This is essentially what we mean when we refer to the execution of contracts: the efficiency with which these agreements allow data and revenue to flow. Contracts that don`t work well are most often an indication of blockages or bottlenecks in workflows, and corrective action in these cases can lead to an overall improvement of the entire system. The end result of a business operation that operates with optimal efficiency is a healthy end result that is ultimately the goal of any business. That`s why we need KPIs. It is important to understand that key performance indicators (KPIs) and service level agreements (SLAs) are not identical, although there is some overlap. In this article, I want to explain the difference between KPIs and SLAs and look at the practical business applications of each. If an SLA is in place, the service provider and customer will regularly assess, communicate and adjust the measures to comply with the agreement. Although an SLA can be part of a legal contract, a contract is not necessarily an SLA because contracts can be entered into without defining service levels. KPI #3 – Contractual Risk: Performance metrics may include standard clause deviations, the number of agreements expiring without a renewal date, the number of inappropriate signature approvals or vendor authorizations, the number of delayed approvals, and disputes resolved. An SLA is also a performance measurement tool, but it is different from a KPI. It is an agreement between an internal or external service provider and the entity that is the end user of that service.
An SLA must clearly describe in plain language what the customer receives and what is expected of the service provider. An SLA is a written agreement that qualitatively and quantitatively determines the service that a provider assigns to a customer. It identifies the measures used to measure the level of services provided, as well as corrective actions or penalties resulting from non-compliance with promised service level expectations. An SLA is required to support the performance of operations that depend on the underlying services provided by the provider. Different levels of service can be offered at different price ranges and customers often make an optimal compromise between service levels and costs. By establishing contractual SLA obligations, suppliers manage the expectations of all their customers. Measured metrics and performance indicators allow the supplier and customer to identify, track, report, and evaluate actual actions that define the actual needs and performance of the business. SLAs are different from KPIs.
SLAs are documents that describe broader service agreements between a service provider and its customers, while KPIs are typically used to measure companies` performance against their strategic goals. However, KPIs can be part of an SLA to measure the delivery of defined service standards. We often distinguish three different categories of service level agreements. These include: KPIs should be used tactically depending on the nature and objectives of the contract. While the purpose of KPIs is to drive development towards achieving the goals for each agreement, the provision of these metrics must take into account the overall business objective so that your contract management strategies are fully aligned with your business goals. It also helps ensure compliance with internal and external regulations and governance. Service level metrics and KPIs provide useful insights. Service level metrics provide insights into basic performance expectations. An agreement to meet these expectations is considered an SLA clause. KPIs provide insight into effectiveness and success in achieving the organization`s goals or expectations.
Although SLAs are used to ensure that service level metrics do not fall under certain metrics, KPIs help ensure that certain performance improvements and outcomes are adequately or excessively met. In order to improve the performance of the level of service, the contracted service provider, internal or external, is expected to take appropriate action. To improve performance on specific metrics and KPIs, organizations need to take appropriate steps internally to achieve strategic goals. Whether your business processes some important contracts at once or has a library of contracts with thousands of agreements, the fact remains that these contracts need to work well for your business to thrive. Your contracts facilitate the flow of information and revenue throughout your operation, so it`s important that you confirm that they are working optimally. Another important measure of contract performance is the annualized contract value, which is the average annualized revenue per customer contract. This is considered essential as the revenue from the contractual agreement and the requirement for timely renewal are analyzed as part of this KPI. The total profits realized in relation to all agreements concluded each year by an organization are evaluated here.
You can easily compare this annual contract value with the organization`s revenue data to calculate the impact of the company`s total revenue. In this way, ACV is advantageous for comparing recurring contracts with lost contracts and new contracts. The fact that SLAs need to define measures of service delivery means that many SLAs define KPIs as such measures for service. While SLAs define the overall agreement and service standards between service providers and their customers, KPIs are used to measure and monitor performance levels. SLAs should be seen as targets for measured actions, rather than as contractual obligations that include provisions for legal and financial penalties for non-compliance with service levels. For example, data center downtime costs an average of about $9,000 per minute, according to a 2016 research report from the Ponemon Institute. Under an SLA, most cloud-based data center service providers only reimburse credits charged for underserved SLAs. KPIs are key performance indicators. These are measures selected to measure progress and stimulate development towards the achievement of objectives. Your contracts and business agreements contain a large amount of information about a variety of aspects of your operation and its activities. To understand how each agreement works, it is necessary to sort this information; Categorize and organize data for effective analysis. This data analysis then provides actionable insights that influence decision-making, governance, and business development.
Of course, in the pre-signature phase, the focus is on mitigating risks in trade negotiations and legal review. In the field of contract management, there are many recognized KPIs that are widely recognized as useful metrics against which contract performance can be measured. Part of the tactical use of these measures is to reduce this wide range of options to the most efficient and productive selection in terms of business. This means choosing the KPIs that provide the most actionable insights with the least resources. As in all areas of your business, your goal should be to make the biggest profits while dedicating a minimum of time, skills and costs to employees. It is important that SLAs include meaningful metrics so that both the service provider and the customer can clearly assess performance. Instead, it`s worth looking at the proportion of contracts that are under «active management» and then further dividing them based on the meaning of the contract. This may mean retrieving some historical data, starting with an informed estimate or running the new KPI for a trial period to determine its benefits. For a service provider, this often also means that the metrics defined in its SLAs become important KPIs that it monitors and reports as indicators of its overall strategic performance.
Poor contract execution compromises compliance in your organization and can cancel budgets if the execution of those contracts is not in accordance with due process. This KPI is crucial to raise awareness and recognize unnecessary costs and to measure the effectiveness of risk management. A 2010 survey by the Association of Certified Fraud Examiners shows that fraudulent activity goes undetected for an average of 18 months and that 24% of reported scams involve billing systems. The Vendor Fraud KPI allows you to identify the best detection and prevention methods, the most fraud-sensitive phase of the contract, and the most effective fraud defenses. LCA is useful at high renewal rates because it aggregates the value of all recurring contracts. .