Why Contract Management is a Good Return on Investment
From small- to medium-sized businesses, to Fortune 500 companies, contracts and related documents are at the very center of every organization. As such, legal professionals, processes, and technologies involved with contract management need to complement each other entirely. That is if businesses want to increase productivity, revenue, and profitability while decreasing contract management costs and risks.
Just as importantly, these tangible results need to exceed all efforts put into managing contracts from the very beginning.
WHAT IS CONTRACT MANAGEMENT ROI?
Corporate legal teams, contract managers, and contract administration professionals put considerable time and effort into effective contract management. The proverbial rub is that they must demonstrate clearly the contract management return on investment (ROI) to organizational leaders. They must show maximum value.
After all, executives tend to view contract management as lacking all of those tangible benefits.
To many, the process is a complete administrative cost center. Concepts like contract process maintenance, contract compliance, and error reduction are seldom top of mind whenever budgets are drawn up.
To gain more technological resources and improve contract management processes, then, legal professionals must show the type of ROI that executive leadership expects to see nowadays.
YOUR ROI CALCULATOR
Here is a question that every general counsel (GC) – let alone a chief financial officer – must ask themselves:
An average company will more than likely net about $100 to $200 million of bottom-line revenue. Considering a contract management system (CMS), just how much does it pay off to purchase and implement such a contract management solution?
Well, first consider recent research from the International Association for Contract & Commercial Management (IACCM). It found that the average company loses 9.2 percent of its bottom line thanks to ineffective contract management. For a company generating $1 billion in revenue every year, estimate that roughly 10 to 20 percent of the topline revenue will convert to the bottom line. That is because the average company will more than likely net about $100 to $200 million of bottom-line revenue.
Now, think about IACCM’s finding again. If 9.2 percent of a company’s bottom line revenue is lost due to poor contract management, this represents approximately $9.2 to $18.4 million. Basically, a GC can bring up to $18.4 million to the bottom line merely by implementing an effective contract lifecycle management (CLM) system. That is the same as $92 to $184 million in topline (gross) revenue.
Finally, consider the fact that a reasonable contract management solution like CLM costs organizations about $100,000 in annual fees. The bottom-line ROI, then, is the net at-risk revenue saved by using the CLM – divided by the annual cost of the solution. Or $9.1 to $18.3 million divided by $100,000. That is a bottom-line ROI of about 91 to 183 times the costs.
In other words, for every single dollar invested in a CLM technology, you can expect to generate anywhere between $91 to $183 in recovered net revenue. Essentially, no revenue is lost because of poor contract management practices. And just think, this math is done without an ROI calculator. It is a back-of-the-envelope calculation and, therefore, a conservative ROI estimate.
With this kind of contract management ROI, buying a CLM really is hardly a costly investment.
CONTRACT MANAGEMENT KPIs
As stated above, GCs and legal teams have a couple of sets of challenges these days. They must oversee the contract lifecycle, from request to renewal. And they must show stakeholders the significance – or true value – of this very process.
At the core of effective contract management is the increase in productivity, the improvement of visibility, and the reduction of overall risk. And the key to measuring the success of contract management programs is clearly identifying contract management key performance indicators (KPIs) in the first place.
Naturally, these KPIs will vary given that contracts, processes, organizations, and industries are fairly unique. Accordingly, it is necessary to review an organization’s contract lifecycle and come up with success metrics aligned with organizational objectives. Contract management KPIs should center around contract value, incidents, monitoring, and renewal. They should consist of both qualitative and quantitative information. Perhaps more specifically, contract management success should be based on the following:
- Contract efficiency (i.e. contract cycle time, vendor, customer, or geographic trends, contract value assessments, and missed milestones)
- Contract efficacy (i.e. number of contracts per type, program, customer, or vendor; the remaining value of terminated contracts; annualized contract value; order value variance; and historical legacy contract trends)
- Contract risk (i.e. standard clause variance; the number of agreements expiring without renewal dates; delayed approvals; improper signature approvals or vendor authorizations; and disputes resolved)
FIND THE RIGHT CONTRACT MANAGEMENT PARTNER
When looking for the right CLM for you and your legal team, consider partnering with a vendor that will work out your cost framework and expected ROI from the contract management solution. If your vendor or consultant is realistic with you, more than likely, the ROI of contract management will meet or exceed whatever you end up proposing to your organization.
Another thing to think about is the speed of deployment. Large, fully-customized systems can take anywhere between 12 to 24 months to deploy. In this light, ask your digital transformation partner how quickly you can get the solution rolled out and operational. With a quick deploy model, for instance, you can generate some excitement around a CLM and build momentum among legal and business departments. Either way, research also shows that the average payback period for legal automation is 2.4 years. But this is rather reasonable for any enterprise solution.
So, there is a good reason why so many companies are rapidly adopting and implementing a CLM. Still, it is important to calculate the value the contract management software is actually generating. This means looking beyond the cost savings produced by automation, itself. Although it is important – and very much a part of the return on investment – a CLM allows legal teams to maximize business relationships with vendors and customers, themselves. It gives them access to actionable business intelligence – those that cannot duplicate in the absence of a CLM. And all of this helps to boost overall revenue.
To find out everything you need to know about contract management, read the Contract Management Primer. It is a free guide that includes a handy contract management checklist for you and your legal team.
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