KPIs in Contract Review

KPIs (Key Performance Indicators) are indicators that are used to measure performance and determine whether specified targets are being achieved. This applies to companies, but also to their respective specialist departments, units and activities, such as contract review. You can find out how to collect KPIs in contract review in this article. 

The importance of KPIs in contract review

KPIs are an essential basis for measuring the success of a company, department or process. The performance values also provide an argumentation basis for investments in technological support and show potential for optimisation.

In order to be able to measure KPIs for contract review, you first need a database. In this blog, you will learn how to collect data that demonstrates your process efficiency and effectiveness in the area of contract review. We will show you how to correlate your data with company goals and use it to create KPIs. 

With this guide, you can then calculate the return on investment (ROI) for an automated contract review on the basis of data-based facts and the insights gained from this and argue your case to management.

Efficiency measurement during contract review

Do you know how much time your lawyers need to review a certain type of contract? Can you estimate the monthly workload for different types of contracts? Do you know how long it takes on average for a contract to be sent to the other party ready for signature? If you have not yet collected these KPIs, we recommend that you take measurements. 

Contract review can be a time-consuming and resource-intensive process. Without accurate measurement, many legal departments don't know exactly how much time and resources actually go into contract review. But the fact is that more and more contracts are reaching legal departments, while resources remain the same.

Questions for self-assessment:

• Time required: Do you know how much time your lawyers spend reviewing a contract?
• Workload: Can you estimate what the monthly workload is around contract reviews? 
• Turnaround time: Do you know how long it takes on average for a contract to be ready to be signed and sent to the other party?

If you can't answer these questions accurately - if you lack the data basis for this - it's time to take measurements.

Step-by-step guide to the introduction of KPIs

Step 1: Identification of the most important contract types

Start by identifying the types of contracts that make up the lion's share of the workload in your legal department. This allows you to set priorities and focus on the areas with the greatest optimization potential.

Examples of time-intensive contract types:

• General Terms and Conditions (GTC)
• Data processing agreements (DPA)
• SaaS contracts (Software-as-a-Service)

Step 2: Measuring the contract review time

In the second step, you record the contract review time per contract type. The contract review time measures the time required to review a contract (a contract version). We recommend that you record the contract review time per contract type ideally ten times. 

Measurement instructions:

• Selection of contracts: Take at least ten contracts from each identified contract type.
  
  
• Time measurement: Measure the time it takes to check each individual contract.
  
  • Measuring point 1: Start of contract review (date, time)
  • Measuring point 2: End of contract review (date, time)
    
    
• Take interruptions into account: If there are interruptions (phone calls, emails), stop the timekeeping and start it again when you resume the contract review.
  
  
• Include different lawyers: Since every lawyer works at a different pace, you should distribute the measurement among different team members in order to obtain a representative average result.

Calculation of the test time

Table 1: Calculation of the test time

Step 3: Monthly number per contract type and time required 

How many contracts do you check on average per month?

To get a complete picture of the resource burden, you should determine the average number of contracts per month for each contract type and show the average review time per contract. This will give you a clear picture of where your resources are going. 

Process:

• Analyse contract history: Look in your contract database or filing system to see how many contracts have been checked in the last six months.
• Prepare data: Enter the number of contracts per month and contract type.
• Calculate average

Example: Calculation of monthly time expenditure per contract type

Table 2: Calculation of monthly time expenditure 

Insight: In this fictitious example, the legal department is most burdened by SaaS contracts.

Step 4: Measuring the lead time of a contract type 

The lead time of a contract describes the time from the arrival of the contract in the legal department until it is sent to the other party or the specialist department for signature. This includes all versions of a contract, or the entire negotiation cycle of a contract.

This metric gives you an indication of how quickly deals can be closed. Shortening the turnaround time of a contract has a direct impact on the overall productivity of your organisation. 

Importance of lead time:

• Accelerate business transactions: A shorter turnaround time enables contracts to be concluded more quickly, which has a positive impact on sales.
• Increase customer satisfaction: Faster processes can increase the satisfaction of business partners.
• Achieve a competitive advantage: Companies that process contracts efficiently stand out from their competitors. 

Measure the lead time of a contract type as follows:    

• Measuring point 1: Date/time of arrival of the contract in the legal department
• Measuring point 2: Date/time dispatch of the last version of the contract ready for signature 

Now calculate the average processing time per contract type from the data. 

Example: Calculating the lead time of a contract in days

Table 3: Calculation of the average lead time of a contract in days  

Qualitative measurement data for contract review

The assessment of the subjective work situation often shows a clear need for action, even if the quantitative measurements are still lacking. The questions below will not only tell you how satisfied the lawyers are with the contract review process, they will also give you an indication of the extent to which the legal department can actually perceive the associated corporate risk management during the contract review. 

The questions below will provide you with values that you can later bundle into KPIs. 

Qualitative survey of your in-house counsels

1. How satisfied are you with the workload due to contract reviews? (Scale 1 - 5, where 5 = very satisfied)
2. How satisfied are you with the overall contract review process? (Scale 1 - 5, where 5 = very satisfied) 
3. How satisfied are you with the ease of consistently complying with company policies during contract reviews? (Scale 1 - 5, where 5 = very satisfied)
4. How confident are you that you correctly comply with company policies in every contract review? (Scale 1 - 5, where 5 = very confident)
5. How do you estimate the contract volume that bypasses the review process or is not reviewed? (Specify the number of contracts)

The metrics from this survey point to the business risks that arise due to incorrect or incomplete contract reviews. These are favoured by an overburdened legal department and non-standardised review processes - these are time-consuming and prone to error. Use these metrics to highlight the financial risks arising from incomplete, inconsistent contract reviews. 

Example: Evaluation of the qualitative survey of your in-house counsels

Table 4: Sample evaluation of qualitative survey of lawyers

Evaluation:

• Identification of problem areas: Low satisfaction scores indicate overload, inefficient processes or lack of support (lack of company guidelines).

• Risk assessment: A high number of contracts that are not reviewed increases the company risk.

4 KPIs for the contract review

You have now laid the foundation and collected your own metrics. You can now use this data to create specific KPIs that serve as a basis for improvements and make the added value of investments, for example in legal tech solutions, measurable. 

KPI 1: Quality of the contract review process 

Metrics: Scale values for questions 1, 2 and 3

Calculation: Average of the scale values for questions 1-3

Explanation: How high is the quality of your contract review process? The higher the scale value, the better the in-house lawyers are able to cope with the workload and comply with company guidelines at all times. The lower the value, the more difficult it is for the legal department to protect the interests of the company in the time available to it. 

KPI 2: Management of business risks 

Metrics: Scale value for question 4 and the number in question 5

KPI calculation: Total number of contracts divided by scale value in Question 4 

Explanation: The lower this KPI, the better the legal department is able to review all contracts in compliance with company guidelines. This reduces the company's risks and enables the lawyers to manage them appropriately.  

KPI 3: Influence on company productivity

Metric = KPI: Average lead time of a contract type in days

Explanation: A reduction in turnaround time enables an increase in business transactions within the same period. The number of completed business transactions in a given timeframe provides an indication of company productivity. The faster a contract passes through the legal department, the more business transactions can be completed.

KPI 4: Efficiency of contract review

Metric = KPI: Average contract review time

Explanation: Significantly reduced contract review time goes hand in hand with increased efficiency and reduced costs. This metric alone will allow you to calculate the ROI for purchasing a Legal AI contract review tool before management.

Example: KPIs in detail

Table 5: Example KPIs in detail

With the KPIs identified, you can specifically improve the efficiency and effectiveness of your legal department. Technological solutions such as Legartis' Legal AI help you do this by automating contract review and thus positively impacting the aforementioned KPIs. 

Learn how Legartis improves your KPIs in the legal department.

The following section explains how to calculate the return on investment (ROI) of an investment in a legal AI and successfully present the business case for buying a technology solution to management.

How to Calculate ROI for a Legal AI 

Take the metric of average contract review time. With a simple calculation, you demonstrate to management that increased efficiency comes with massive cost reductions.

Here is a brief example of figures

• You have 200 SaaS contracts a year that need to be reviewed.
• The average contract review time per SaaS contract is: 4.4 hours
• The average hourly wage for an in-house lawyer is: CHF 172
• The annual contract review costs for this contract type are: CHF 151.040

If you check these contracts automatically with a Legal AI, the average contract review time is reduced by 50 - 80%. This results in an annual cost saving of 75.520 - 120.768 CHF.

Example: Calculating ROI

Table 6: ROI Legal AI Solution

Go to management with this simple invoice - it shows that investing in a Legal AI technology that automates contract review,

a) amortized within a very short time
b) Reduced costs
c) Resources free power

Argumentation for a Legal AI solution before management

Also show management the status quo of the "management of business risks' KPI. Show how many contracts currently fall through the audit grid (estimated) and what estimated, unknown liability risks result.

If the value of this KPI is high, as in our example in Table 5, then it is advisable to also reduce this value using an AI technology.

With the "Impact on Business Productivity" KPI, you have a data base on hand that shows management that shortening the lead time of a contract has a direct impact on fast business closings - and thus the legal department could have a positive impact on business productivity if this value is improved.

Summary of the arguments

Table 7: Summary Arguments before Management

FAZIT

The introduction of KPIs in contract review is a critical step in making the efficiency and effectiveness of the legal department measurable. By systematically collecting quantitative and qualitative data, you get a clear picture of the current performance of your contract review processes.

With meaningful KPIs, you can not only make internal optimizations, but also make a data-driven argument to management. Calculating the ROI for automated contract review shows that investing in legal AI solutions not only delivers cost savings, but also minimizes business risk and increases productivity.

The digitization of contract review offers the opportunity to position your legal department for the future. You relieve your lawyers of repetitive tasks, increase team satisfaction and contribute significantly to the success of the company.

Increase your KPIs, reduce costs and minimize risk with Legartis’ leading AI.