Effective contract management needs a significant investment of money, personnel time, and resources. To get the most value out of these expenses, you must measure your contract management ROI. Calculating the ROI is a complicated process, so you need to be equipped with the right strategies.
Before exploring the ways to improve contract management ROI, let’s hash out what it is and how you can measure it.
What is contract management ROI?
Contract management return on investment (ROI) is a performance metric. It’s used to check how efficient and profitable contracting processes are. It shows if contract management results justify the investments poured into it.
A low ROI signals that the company needs to change something in its processes. In most cases, this compels organizations to adopt contract management software. Tech solutions make the personnel more productive and streamline workflows, limit liability, and secure profitability in the long run.
How to calculate the contract management ROI
To calculate ROI, gauge the profitability of contract management against the resources invested. Divide the profits you earned from your contracts by the investment costs to get the figure.
To calculate the contract management ROI, you’ll have to factor in the following:
- Total annual expenditure in your organization
- Total number of customer contracts in your organization
- Percentage of revenue managed by contracts
- Percentage of contracts that get renewed automatically
- Percentage of contracts renegotiated annually
- Loss/Penalty due to contract non-compliance
- Average contract cycle time
- Daily employee costs spent per day
The computation will show you the savings you’ll make from minimized contract value erosion, avoidance of penalties, auto-renewal, reduced contract negotiation days, consolidation opportunities, and decreased work hours for in-house lawyers and outside counsel.
You may also get a ballpark figure by considering the cost of mismanaging your contracts. The International Association for Contract and Commercial Management warns that a company can lose 9% of its income due to contract mismanagement.
If your company earns $100 million yearly, you stand to lose $9 million of your annual income. Considering these figures, you can arrive at the following conclusion. A piece of software is well worth your investment if it costs much less than $9 million in a year. And makes your contract management processes more efficient, at that.
So, how can you ensure you’ll be bringing in ROI that justifies the costs of your contract management?
Four ways to boost your contract management ROI
To improve your company’s contract management ROI, you need to maximize the use of your resources. Here are four ways to ensure you’re headed in the right direction.
Measure and track results with metrics
To improve contract management ROI, you’ll have to make processes more productive. And you won’t know if you’re making any headway unless you set measurable metrics.
Businesses and organizations from different industries will need different key performance indicators (KPIs). In any case, you must ensure you have all the metrics to measure the following:
Contract effectiveness
Contract effectiveness is about the results your organization gets from your contracting processes. It factors all the metrics showing you how much value the contracts bring to your company. This includes annualized contract value, terminated contract remaining value, and order value variance.
Contract efficiency
It pertains to the balance between input and output. The goal is to achieve excellent results without overspending resources. Consider metrics like contract cycle time, missed milestones, and contract value assessments.
Contract risk
You should have a clear picture of how well you manage contract risks or avoid potential losses. Check the number of agreements expiring without renewal dates. Look for improper vendor authorizations and the number of delayed contract approvals.
Curtail the need for outside counsel
Saddled with a heavy workload, legal teams may seek the help of outside counsel. The in-house lawyers often end up working on endless administrative tasks. At the same time, outside counsel resolves complex legal matters.
Disparities in the way the in-house and the external legal teams work can cost dear. The teams might struggle with slow resolution times, poor communication, and exorbitant billing.
By automating repetitive, low-level tasks, you will free up time for the in-house team. They’ll get more bandwidth to work on complex legal matters. This then minimizes, if not completely eliminates, the need for outside counsel.
Cut down resource spending with automation
Automation means spending less time and effort on repetitive tasks. It allows lawyers to focus on the substance of the agreements and maximize their profitability.
AI-empowered automation dramatically speeds up data entry. Editing, tracking reviews and approvals, redacting sensitive information—it all becomes faster. It moves beyond just grunt work, with bots now beating lawyers in loophole spotting.
A contest between AI robots and US lawyers saw the former finding 94% of the contract loopholes. The latter, meanwhile, picked up only 85%. Moreover, the bots took as little as 26 seconds to complete the task, while the lawyers needed 92 minutes.
To maximize the potential of automation, consider incorporating a contract lifecycle management (CLM) system into your operations. This software covers all the processes, from initiation and approval to obligation monitoring and renewal.
An all-in-one CLM system brings all contract-related workflows to a centralized platform to manage all the data and processes easier. Standardizing the contracting processes from start to finish, it reduces the need for manual tasks and improves document management. Shorter approval times and better contract compliance are important benefits, too. On top of that, the tech measures contract success with analytics.
Conclusion
Like any business area, contract management requires ROI that will justify its expenses. You need the right contract management strategies to achieve high ROI. And technology plays a crucial role in implementing them.
AXDRAFT offers an all-in-one contract management platform for complete control over contracting processes. Our CLM software can save up to 80% of your time and resources. How? Through seamless workflows and effective document management. Give it a try with this demo.
FAQ
Here are some common questions people ask about contract management.
Also known as return on costs, ROI refers to the net income a company gains from a given investment. In contract management, ROI is the performance measure. It calculates the gains from the people, processes, and technology behind contract management.
Although contract management can be a simple task, in most cases, it isn’t. Organizations often come across obstacles that prevent them from achieving operational efficiency. One of the challenges you’re likely to meet is poor communication between teams or company units. Then there’s a lack of stakeholder involvement and contractual risks too hard to spot or manage. You also risk having important information buried in heaps of paperwork. And don’t forget about suppliers neglecting their obligations.
The consequences of poor contract management range from inefficient contract storage and workflow to costly liabilities and hefty fines. Clearly, contract management is not one to be taken lightly. And contract management teams have serious responsibilities to shoulder.
But with the right processes and tools, you can take a huge load off the team’s shoulders.
Contract management is instrumental in maximizing the favorable outcomes of agreements. And in minimizing the risks they bring. It helps mitigate financial and operational risks. Finally, it enhances financial management and performance.
Well-oiled contract management processes are essential. They help businesses deal with high volumes of transactions and commercial agreements.
A contract management strategy is a plan guiding leaders through the contract lifecycle. An effective strategy makes processes efficient while minimizing the contractual risks. Legal teams often choose a centralized platform to manage the contract lifecycle effectively.