A common scenario in most companies: You sign a contract with a vendor to provide essential services for your business. The agreement outlines specific deliverables, deadlines, and performance expectations. And you go on with business as usual.
But who’s to monitor whether they’re in compliance with the contract line-by-line?
Without effective contract performance monitoring, you might find yourself facing missed deadlines, subpar deliverables, and frustration.
Managing contract performance isn't just about ticking boxes and going through the motions. It's about ensuring that your contracts deliver value, mitigate risks, and build strong relationships.
By the end of this blog post, you'll be ready to take the stage with confidence, armed with tips, tools, and real-life examples to master the art of contract performance management.
What is contract performance management?
Contract performance management is the process of tracking, monitoring, and managing the delivery of goods or services under a business contract. Its primary goal is to ensure that both parties involved meet all the obligations outlined in the contract.
Contract performance management is an integral part of contract management itself. Contract management aims to ensure that individual contracts align with the broader strategic goals of an organization. By effectively managing contract performance, organizations can ensure that each contract contributes to the overall success of the business.
4 Reasons to measure and manage contract performance
Contract performance management helps prevent potential legal disputes. When both parties meet their contractual obligations, there's less room for misunderstandings, conflicts, and finger-pointing. A well-managed contract performance builds trust and transparency, fostering strong relationships between contracting parties.
Here are more reasons to manage contract performance on a regular basis.
1. Meeting obligations to reduce the risk of breaches
Contracts establish a set of obligations and expectations between parties involved. Effective contract performance management ensures that these obligations are fulfilled as agreed upon, minimizing the risk of breaches or disputes.
2. Maximizing value derived from an agreement
Managing contract performance helps optimize the value derived from the contractual relationship. By monitoring and tracking performance, organizations can identify opportunities for improvement, cost savings, and enhanced efficiency.
3. Ensuring adherence to compliance requirements
“While it doesn’t always get the love it deserves, a robust compliance function is an important part of risk-reduction at companies of any size. As such, in-house lawyers should get behind the creation of a compliance group if there isn’t one or enhance the existing one whether it sits in the legal department or not.”
~ Sterling Miller, CEO and Senior Counsel, Hilgers Graben PLLC
Ten Things: Building a Strong Compliance Department
Contracts may contain specific compliance requirements, such as regulatory standards, industry guidelines, or legal obligations. Managing contract performance helps organizations ensure adherence to these compliance requirements, minimizing the risk of penalties, legal liabilities, and reputational damage.
4. Continuous improvement for efficient processes
Managing contract performance involves regular monitoring, evaluation, and feedback to gain valuable insights into what works well and areas that need improvement. These insights can help refine processes, enhance performance, and drive continuous improvement in future contract engagements.
Also read: Poor Contract Management: Risks, Impacts, and Remedies
Tips and best practices to manage contract performance
From establishing clear expectations and building strong relationships to monitoring performance and addressing issues, you'll ensure that your contracts deliver outstanding results and contribute to your organization's success.
The following tips and best practices will help you effectively manage contract performance.
1. Establishing clear expectations from the get-go
To set the stage for successful contract performance, it's crucial to establish clear expectations from the get-go. This involves:
a. Defining performance requirements and specifications
Clearly outline the specific deliverables, quality standards, and timelines expected from each party. Be precise about what constitutes successful performance to avoid any misunderstandings.
Example: If you're contracting a software development company to build a mobile app, specify the desired features, functionality, and performance benchmarks you expect the app to meet.
b. Aligning expectations with the contract terms and conditions
Ensure that the performance expectations align with the contractual obligations stated in the agreement. This alignment creates a solid foundation for evaluating and measuring performance.
Example: If your contract specifies that the software development company must deliver the app within three months, make sure your performance expectations reflect this timeline.
2. Building strong relationships to empower contract success
Successful contract performance management thrives on strong relationships between the contracting parties. Nurture these relationships by:
a. Maintaining open communication channels
Encourage regular and transparent communication between all parties involved in the contract to foster a shared understanding of expectations, progress, and any challenges faced.
Example: Schedule regular check-in meetings or establish a communication platform where all stakeholders can provide updates and address concerns promptly.
b. Establishing trust and collaboration
Build trust among the contracting parties by fostering a collaborative environment where everyone feels valued and empowered to contribute to the contract's success.
Example: Encourage open dialogue, active listening, and constructive feedback to build a sense of trust and collaboration among team members.
3. Regular monitoring and evaluation for informed decision-making
To ensure contract performance stays on track, it's essential to implement a robust monitoring and evaluation system. Here’s how:
a. Implement a robust monitoring system
Set up mechanisms to monitor contract progress, adherence to timelines, and compliance with quality standards. This can include tracking contract management key performance indicators (KPIs) and using tools to collect relevant data. We’ll explore these in detail in the following sections.
Example: Use project management software to track milestones, monitor task completion, and gather data on the app development process.
b. Conducting periodic performance evaluations
Regularly assess contract performance against the established expectations and metrics. Identify areas of strength and improvement to inform decision-making and drive continuous enhancement.
Example: Conduct quarterly reviews to evaluate the software development company's progress, assess the app's functionality, and identify any performance gaps.
4. Addressing performance issues to improve contract performace
Even with the most robust contracts, performance issues can arise. Effectively manage these issues by:
a. Identifying performance gaps and issues
Actively monitor and analyze performance data to identify any deviations from the established expectations. Promptly identify areas where performance is falling short or not meeting desired outcomes.
Example: If users report frequent crashes in the mobile app, investigate the issue promptly to identify the root cause of the performance gap.
b. Implementing corrective measures and performance improvement plans
Once performance issues are identified, take decisive action to address them. Collaborate with the relevant stakeholders to develop action plans, implement corrective measures, and continuously improve contract performance.
Example: Collaborate with the software development company to identify the cause of the crashes and establish a plan to fix the bugs and enhance the app's stability.
Additionally, leveraging contract monitoring tools like contract management software, document management software, and analytics tools can further enhance your ability to manage contract performance efficiently and effectively.
Also read: Why Contract Monitoring Checklists are Essential for Effective Contract Management
6 Key metrics for assessing contract performance
To effectively assess and monitor contract performance, you should utilize relevant metrics that offer valuable insights into various aspects of the contract.
The following contract performance management metrics will not only help you gauge the financial performance of your contracts but also shed light on areas such as contract compliance, potential fraud risks, and customer satisfaction.
1. Annualized Contract Value (ACV)
The Annualized Contract Value (ACV) metric provides a means to quantify the overall value of contracts within a year. It plays a crucial role in assessing the anticipated revenue that your company can generate from the contract.
By actively monitoring ACV, you gain valuable insights into the contract's progress and evaluate its financial implications for your organization. You can also gauge the effectiveness of the contract in driving revenue and make informed decisions based on its impact.
2. Terminated Contract Remaining Value (TRV)
The Terminated Contract Remaining Value (TRV) metric takes into account not only the initial contract value but also any subsequent modifications that may have occurred.
By deducting the payments made up until the termination point, TRV provides a clear estimation of the value that remains in the contract, helping you determine whether any further payments should be made to the contractor.
However, the reason for termination can have implications on the remaining value calculations, as voluntary termination may warrant the continuation of certain payments, while termination for cause may not require further payments.
By leveraging the TRV metric and considering the specific circumstances of contract termination, you can effectively navigate the financial aspects associated with premature contract closures.
3. Order Value Variance from Original Contract Value (OVV):
The Order Value Variance from Original Contract Value (OVV) metric measures the difference between the actual order values and the original contract values.
By calculating the percentage of variance, you can evaluate how closely the actual orders align with the initial contract values. This metric provides insights into any discrepancies and can be used to identify areas for improvement or renegotiation if necessary.
By leveraging the insights provided by the OVV metric, you can make informed decisions regarding potential adjustments to the contract. Whether it entails refining the contract terms, revisiting pricing structures, or engaging in renegotiation discussions, this metric empowers you to take proactive steps towards enhancing the alignment between the actual orders and the original contract values.
4. Vendor fraud
Lack of oversight can increase the risk of fraudulent activities by contractors. To mitigate this risk, establish protocols such as asking for regular progress reports, conducting periodic review of work, and involving senior authorities when reporting suspected fraud or other concerns.
You can safeguard the integrity of your contracts and protect your organization's interests by continuously addressing vendor frauds.
Also read: 6 Tips For Effective Vendor Contract Management
5. Contract compliance
Contract compliance measures the extent to which the contractor meets all the specified requirements outlined in the contract. It encompasses factors such as timely completion of deliverables, adherence to specifications and standards, the number of change orders issued, claims filed, and the results of quality audits.
Tracking contract compliance metrics enables you to evaluate the overall performance of the contractor and ensure both parties fulfil their obligations.
6. Complaints resolved
The metric of complaints resolved focuses on tracking of raised issues, thorough identification of their root causes, and the assessment of their efficient resolution.
By closely monitoring this metric, you gain valuable insights into any recurring patterns or problems that may arise in contract performance. This empowers you to take prompt corrective actions to address these issues effectively.
A high number of complaints can serve as a clear indication that adjustments or modifications to the contract may be necessary. It may also highlight the need for enhanced clarity in the contractual terms and requirements.
Conversely, a low number of complaints signifies effective contract performance and the potential to raise standards further. It indicates that the contract is well-defined, and both parties are successfully meeting or even surpassing the established expectations.
Also read: 4 Crucial Contract Management KPIs to Track for Legal Success
Tools for contract performance management
When it comes to contract performance monitoring, it's not just about keeping an eye on the clock; it's a comprehensive approach that oversees various aspects, including delivery timelines, service quality, budget compliance, and other key metrics that define the success and legal compliance of the contract agreement.
Let's dive into the tools that can support you in achieving successful outcomes.
1. Performance measurement tools
To effectively measure and track contract performance, utilizing performance measurement tools is crucial. Here are two key tools commonly used:
a. Key Performance Indicators (KPIs)
KPIs are specific metrics that measure critical aspects of contract performance. They provide a quantifiable way to assess progress and success against predetermined objectives.
For instance, if you're managing a software development contract, relevant KPIs could include the number of bugs resolved, customer satisfaction ratings, or adherence to project timelines.
b. Balanced scorecards
Balanced scorecards provide a holistic view of contract performance by incorporating multiple performance indicators across various dimensions. It allows you to evaluate performance from different perspectives, such as financial, customer satisfaction, internal processes, and learning and growth.
2. Data analytics and reporting
Leveraging data analytics and reporting capabilities is a powerful way to gain deeper insights into contract performance.
Here's how you can harness data analytics and reporting for effective contract performance management:
a. Leveraging data analytics for performance insights
Analyze performance data to uncover patterns, trends, and potential areas for improvement. By mining contract-related data, you can identify factors contributing to successful outcomes or areas that require attention and optimization.
b. Generating comprehensive performance reports
Create comprehensive reports that provide an overview of contract performance, key metrics, and progress against goals. These reports can serve as valuable tools for communicating performance to stakeholders, identifying areas of concern, and facilitating data-driven decision-making.
3. Contract management software
Contract management software offers a digital solution to streamline and automate contract performance management. It provides a centralized platform to manage contract lifecycles, track milestones, and monitor performance.
Some features and benefits of contract management software include:
- Document management: Efficiently store, organize, and access contract documents in a secure and easily searchable repository
- Automated alerts and notifications: Receive timely reminders for critical contract milestones, renewal dates, or performance evaluation deadlines
- Performance tracking: Track performance metrics and milestones in real-time, enabling you to monitor progress and identify any deviations or areas for improvement
- Collaboration and workflow management: Facilitate seamless communication and collaboration among stakeholders involved in contract performance management
- Reporting and analytics: Generate comprehensive reports and leverage data analytics to gain insights into contract performance trends, identify patterns, and inform decision-making
Also read: How Contract Data Management Helps Maximize Legal Impact
How does SpotDraft help manage contract performance effectively?
SpotDraft is a cutting-edge contract management software that revolutionizes the way organizations manage and monitor contract performance.
With its advanced features and intuitive interface, SpotDraft streamlines the contract management process and provides valuable tools to enhance contract performance. With this CLM solution, you get the following benefits:
1. Automated contract tracking and reminders to never miss deadlines
SpotDraft simplifies contract performance management by automating contract tracking and reminders. It enables users to effortlessly monitor critical contract milestones, such as delivery timelines, payment schedules, renewal dates, and performance obligations.
By sending automated reminders and notifications, SpotDraft ensures that contract managers stay informed and take necessary actions in a timely manner, mitigating the risk of missed deadlines and non-compliance.
2. Centralized contract repository for easy access to documents
SpotDraft offers a centralized contract repository where all contracts are securely stored and easily accessible. This centralized repository eliminates the hassle of searching through multiple folders or physical files to locate a specific contract.
You can quickly retrieve contracts, review terms and conditions, and access essential performance-related information. This feature streamlines the monitoring and evaluation of contract performance by providing a comprehensive overview of all contractual obligations in one place.
Also read: Rethinking Contract Repository Management in the Age of AI
3. Performance tracking and analytics
SpotDraft empowers organizations to track contract performance through its performance tracking and analytics features. Users can define key performance indicators (KPIs) and set benchmarks to measure and evaluate contract performance against predetermined goals.
By capturing real-time data, SpotDraft generates insightful analytics and reports that provide a clear view of how well contracts are being executed and whether they are delivering expected outcomes.
4. Integration with third-party tools and APIs
SpotDraft offers seamless integration with other third-party tools and APIs, such as Slack, Jira, DocuSign, HubSpot, and more, enabling organizations to leverage additional functionalities and enhance their contract performance management.
Integration with project management tools, accounting systems, and analytics platforms allows for a comprehensive and interconnected approach to monitoring and optimizing contract performance.
Supercharge your contract Performance management with SpotDraft
Managing contract performance ensures that contracts are effectively executed, risks are mitigated, obligations are met, and value is maximized. It is a proactive approach that contributes to successful contract outcomes, stronger relationships, and organizational success.
With the best practices, tools, and key contract performance management metrics outlined in this post, you should be in a better position to track and manage your contract performance and gain maximized value.
To make contract performance management even more seamless, consider implementing a CLM solution like SpotDraft in your business processes. Request a demo!