Poor contract management plagues many businesses — it often results in costly mistakes that set the business back and leads to lost deals. Research shows that poor contract management costs companies a whopping 9.2% of lost annual revenue – a number that can go up to 15% in larger companies.
That’s why one of the most effective ways to measure the performance and impact of a legal team in an organization is to analyze its contracting processes — and specifically, set KPIs around them. Setting the right KPIs helps you answers key questions like:
- Is communication between cross-functional teams streamlined?
- Are legal resources and time being used efficiently and strategically?
- How does the legal team directly and indirectly contribute to helping other teams improve the business’ bottom line?
We spoke with legal leaders and in-house counsels to understand this matter and have included their insights within the article. Read on to find out why setting KPIs around critical contract management processes is so important and which key metrics experts recommend you should start tracking.
How do contract management KPIs set the legal team up for success?
“Lawyers are always super scared of translating turnaround times into quantifiable metrics. But whether it's marketing review or sales contract review, I track my average times for those and it's automatic through the tool I use. For example, my average for marketing review is something like one day and nine minutes.
And whenever someone's worried about the process and says something like, ‘Do I really have to submit all marketing to Legal?’ — my answer is ‘Yes, you do. If you have a problem with my turnaround times, let's chat.’
So don't be scared of the process, be scared of a flawed process.”
— General Counsel in the FinTech industry
There’s often friction between legal and business teams — it’s critical for modern legal teams to look at things more holistically to understand why this gap exists.
Often, the answer lies within the contracting process itself. Specifically, it boils down to these things:
- How easy is it for business teams to communicate their requirements with Legal, and how soon do they get a response?
- Is the legal turnaround time too long?
- Is there a misalignment between legal and business priorities?
- Are there tools and processes set that business teams don’t use or are unaware of and lead to inefficiencies?
- Is there a deeper problem within how contracts are managed at an organization?
Setting key performance indicators (KPIs) helps answer these questions by turning them into quantifiable problems. For example, if the average legal turnaround time is 3 days right now, what can be done to reduce that? Which types of contracts can be processed more efficiently or even without Legal review by setting templates?
The first step to eliminating these challenges is to make the contract management process more data-driven and use that data as evidence to identify core issues and areas of improvement, solve key legal challenges, and bridge the gap between legal and business by demonstrating the former’s value to the latter.
3 critical contract management KPIs/metrics to track
“If you are a commercial-driven business, the most important thing is to show how fast you are closing deals, what percent of deals are getting closed without any edits, how many litigations you are handling and how much you have saved, and how many templates have you created to support other business units. I don't think there is one key metric that defines the legal team — it really depends on the business.”
— Chief Legal Officer in the Event Tech industry
When you first start tracking key performance metrics for your contract management process, it’s easy to feel overwhelmed due to the sheer amount of data available. However, you don’t have to start tracking everything immediately. We spoke to legal leaders to understand some of the most critical metrics and have outlined 3 key contract management KPIs below.
Also Read: Rethinking OKRs, KPIs, and Goals for In-House Legal Teams
#1 Number of deals/contracts closed
It might be a no-brainer that perhaps the first KPI you should start tracking is the number of contracts closed month-on-month.
Tracking this metric will help you understand:
- How many contracts did Legal close throughout the year?
- What were the most and least productive months in terms of volume of contract closure?
- What were the dependencies that were a blocker in closing contracts?
- What types of contracts were closed month-on-month, and how many of each were closed?
- Out of the contracts closed, how many had been templatized and how many were created from scratch?
- Is there scope for further templatization to improve contract closure?
- What is the relation between number of contracts closed versus the quality of contracts.
#2 Value of deals/contracts closed
Contract value is an important metric that can prove of significant value to the entire organization. Finance teams use this information to make forecasts, sales and procurement teams use this to understand the nature of the deals they’re closing and their average deal values, and so on.
For legal teams, tracking contract/deal values helps understand:
- Impact of contract closure and legal productivity on business in terms of revenue.
- Total value of contracts over a period enhanced by number of contracts closed.
- Maximum, minimum, and average contract value to help set up appropriate approvals and automate wherever possible.
- The relationship between contract value and contract term, contract renewals, etc.
- High-value contracts and deals that they should dedicate more efforts to, as opposed to low-priority contracts.
Also Read: 5 Key Contract Reports to Share for C-level Review
#3 Cycle times or turnaround times for contract closure
“One of the revenue leaders I worked with told me, ‘Time kills all deals; you gotta close deals fast,’ and I keep this in mind every time I’m pulled into a sales deal.”
— Sue So, Head of Legal, Hopin
An important KPI for the entire legal team as well as individual team members is the turnaround time for closing contracts or the cycle times for various contracts.
Tracking turnaround times helps legal teams understand:
- What was the overall cycle time for closing different types of contracts?
- What was the average turnaround time for each stage of the contract lifecycle?
- What are the types of contracts that take longer to close and which are closed quickly?
- What are the turnaround times for templatized vs editable contracts?
- If you have a CLM software, how does the tool improve turnaround time and is there scope for further improvement?
- How does deal value affect turnaround times?
- What were the average and individual turnaround times for different legal team members?
- How many rounds of negotiations do different contract types require, on average?
Additionally, it’s important to factor in the wait times for the legal team at different stages of the contract lifecycle separately. It helps Legal understand the dependencies or stakeholders where contracts often get stuck and figure out their actual TAT for different contracts. Furthermore, it helps identify specific contract approvals or review requests that can be automated through CLM software or by setting pre-approved limits.
“Contrary to what business teams might think, legal teams are usually not the ones delaying the contract process. Most times, they are waiting on other teams and stakeholders for review, inputs, or approvals on certain aspects of the contract. It is critical to track these wait times and exclude them to showcase the actual TAT of the legal team. Setting up a process to reduce these wait times will also help Legal reduce contract closure cycle times.”
— Diwyata Burbure
Senior Vice President – Legal Tech @SpotDraft
How to track contract management KPIs as a legal function
Now that we’ve established why it’s so important to track the efficiency of your contract management process and some key metrics you can begin tracking, it’s time to outline how. There are three ways you can track contract management KPIs:
#1 Tracking data manually through spreadsheets
The quickest way to start tracking KPIs and various contract data is to set up spreadsheets. Though this can be a huge task in itself, as manually updating these sheets with data can get cumbersome and take away time from other productive tasks, it’s still a cost-effective way to begin tracking various legal metrics in a limited budget.
Also Download: SpotDraft’s Contract Tracking and Management Spreadsheet Template
#2 Automating reporting through your contract management software
If you have a contract management software, then chances are it already includes built-in analytics and reporting tools to help you track various KPIs. For example, SpotDraft offers instant generation of custom reports as well as a personalized dashboard with contract insights.
“The best thing about SpotDraft is the report generation, which saves us from a lot of manual effort.”
— G2 Reviewer
These tools can automatically collect and analyze data, and pull up the reports you need without having to do a lot of manual work, providing real-time insights into the performance of the legal team.
#3 Using dashboards to track and visualize data
There are various dashboard tools that legal teams can use to visualize their KPIs in real-time. These tools help in identifying trends and patterns in data, making it easier to see the big picture and make informed decisions. Before you buy a separate dashboard tool, however, make sure to check if your CLM, if you have one, offers dashboards with relevant metrics already — and if you don’t, see if it might be more prudent to invest in a CLM instead.
Also Read: Contract Management Dashboard: A Comprehensive Guide
Achieve contract management efficiency with SpotDraft
It’s difficult to quantify the value of all the work legal teams do, as many of the tasks, such as advising leadership teams, managing risk, etc., are strategic and complex in nature. However, many parts of the contract management process can, and should, be quantified into easily understandable KPIs or metrics that not only demonstrate the value of the legal team but also set them up for success by making the process more efficient.
SpotDraft can help you both streamline contract management for your organization and automate reporting to allow for instant access to important insights on your process. Book a demo with the experts at SpotDraft to learn how.