It seems like every legal department has the ambition to be data-driven. But how do you get started and what should you track?

This is a chapter from our Modern Contract Handbook, featuring insights from expert authors on every stage of the contract process.

What are the key contract performance metrics for your business?

Contract data can raise something of a chicken-egg conundrum: do you need technology in place to get the data, or do you need the data to justify getting the technology? The truth is that you don’t need technology to start tracking at all. In reality, we mostly still live in a world of manual process. That’s good news: it means that when it comes to contract data, you’re free to get started any way you possibly can.

1. How many contracts, and what kind?

Any lawyer should be able quickly to answer how many contracts they process in a given period. It’s no longer acceptable for the answer to this question to be anecdotal, or imprecise, or ‘it depends’. These metrics are the bare minimum, and there’s no excuse not to have them. It’s a common crutch to say that you don’t have the data, so you can’t be data-driven. Without this data you can’t answer basic questions from the business, and that is not a good experience for the business. Start with a contract spreadsheet and just do it.

2. Turnaround time

Every legal department at some point faces the perception that they ‘take too long’. Even if they don’t, there is a high likelihood that the business sees it differently. Sometimes their complaints are unwarranted and unfair, and at the other end of the spectrum it can be a real problem that gets escalated to the C-suite.

Tracking turnaround time is the way to dig into this, and identify the problems that cause friction in your contract workflow. As soon as you start to track this, it has the potential to become a negotiation battleground between the business and legal, or even outside counsel, who may be the ones slowing things down. Turnaround time has several sub-categories:

i. Response time

One of the most common complaints legal faces is that it’s a black hole into which business colleagues have no visibility. If someone sends a document to legal for review, did legal do anything with it? When? Did they even receive it? Tracking your initial response time is the quickest way to resolve this complaint. A simple confirmation email acknowledging receipt goes a long way, and a track record of those acknowledgements being sent in a timely manner will go a long way.

ii. Time to first and final drafts

The time that elapses between a legal team receiving the necessary information to begin work and the creation of a first draft is a key indicator of efficiency in legal operations. After this, the time that passes between lawyers receiving feedback and input from stakeholders, and the arrival of the final draft, is a useful benchmark. Knowing how quickly work progresses from the very first iteration to final draft is management information you can’t ignore.

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3. Cost per transaction

“Awareness of the fully loaded contract cost is a fantastic tool to help you make a business case for additional headcount, or for using an ALSP for future similar transactions”

As your legal function becomes more mature, you might start to track cost per transaction, which is a really interesting number to share with your stakeholders. This figure is one concrete way that legal can show genuine input to the bottom line of the company.

Cost per transaction could be based on internal costs: calculating the fully burdened time of the legal team’s members who were involved in the process, for example. If you’re outsourcing, then an awareness of the fully loaded cost is a fantastic tool to help you make a business case for additional headcount, or for using an ALSP for future similar transactions.

4. Simplicity and readability

We started out this guide with Ken Adams’ take on contract readability, and the great news is that there are mechanisms in place to measure this. If you’re working in Word, you can use the Flesch-Kincaid Grade Level to monitor your team’s improvements in simplifying contracts. If complexity and a lack of readability are causing contracts to take a long time, then this metric can help you to work out what needs to change, whether that’s formatting, vocabulary, numbering and lists, or any other useful technique to make your document more readable.

Smart legal teams also measure the readability differences between their different lawyers. Some drafters like to linger on every word, whereas some will never use 20 words when 5 will do. Focus on achieving consistent readability across the team and you’ll drive efficiency in contracts across the department.

5. Dollar value

Some legal teams cater for their specific risk appetites by tracking the dollar value of a contract and setting thresholds at which legal does and doesn’t need to be involved. This lets the decision-makers of a legal department make it clear if business colleagues are flooding legal with contracts that don’t need their input. This metric can help you to show that a policy needs to exist and be enforced, and to encourage people to take responsibility. It’s as much about operational capacity as it is about risk mitigation.

“In a high-growth SaaS environment, tracking deviations can be crucial - if reps are deviating from standard terms around breach notifications, that’s critical information”

Being able to track the overall value of a contract also allows you to segregate your contracts into buckets: if in a given month you have ten contracts worth less than $20k, and three worth more than a million, then how would the business want you to prioritize them? By understanding your pipeline you can understand and maximize its value to the business. Of course, value is only one consideration of risk assessment, and there are many other factors that go into prioritizing legal resources, but it does serve as a very helpful objective standard for certain types of transactions.

It can be hard to measure value when it comes to contracts that aren’t defined by empirical data and dollar values. One way to handle this is to tag and categorize them during intake. That might be a manual task, or you could use a smart inbox and create rules to help create those workstreams.

6. Obligations

Similarly, whether to make legal responsible for monitoring expiration dates or other post-execution operations is a philosophical decision for each legal function. If the legal team wants to take ownership of it, that’s one thing; if the business wants legal to babysit supplier deadlines, that’s quite another. Making sure the business stays on top of expirations and terminations could be hugely valuable, but the question is whether manually looking up dates is a good use of lawyer time or not. Legal software might be able to help with the heavy lifting here.

7. Deviations

Flagging deviations from your standard terms is always valuable. Getting insight and metrics from inside the document is labor intensive, but that’s where technology can play a key role, and there are lots of systems making great progress with their document review capabilities. In a high-growth SaaS environment, for example, tracking those deviations can be crucial - if reps are deviating from SLAs, or standard terms around breach notifications, then that’s critical information to track. Focus on what’s important to your industry and keep your eye on the top four or five elements within contracts that you need to monitor. Beyond that, it can quickly get too big a task to handle. Anyone you ask will want their specific area of concern tracked. Pick wisely.

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Tracking and acting on these legal KPIs can make a massive difference not just to a legal team’s performance, but to the business itself. However, the uncomfortable truth is that most legal teams are a long way from building that sophisticated understanding of their data.

Broadly speaking, the market divides into three. In the first group, some legal departments still think everything’s fine. They’re firm in their belief that they’re professionals, they know what they’re doing, the nature of their work is hard to predict and the C-suite will just have to live with it.

In the middle group are the legal professionals who find themselves in that frustrating place where they know they need to do something, but they’re not sure where to start. This group, along with those who are starting to explore and try the basics, is by far the biggest group.

The final group are the early adopters: those departments that are seizing the initiative, managing the change, and making sure it’s ingrained in the philosophy and DNA of the attorneys. That might be because they’re innovators and leading the charge themselves, or it might be because the demand from the business for actionable insight is high and non-negotiable.

Whatever their motivation, this is the group with the best decision-making ability, the best understanding of its own efficiency, and the biggest potential to truly add value to the business as a genuine strategic partner. By starting at the beginning and building data from the ground up, every legal department can join them - they just need to start somewhere.

This is a chapter from our Modern Contract Handbook, featuring insights from expert authors on every stage of the contract process.