Contract performance monitoring; what KPIs will I measure?

Soon you will have hundreds of contracted suppliers providing goods or services to your organization. And any delivery that is late, poor quality or not done according to the right price agreements affects the organization's performance, customer satisfaction and revenue.

So it is important to measure contract performance based on KPIs. Now for contracts, it is still sometimes difficult to determine which KPIs are relevant because supplier contracts vary greatly among themselves. You can imagine that delivery time of strategic goods is more crucial than, say, routine products such as office supplies.

Nevertheless, there are a number of KPIs that you can use as a standard when measuring contract performance.

KPIs help contract managers measure contract progress and results. Consequently, properly designed and optimally deployed KPIs can have a significant effect on final results. In general, the best KPIs are those that are formulated “SMART. 

Specific
The probability of achieving specific goals, is higher than for general goals. When formulating a specific goal, you must answer the questions “Who is involved?”, “What do I want to achieve?”, “When do I want to achieve this?” and “Why do I want to achieve this? An example of a general goal is “Improve productivity within the organization,” but a specific goal is “Save 300 hours per year by automating contract management.

Measurable
If you want to know if your KPI is measurable, ask yourself, “How will I know when the goal is achieved? For example, a measurable goal might be: “By Feb. 1, 2025, our contract managers will have saved 300 hours per year compared to the previous year by automating contract management.

Acceptable
Is the goal acceptable and how will we meet the goal? Acceptable goals describe procedures and tools deployed to achieve the goal. In the case of the objective mentioned above, that might include purchasing software that facilitates contract automation.

Results-oriented
With a clear outcome in mind, it becomes easier to create a strategy or plan that will help achieve the goal. You become more focused on implementing the necessary steps to achieve the goal as quickly and efficiently as possible.

Time-bound
A goal must be set in a specific (AND realistic) time frame. Without this element, there is no urgency and actions are pushed forward and postponed. Naming a specific date by which the goal must be achieved helps to work on the goal in a result-oriented way and in realistic steps.

Contract efficiency is a critical component in increasing profit margins, after all, the faster a procurement contract is used within the organization, the faster savings are achieved. Unfortunately, the contract management process within organizations is often anything but efficient. By examining the length of the contracting process and discovering key trends in it, you will gain insight into the efficiency of contracts and processes. Should it turn out that these processes are currently not efficient, the results will give you tools to implement changes that will have a positive impact on the organization.

For example, the KPI 'average contract duration' provides insight into how quickly procurement contracts are concluded. It is the most commonly used KPI to measure the efficiency of a contract management process. A shorter average contract duration can indicate a greater number of closed procurement contracts, which obviously results in more savings and thus more profit for the organization. Of course, the time between signature and renewal does vary by contract type, structure and stakeholders.

By measuring contract efficiency, you'll discover that you may run into similar problems time after time with a specific supplier or during a particular stage in the contracting process. The key then is to figure out how to make adjustments and avoid making the same mistakes.

Contract effectiveness is indispensable when it comes to a successful contract management process. By establishing KPIs around effectiveness, it is easier to identify opportunities and meet your interim goals. KPIs within this theme include:

• Contract compliance indicates the use of existing contracts (for example, is there a lot of out-of-contract purchasing?);
• Total number of suppliers (after all, fewer suppliers create more efficiency);
• Number of contracts per procurement package, supplier or geographic location;
• Procurement volume per supplier, procurement package or geographic location;
• Performance by purchasing package, supplier or geographic location.

The suppliers that actually add value are those that consistently perform according to contract agreements. No matter what goods or services a supplier provides, quality is always an important factor. 

As an organization, if you cannot rely on a supplier's ability to perform decently, it will obviously cause short-term problems. Deadlines for delivery of a finished product have to be postponed because the quality of a semi-finished product, for example, does not meet requirements. This directly jeopardizes primary business operations. 

Also, poor quality will affect the organization's long-term goals. So it is important to clearly communicate expectations around quality to suppliers and take action in case of poor or inferior quality of delivered services or goods. 

In addition to agreeing on the quality of deliveries, timeframes must be established in which services and goods are delivered. Quality is irrelevant if goods are delivered a month late. Consistent and timely performance over the life of a contract, helps achieve short- and long-term goals. By accurately monitoring delivery times, delivery issues can be raised and adjusted far in advance.