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Five Risk Management KPIs for Effective Contract Compliance

John Doe
John Doe

Technical Writer & A Civil Rights Activitist (TEST)

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KPIs or Key Performance Indicators are quantifiable measurements to evaluate success. It is a golden rule in business that measurable results can be managed. Therefore indicators represent an invaluable part of the process of running a business.

People who deal with contract compliance daily and want to do their job efficiently state how measuring performance and, therefore, compliance with contracts is essential for excellence in the management of contracts. Therefore professionals rely on KPIs.

To help you become a club member and better understand KPI, we will elaborate more on this phenomenon and mention what five indicators should be on your list if you decide to implement KPI.

Five indicators we will discuss are:

  • Variance in Contract Terms
  • Monitor Renewal Dates
  • Inappropriate Vendor Authorization
  • Approval Delays
  • Compliance Resolution

Keep reading and discover why precisely these indicators are relevant to your contract compliance.

KPIs 101: The Story Behind Phenomenon

As you can understand from the introduction, KPI is simply a list of indicators that facilitate understanding the basic functionality of every feature in the contract management software. These serve the purpose of efficient management, measurement, and execution of contracts. It is software that helps you keep track of contract compliance.

Usually, businesses that encounter roadblocks or bottlenecks in the contract signing process also have issues recognizing new revenue. The KPI is therefore designed to help you. It is adaptable to your needs and fosters much necessary transparency in your contracts and compliance with them.

The last bit of advice that can convince you to use KPI in your business is IndustryWeek’s research showing that organizations with a well-defined contract compliance process achieve up to 80% savings compared with other organizations.

Naturally, organizations willing to take KPIs as part of their performance of contracts need to align the Contract Management KPIs with their business. This is essential for the results you seek to achieve, which must be feasible and realistic.

It is up to the manager to shape the overall process by setting objectives, layers of process, and execution style. This process is eased up if you have already set realistic and feasible goals on which KPI can rely.

It is always recommendable for any process, compliance or activity to ensure you have numerous indicators. For contract compliance, KPI can also offer you a variety of indicators, but the five we will further elaborate on should always be included.

Seven indicators KPI infographic

These are:

  • Variance in Contract Terms
  • Monitor Renewal Dates
  • Inappropriate Vendor Authorization
  • Approval Delays
  • Compliance Resolution
  • Quality/Complaints Resolved
  • Vendor Fraud

The Five Golden Indicators of KPI

Variance in Contract Terms

Transparency is critical to any contract compliance, regardless of the organization. In order to assure transparency, all terms and conditions in the contract should be measurable and reviewed. This is the only way to know with certainty contractor met all requirements and that there is no variance in the contract terms.

By reviewing all set indicators, you, as a company, can track and recognize any form of contract variance. Variance can be defined that one of the contracting parties doing something different from the way they originally agreed.

These differences can be detected using software that alerts owners if a breach occurs. Therefore, any variance in terms can be removed, and execution can be assured. This can also be an excellent base for a change of existing contracts.

Many companies use this indicator to fortify their position, priest any risks, remove any inconsistency and avoid incomplete agreement execution. Additionally, it is a great tool to check for outdated language and remains compliant with regulations applicable to the contract, contracting parties, and your organization.

Talking about the more technical side of variance can help you track losses. The Original Value Variance is a value that helps you track them, and in a contract, it can be high, which is cause for concern. The allowed variance is 5%.

As an owner, having high OVV should indicate that there is a mistake and that you need to apply a different strategy. Changing any of these elements and ensuring you fix all errors can help you save money and prevent losses.

Monitor Renewal Dates

The expiration date is a substantial part of any agreement, which is a necessary marker to refer to the project termination and all that has been achieved. If the contract expires and your project is not terminated, then there are several options to discuss, such as auto-renewal, change of conditions or even break of contract.

In order to assure that they have space for negotiations, many companies have a system that alerts them about expiration allowing the management enough time to act.

This system is, therefore, a great tool that provides negotiation leverage based on time by also providing the ability to observe setting rates. This is essential since different renewal strategies can influence the renewed contract and rates.

KPI, with its function, can foster this process and help you prioritize your actions. To use the system correctly, it is essential to determine the optimal value for the Customer Renewal Rate.

Customer Renewal Rate depends on the services and market you are operating in a while also being influenced by economic stability. It is suggested that the rate is above 80%. KPI set in these parameters helps you the customer renewal rate every week and allows you mentioned space to think of strategies.

There are also several KPIs functions related to renewals that you can consider:

  • Ability to keep track of whether a contract was set up for automatic renewal, was renewed that way, was renewed with express consent, or was terminated
  • Set of techniques for choosing the desired arrangements to publish statistics on renewals
  • Procedure for deciding whether the non-renewal of a specific contract was regrettable or avoidable
  • A method for presenting statistics on renewals.

Inappropriate Vendor Authorization

Vendor authorization refers to the process by which the state WIC agency evaluates, selects, and enters into an agreement or contract that applies or reapplies to be authorized as a vendor.

When regulations began to appear in the last decade, compliance became a new motivator to control these relationships, and vendor management reached a new level of importance.

From this process, inappropriate vendor authorization can often occur and put the entire project at risk. Inappropriate vendor authorization is a simple question frequently overlooked in a rush to reach an agreement and begin the project.

On the other hand, failure to obtain proper authorization from the contractor’s official can also result in security breaches, intellectual property loss, lawsuits, and failing professional relationships.

Risk is now the primary motivator, thanks to the increased practice of sharing private and vulnerable data with vendors. According to the research, 41% of participants were most concerned about a data breach involving one of their vendors.

Some of the risks associated with vendor authorization also include:

  • Strategic risk,
  • Operational risk,
  • Security risk,
  • Financial risk,
  • Business continuity risk

Approval Delays

Signing a contract has been the most influential point in the overall process of doing business among vendors. But despite its importance, it is not so rare for one side to wait for an interminable period for the contract to be signed.

This is one of the situations that should be perempted and can therefore be included in KPI. Reasons why this happens, can vary, but the costs are numerous.

Tracking the approval process can reduce delays and lost opportunities and strengthen corporate sales. This indicator also helps you identify bottlenecks and holdups in the process, which is especially useful for sales contracts that directly correlate to business performance.

Keeping this in mind, KPI can help you measure how long it takes to create a purchase or deliver a specific action within your business production process. It estimates in days and calculated over the last 365 days, beginning with the current date.

It can apply four measurements:

  • Days with a low cost,
  • Days with a medium cost,
  • Days with a high cost,
  • Days with a very high cost

All these functions can help you determine the costs of any delays and provide arguments to avoid this practice in the future.

Compliance Resolution

The term “corporate compliance” refers to your company and its employees adhering to all applicable laws, regulations, standards, and ethical practices. Compliance, as noted, is very relevant for good business and assurance that all contract conditions will be met.

Therefore monitoring it through KPI provides more information about the organization’s policy and regulatory compliance posture. KPIs also communicate to relevant stakeholders the strengths and weaknesses of the compliance function and preempt any issues.

Compliance KPIs serve as an “early warning system,” detecting compliance issues quickly so that you can correct them and improve your controls. By acting quickly, you can avoid fines, regulatory penalties, customer churn, financial losses, and negative publicity.

Another function, MTTR, demonstrates how quickly you can resolve discovered compliance issues. It is very significant because it can indicate:

It lacks scarce resources and technology, even suggesting automatizing certain manual processes if necessary. It can indicate the total time required to resolve all issues. Then divide this total by the number of issues.

As is the case with all other mentioned indicators, compliance resolution demonstrates how quickly discovered compliance issues can be resolved. You can also track the time between discovering risk and implementing mitigation measures.

If the contract terms are not met, action must be taken to correct the defect. Knowing the success rate of these correction efforts is critical for limiting unnecessary risk exposure and determining how to mitigate future incidents better. Solutions could include more stringent monitoring or rethinking contract language, terms, and conditions.

Vendor Fraud

Vendor fraud as a KPI is critical for detecting unnecessary costs and assessing the effectiveness of risk management. According to surveys, 18 months is an average timeframe for fraudulent activities going undetected on average. Therefore this KPI enables you to identify the best methods for detection and prevention even in the contract stage, which is the most vulnerable to fraud.

It is important to note that only approved transactions later discovered to be fraudulent are counted. However, because declined transactions are not defined as fraudulent, they are not included in the fraud rate calculation.

Therefore many companies use the Fraud Rate and calculate their chances retrospectively, but the best practice tip is to ensure fraud prevention using KPI.

Quality/Complaints Resolved

Taking quality standards seriously and resolving complaints reflect the company culture and the relations they want to build with their customers. Therefore the amount of resolved complaints and improved quality standards is very relevant and can be tracked using KPI.

For example, In a manufacturing-related contract, the measure is typically defects per million, while in service contracts, the metric is more difficult to define.

Therefore on the market, you can find several different metrics, such as the Score of Customer Satisfaction (CSAT) determines how satisfied customers are with your service by dividing the total number of satisfied customers by the total number of customers who completed the survey and multiplying that number by 100.

Another one is calculating your NRR (also known as DSAT or BADSAT), allowing you to compare the number of negative customer reviews received by an agent or team to the number of positive reviews received as a percentage.

Lastly, you can use the metrics related to the percentage of solved tickets reopened due to customer response. These tickets were previously resolved but are automatically reopened when a customer responds to (or calls back about) a previously resolved.

Final Remarks

KPI, as visible, is a very practical, adaptable, and comprehensive set of indicators that will help you and your business achieve contractual compliance. The process is simple and grasps the core of each relevant idea you want for your business.

It is a great tool that relies on the roots or better-said goals that you set for yourself. Indicators vary depending on your desires and can be implemented easily. Use time-specific metrics, strict implementation timelines, and actionable reporting, and make informed decisions based on your results as soon as possible.

We hope our list helped you set the base for an overall idea of how to use KPIs and what to include in your list to foster better compliance.