Our corporate attorneys will also guide you through the process of performance in cases of both cross border and domestic executions to ensure that your contract is fully executed to the letter of the law.

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For further information regarding Commercial Law, please visit our website at www.kpalegal.com or write to us at [email protected]

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Early in your business's lifespan, you likely began a contract management system, whether electronically (for new, modern tech companies) or using an old-fashioned filing system. Thanks to modern technology, however, you have more opportunities than ever to make the most of your contract management efforts. That includes scoring your commercial contracts to better understand their risks and help prevent risks in the future. Everyone has heard horror stories of companies that went under — or came close to it — due to a bad contract. Are you using the right KPIs to score your commercial contracts and reduce your risk? 

What are KPIs for Commercial Contracts?

KPIs, or key performance indicators, are measurable values — either qualitative or quantitative — that define how effectively your contracts are meeting your business's goals. Without the right KPIs, you leave many aspects of your contracts, and therefore your business's performance, up to chance. Not only that, an inefficient contract management process can leave you missing out on many of the opportunities your business might experience.  By measuring the right KPIs and using them effectively, you can improve your contracts and better manage your business. KPIs help you control risk and choose the contracts that are right for your business.

The Most Important KPIs for Commercial Contract Management

In order to effectively manage the effectiveness of your contract management, you must isolate the most important KPIs. By narrowing them down, you can better understand which metrics will ultimately benefit your contracts and contract management most.  1. What is the length of your contract cycle? Your contract cycle determines how long it takes, from contact to signature, to execute a contract. Often, the contract process becomes long, drawn-out, and inefficient. All too many negotiations fall through — or become bogged down by excessive features or information that isn't necessary to the contract.  How long does it take your business, on average, to create and sign a contract?  You want to know the average length of your contract cycle, as well as how long it takes to complete specific types of contract cycles within your company. You may also want to break down the contract cycle and determine where the longest delays are — and, therefore, where you can institute changes to decrease those delays.  Separately, you may want to consider how long it takes for clients to renew their contracts with your company. Are companies spending an excessive amount of time looking back over the contract or considering loopholes, or do they generally renew automatically?  2. What is the average value of your corporate contracts? Your company may have a handful of big corporate contracts, or you might prioritize corporate contracts and have only a handful of smaller contracts at your company. You need to know the average value of your contracts as a whole, as well as the average value of your big contracts. Make sure to carefully examine any outliers that could impact the averages. Bigger contracts often take longer than smaller, more automatic deals. Measuring their value against the time taken to close them can let you know more about how valuable a bigger deal really is. 3. What is the average risk of your contracts? When you take a look at your contracts, what's the average value of the risk associated with them? Contracts generally have two types of risks: contract-related risks, or the risks that could occur within the lines or wording of the contract itself; and supplier-related risks.  What could happen, for example, if your suppliers fail to deliver the necessary materials for you to fulfill the contract?  What happens if you face financial difficulties during the process?  Could the contract itself create financial difficulty for your business — trying to take on too much when you lack the resources to fulfill the contract, for example?  Carefully evaluate the risks associated with each contract and assign them a value.  4. What degree of deviation exists in your contracts? Your business probably has a standardized contract that allows you to easily sign new clients up without having to negotiate a new contract each time. When you work on a contract specifically for a new client, however, that client's specific needs may cause you to deviate from your standard contract.  As you evaluate your contracts, consider how each one deviates from your standard contract, including what those deviations will mean for your company. Some minor deviations, like shortening a few deadlines for a rush order, can be easy to handle. More serious deviations, including a lower allowance for overhead and profit, could spell disaster for your business. Being forced to add termination for convenience clauses can be even more detrimental. 5. How many of your contracts expire and are not renewed? Contract renewal is an important aspect of any business. Returning customers — those who will continue to use the services provided by your business — have a greater value for your business than brand new customers who may use you for only a single contract period. If you have a high customer churn rate, it’s time to investigate. You may find that something your business is doing does not fit the needs of your customers or that your current contract model fails to adequately reflect your customers' needs. A solid contract does not just benefit your business. It also offers enough benefits for your customers that they come back for the services you provide. You may find that something your business is doing does not fit the needs of your customers or that your current contract model fails to adequately reflect your customers' needs. A solid contract does not just benefit your business. It also offers enough benefits for your customers that they come back for the services you provide. Many of these KPIs will already be reflected in your contract administration plan, so implementing contract scoring won’t be as challenging as it may seem at the start. If you want to learn more about contract administration plans, read our recommendations for best practices.

The Benefits of Standardizing KPIs for Contract Scoring and Contract Creation

When you standardize your KPIs both for contract scoring and for contract creation, you develop a better understanding of exactly what makes an effective contract. Also, you can develop a strategy for making both your contracts themselves and the contract creation process more efficient in the future.  1. Understand what risks you're taking with your contracts. Do you have a high-dollar contract that represents a high level of risk for your company — a client, for example, who struggles to pay on time, or a job that has a high chance of failure? When you standardize your KPIs, you'll be able to quickly determine where those risks are and how they could impact your business in the future. Effective contract scoring can also help you prevent those risks in the future, along with these five contract management practices. It can even help you eliminate or pass on potential contracts that might not benefit your business.  2. Streamline your contract creation process. If you find that your contracts take an excessive amount of time to create, you can isolate the problems that cause those delays. If some aspects of your contract creation process are consistently slowing down the whole, you can then take steps to streamline your content creation process. Scoring your boilerplate contract — and removing these hidden risks — can also improve your process. When you understand where the potential challenges are along the way, you can break them down — and get them out of the way. Not only does that speed up your contract cycle, but it also makes your contracts’ scores healthier. 3. Avoid contracts that pose too high a risk for your business. In the client acquisition process, especially when it comes to corporate clients, it's easy to let your excitement get ahead of you. You're eager to sign a new client or to expand your business, so you might not take the time to clearly understand the risks involved. Your sales team may also be eager to close a deal without seeing the long-term ramifications. By creating standardized KPIs to score your contracts, however, you can more effectively evaluate the risk posed by a potential client — and avoid contracts that might pose too high a risk for your business. Standardized scores also clearly communicate to other departments when potential contracts are good or bad.  You may even choose not to renew current contracts that don't offer as much potential gain for your business as you initially thought. For example, you may discover that you have a long-term client whose contract no longer delivers the value it did in that client's early days with your business. In that case, you may want to reevaluate your contract with that customer or choose not to renew it. 4. Increase customer retention. Customers who stick with your business have a much higher lifetime value than those that remain with your business for only a single contract term. When you score your contracts using the right key performance indicators, you can discover what elements your customers really need in their contracts — and, as a result, you can significantly increase your customer retention rates.  

How to Use Your KPIs to Score Corporate Contracts