ways to manage contracts in simple and basic ways, like spreadsheets and share points, consider utilising solutions built to work with contracts and get them activated. P2Connct provides an easy way to activate contracts and contract documents for your organisation to see. This allows you to not only store contracts in a repository but also schedule expiration notifications automatically, know when a document is changed and by whom, and know if your users should see a particular document to collaborate with your suppliers. All organisations and companies will at some point enter into some agreement or contact with their suppliers, either indirectly through accepting a quote without previous agreements, paying for an order with a credit card on a supplier’s platform, or negotiating and signing a contract for a specific timeframe to have products or services delivered. Some supplier agreements can be more crucial and extensive to structure and actively manage, whereas others are more easily followed up at a scheduled interval.
Are you curious about how P2Connct can help you monitor and track your contracts while guiding your users with a Guided Intake platform? Get in touch with our team through the chat, or book a meeting here.