Most industries have a large portion of their spending locked in numerous contracts. According to McKinsey, companies in utilities, aerospace, defence, and food manufacturing can have 90 percent or more of their annual revenues represented in contracts. With such significant value locked in contracts, there is a huge potential to optimize contracting processes for improved business performance. With standardized contracting processes and best practices in place, contracts can be turned into high-value power machines enabling massive cost savings and immense benefits for any organization. They can be an effective tool for the legal and contract management teams to unlock maximum potential and value from the contracts.
Below, we will focus on four valuable contract lifecycle management best practices that can unlock massive savings for your organization.
1. Maintain an integrated contract repository:
Large companies deal in tens of thousands of contracts yearly. Storing these contracts appropriately to have full visibility to track and manage them optimally is of utmost importance. Often, in manual contracting processes, contracts are stored in multiple places like excel sheets, PDFs or shared drives or even physical folders. This makes it not only extremely difficult to locate older contracts out of disparate storage systems but also exposes them to legal and security risks.
An automated contract repository has easily accessible centralized storage where all contracts and documents related to the contracts, get stored. It also ensures better security for the contracts via granular and user-defined access. Robust data encryption for all contracts with multi-level privacy ensures enhanced data integrity. These systems come in-built with multi-search parameters to easily locate the right document or contract from the vast library.
2. Standardize contract processes:
Automation in contract authoring makes authoring a less gruesome and time-consuming task. It simplifies authoring by making use of contract templates and clause library to easily author contracts in a standardized manner. Standardizing contracting language and effecting version control when redlining contract modifications can minimize exposure to legal risks and capture benefits for organizations and reduce the timeframe. As per a Forrester Research survey, CLM solutions shrink the timeframe required by legal teams to draft and review contracts by up to 80%.
An automated, integrated contract management solution streamlines the contract process and helps move contracts quickly from one step to the next. Rather than the bottlenecks inherent in spreadsheets, PDFs, emails or shared drives, cloud-based contract management lets you configure approval workflows — including parallel and serial — so that the process stays in motion, seamlessly. Centralized storage and at-a-glance dashboards and reports show real-time where contracts and associated documents are in the approval path, and the next person in succession is automatically notified once an action has been taken by the person responsible.
3. Measure contract performance:
Once the contracts kick off, full-fledged monitoring of KPIs takes wings. At this stage, it is crucial to regularly measure the performance of a contract to ensure we get maximum value out of it. IACCM studies indicate that organizations lose 9.2% of revenue every year due to poor contract management practices. Constant benchmarking of actual project spends with initially approved project costs is a mandatory metric for effective CLM to avoid such setbacks. In manual contract management, the post-award stage gets ignored completely and at times even the essential KPIs are not in place. When contracts are saved in a file or excel format with no centralized repository, it becomes nearly impossible to track them real-time for any approaching deadlines, compliance changes or milestones. Often this leads to heavy losses due to ignored timelines or hefty fees in penalties.
An automated CLM solution is integrated with CRM, ERP, HRM, and FIM systems to provide real-time insights into contract performance and utilization. It helps mitigate risks associated with erroneous contract terms, non-enforcement of clauses, and missing of deadlines and contractual obligations by tracking contracts real-time across devices. Research by the Aberdeen Group revealed that 66 percent of companies see increased contract compliance when they use an automated contract management solution.
4. Track cost of contract management:
Tracking costs of contracts and calculating RIO have always been a difficult nut to crack. Just like with any other enterprise-wide functions, tracking contract management to analyse its RIO is a complex process. But where companies have deployed mature Contract Management Systems, it becomes easy to track costs and returns by simply following some simple calculations and metrics. Companies could measure money saved against the actual operational costs with some pre-decided parameters.
The dollars saved could include:
- Prevention of financial losses
- Money saved in penalties due to missed time-lines
- Money saved in hefty fees in case of non-compliance
- Decrease in labor costs due to automated processes
- Identification of consolidated opportunities
- Identification of any other sources of income
The operational costs could include:
- Legal operation costs
- Contract renewal Management costs
- Sales operations costs
- Licensing and auditing costs
Calculating the difference between these two parameters could give organizations with mature CLM systems near accurate data to track the returns on their contracts along with reducing costs of contracting. As per a Goldman Sachs survey, Contract Lifecycle Management can reduce legal costs by up to 70%.
To conclude, by following the above best practices closely, every stage of contract management could be turned into a powerhouse of larger returns and savings for your organization.
For further insights on reducing operational costs and welcome massive savings, register to attend a Webinar on 4 Contract Management Best Practices to Unlock Savings and learn how to best implement these contract management best practices, and help your organization get on top of the contract management ladder.