Contract managers, like every other manager in business, is drowning in data. Everyone has gotten the message that data is valuable, and the proper use of that data will give your organization a competitive edge.
But what data should you be focusing on?
If you are using contract management software, you have access to dozens of different contact performance metrics. Instead of dividing your attention by obsessing over all of them, you should narrow your focus to just three contract performance metrics.
If you carefully monitor and manage these three metrics, you will see improvements across the company:
- Contract Obligation Performance
- Renewal Rates
- Cost Effectiveness
Contract Obligation Performance
Failing to meet contract obligations is expensive. If contracts have compliance penalties, you are cutting into your profits every time a delivery is late, incomplete, or otherwise sub-standard.
Failure to meet contract obligations hurts your business in other ways too. If you fail to measure your business results against the terms of the agreements, your company may be overpaying on claims payouts.
You also aren’t able to correct systemic problems with your project implementation because you won’t know how widespread the problems are if you’re not monitoring the contract obligation performance metric.
Monitoring this one metric is like having a routine physical exam. Most of the time the results will be routine, but when there’s a problem, you have a better chance of catching it early, before it becomes fatal.
Renewal Rates
The contract renewal rate metric gives you an overview of your entire contract management system. A high level of contract renewals gives your company a reliable stream of revenue and the ability to create accurate financial forecasts.
A low rate of renewals means that there are problems in your contract compliance efforts or with your contract administration.
However, automatic renewals can be a double-edged sword. When your contracts auto-renew, it’s easy for bad contracts to get renewed.
If your renewal rate is too high, it can also be a sign that you are not carefully screening contracts before they auto-renew to cancel deals where your partners fail to pay on time or present other issues for your business.
Cost-Effectiveness
The goal of every business is to increase profits. You maximize profits by a combination of high-revenue generating activities and stringent cost control measures.
The cost-effectiveness metric helps you maximize revenue and minimize costs. You can compare each of your contracts and see at a glance which contracts are meeting cost and value targets and which contracts are underperforming.
Sometimes you have a great relationship with a vendor. It seems like everything is going well. But, until you look at the cost-effectiveness of the agreement, you can’t know if the contract is costing your organization more trouble than it’s worth.
Cost effectiveness numbers never lie. You can use this metric to:
- Find vendors you want to do more business with
- Find vendors you want to cancel contracts with
- Leverage better deals out of underperforming partners
If you want to overtake your competitors, you have to stay on top of your contract performance. These three metrics give you the best window into your business.
For more details - visit: Contraxaware.
I help companies manage contracts proactively.