Cost of a Contract – Where CLM’s Drive Efficiency
Our friends at the IACCM recently refreshed an excellent publication asking a simple question: what is the cost of a contract? For a business, general counsel, and contract manager – this figure is important. It sets a benchmark against which a company can compare itself to strive for best practices, even if it is a negative outlier.
Whether your business is a negative outlier or not (higher costs than normal), knowing this figure lets you decide on whether it is good enough, or needs to improve. So, if your choice is to work on reducing your service level costs, ask yourself what your targets are and how you can get there. Although not the complete answer, contract lifecycle management (CLM) technology can be part of the equation to reducing your average costs.
COSTS TO INCLUDE
Naturally, it is easy to take a facetious view of this topic. It is similar to asking ‘how long is a journey?’. Then, is it uphill or downhill?
As part of the direct and indirect costs, you should consider the following:
- The average cost to business of reviewing contracts has risen to $6,900
- The complexity of the contract
- Scope of the project/agreement
- What to include: statements of work, service level agreement details etc.
- Whose time is included in the cost? (administrator for formatting, lawyer, paralegal, contract manager)
- Where do you start? (requirements definition, formatting, or clause definitions)
- Was it a master agreement and were standard company accepted clauses used?
- Include the comparative work against other contracts for consistency
- Summarize a snapshot of key metrics, risks, and financial implications
Ultimately, there are quite a few differences between contracts, and the contracting processes used. To consider every permutation of these and other factors could be mind-boggling. Naturally, every contract is different. And the only real answer is to consider each on a case by case discussion. However, this would not provide a benchmark ‘norm’ for the cost of a contract. As such, the IACCM research asks the professionals involved to make reasonable estimations.
THE COST OF A CONTRACT – RESEARCH
IACCM’s October 2018 research finds, “the average cost to businesses of processing and reviewing basic everyday contracts has risen to $6,900.” (IACCM Research Report: The Cost of a Contract). This represents a growth of 38% over the past six years, for a standard low-risk procurement or sales contract.
From the 700 major companies, the study breaks out the type of costs into the simple contract, mid-complexity contract, and high complexity contract. Depending on the complexity, the IACCM found costs in the high complexity category averaging $49,000. This category included contracts that could range into hundreds of thousands of dollars.
TIME SPENT IN CONTRACTING
Breaking out averages for the time spent in the contracts process, IACCM breaks it down as 25% contract creation, 30% negotiation, and 45% review and approvals. Among the most efficient organizations, contract creation takes the bulk of time at 40%. This significantly reduces the time needed for negotiation, review, and approval portions.
AI AND CONTRACT LIFECYCLE MANAGEMENT
Among the most fascinating aspects of the research is the look forward. Driving efficient contract management processes is a key way to get to the lowest costs in this domain. In fact, efficient businesses cut about 33% (one third) of their costs of a contract compared to the average company. This is done by using playbooks (master term agreements), and CLM technologies equipped with artificial intelligence (AI).
CLM technology can be part of the equation to reducing your average costs. As a result of using advanced tech, these efficiency leading teams were able to eliminate the need for case by case, manual reviews. Instead, the AI engine took on the labor-intensive work of comparing contracts for consistency, liability risks, and financial boundaries.
IACCM found that costs incurred for a contract by the top quartile was $3,800, $14,000, and $49,000 for simple, mid, and high complexity contracts; respectively. But, for simple contracts this is a 45% saving and a 34% net benefit on mid range complexity agreements.
GETTING THE RIGHT CLM TECHNOLOGY
CLM technology can dramatically help your company reduce the average cost of a contract. In this era of always needing to run cost-cutting and drive greater efficiency, these results count. Get started with your own efficiency drive. Ask to see a demo of the most advanced AI-driven CLM technologies on the market by ContractPodAi. It will help you drive similar results to those found by the IACCM. It makes a difference!
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