7 KPIs For Effective Contract Management in Procurement

Does your business spend a lot of time drafting and negotiating contracts with vendors? Most probably, yes.

But once the contract is finalized, how often do you refer to its terms and conditions and monitor compliance? And why is there a huge gap between contract creation and implementation?

Because most businesses today have contracts with multiple suppliers. For a large enterprise, there may be more than a thousand suppliers at a time. A mid or small business may also be dealing with hundreds of suppliers.

These suppliers deliver products and services at prices agreed during contract negotiations and then share invoices for payment. Internal teams check and validate these invoices against original purchase orders and goods receipts to approve the payment.

So, is that what contract management is all about?

How do businesses ensure that the products are delivered on time and are at par with quality standards? Do vendors comply with the terms and conditions mentioned in the contract? Do they get penalized in some form for late delivery or substandard goods?

If you cannot measure all this, you certainly cannot improve it.

How to Measure Contract Performance

You must have a mechanism in place to measure contract performance. This requires setting up key performance indicators (KPIs). Along with performance, contract management KPIs can help identify specific areas of improvement and compliance issues, if any.

Here are seven KPIs for effective contract management:

1. Contract lifecycle duration

Do you know how long the contract process takes from start to finish? To calculate the cycle time, you need to determine the time taken at each stage of the contract, such as drafting, editing, negotiating, redlining and signing. By monitoring this information, you can identify bottlenecks and take proactive steps to streamline different contract stages. For example, you may find that the initial stages of contract drafting and negotiation take a lot of time and need to be expedited.

2. Contract acceptance rate

This KPI tracks the percentage of contracts accepted without any revisions. High acceptance rate shows that there is clarity in the terms and conditions and negotiation process is effective.

3. Defect rate

A key indicator of supplier performance, defect rate is usually measured in defects per million. This KPI can offer useful insights into suppliers’ quality standards. A low defect rate validates the supplier’s adherence to quality guidelines.

4. Lead time

Vendor lead time, often measured in days, is the amount of time taken by the vendor to process and ship an order. When lead times are low, a business can operate smoothly. High lead times, on the other hand, can impact operations. For example, a shortage (and high lead times) of semiconductors impacted multiple industries during the Covid-19 pandemic.

5. Compliance rate

This shows the number of vendor contracts that comply fully with the relevant terms and conditions. Low compliance rate can escalate costs and harm business reputation.

6. PO accuracy

This KPI helps businesses check whether vendors are delivering what was ordered in the purchase order. It measures the percentage of incorrect products or services delivered during a period. Low PO accuracy increases operating costs.

7. Missed milestones

Check if the vendor has met the deadlines associated with contract milestones. Missed deadlines can highlight specific operational areas that need improvement.

In addition to the above KPIs, you should also assess vendor availability. This can help measure vendors’ capacity to respond to unplanned demand. A high score on this KPI implies that the business can rely on the vendor in difficult situations.

The contract renewal rate, which shows the percentage of contracts renewed with existing suppliers, is another indicator of the overall contract management process. A high renewal rate is a sign of healthy supplier relationships.

Technology Can Simplify Contract Management

Setting and measuring contract management KPIs may seem overwhelming at the beginning. When done manually, this can be time-consuming, inefficient as well as inaccurate.

This enhanced visibility supports strategic decision-making and improves operational efficiency. APIs also enable procurement teams to collaborate more effectively with suppliers by integrating supplier databases with procurement systems. This ensures the department gets real-time updates on order statuses, delivery schedules and performance metrics.

Contract management software automates the end-to-end process, from sourcing to supplier selection to contract creation and performance management. For example, it can create contracts directly from supplier offers in a sourcing event and push negotiated prices into online catalogs to simplify purchasing.

It also lets you see the time taken during each stage of the contract lifecycle on a contract management dashboard. This helps identify specific stages of the contract lifecycle that take longer than others. Likewise, contract management software provides full visibility into contract utilization and compliance. It also helps monitor compliance against user-defined attributes.

With contract management software, you get complete control of vendor contracts throughout their entire lifecycle.