If you want to improve your procurement practices, focus on these mission-critical contract management metrics to figure out what you need to change first.
Looking to improve the financial performance of your procurement process? These contract management metrics will improve your procurement performance.
Contact management and procurement are inextricably linked. All of your procurement efforts are tied to the contracts your team has negotiated.
If your procurement department is underperforming, you should look to a handful of contract management metrics to find the source of your problem. The metrics that have the most direct relationship to procurement are:
- Vendor Contract Cost Savings
- Procurement Cycle Time
- Contract Non-Compliance Rates
- Supplier Spend Ratios
If you stay on top of these metrics, you will see rapid improvements in your procurement numbers.
Vendor Contract Cost Savings Reports
Often procurement concerns start as budget concerns. Managers want to increase profitability by making sure the organization is getting the maximum value from each contract.
The vendor contract cost savings report makes it easy to compare the contracts from all the vendors in one glance.
This report shows how much the company saves by working with each vendor. Vendors that provide excellent value should become priorities for contract renewals. Procurement managers can also begin looking for other vendors to replace ones that are underperforming the estimated value of their contracts.
Procurement becomes more efficient as the best vendors are prioritized, and the worst performing vendors are replaced as quickly as possible.
Procurement Cycle Time
The old saying that time is money is especially true in procurement. Long procurement cycles not only waste time, but they also disrupt investor and customer relationships. The longer it takes to make a procurement deal, the harder it is to deliver on time.
Companies that carefully monitor their procurement cycles can shorten the cycles by using contract management software to streamline the procurement cycle. Other practices like electronic signatures and fewer departmental sign-offs can also increase efficiency.
Contract Non-Compliance Rates
Procurement managers oversee a lot of moving parts. It’s difficult to keep track of everything. One critical contract management metric that procurement managers need to look at every month is the contract non-compliance rate.
How good are your vendors and suppliers at doing what they promised? The higher the rate of non-compliance, the more waste there is in your procurement process. Often non-compliance is related to poor communication with the vendors.
Are contract penalties being used to encourage compliance? Are the penalties being billed and collected?
Regular focus on the non-compliance rate can help spotlight the best and worst vendors and allows you to take action to correct systemic procurement issues.
Supplier-Spend Ratios
The fewer vendors you have to rely on, the fewer things that can go wrong in your supply chain. Looking at your supplier-spend ratio will show you how well your organization is doing at finding the right vendors.
The higher your supplier-spend ratio, the more time and money you’re spending on contract negotiations, invoicing, and compliance.
Contract management software can calculate your supplier-spend ratio in moments. From this one metric, you can get a feeling for the state of your supply chain. Running a more detailed report will allow you to find small vendors you may be able to eliminate.
If you can concentrate your buying power among fewer vendors, you decrease your administrative costs, and you increase your negotiation power with the remaining vendors, which can lead to discounts and better contract terms.