ROI and Cost Saving Strategies for Contracts

Introduction

“On average, corporations are losing the equivalent of 9.2% of annual revenue through weaknesses in their contracting process. These losses arise from a combination of missed savings and cost reduction on the one hand, and lost revenue opportunities on the other.”

– IACCM

Careful contract management is essential to business continuity. Especially in uncertain economic times, it’s critical to have visibility into all payment terms and clauses to understand which obligations hold the most risk, supplier risk identification, and remediation, cost savings & revenue opportunities.

Both efficiency and lower costs can be achieved by digitally transforming the contract management process. A contract management software substantially increases what is in the control of the contract management team by automating processes to allow focus on higher-value tasks like reducing revenue leakage and aligning billing and incentives with contractual obligations.

Let’s look at some of the digital contract management strategies to navigate the business through these uncertain economic times.

Focus on what matters
1

Business Case Examples – The Good and the Bad.

Justifying the business case for moving to a full lifecycle CLM can be daunting. We at Zycus have seen business case justifications sail through financial scrutiny and we’ve seen ROI cases stall on the first review.

The big difference between success and failure is the focus on soft versus hard impacts.

As an example, we often see people looking to use the gained efficiency of the Legal team as a justification.

Let’s take an organization with 30 non-attorney legal professionals that are 100% focused on contracts and 15 Attorneys that are 50% focused on contracts. This team processes 1000 contracts per year.

Based on multiple surveys, big 4 inputs, and independent financial analysis, the typical enterprise will spend 20% fewer hours on contract management with a CLM in place.

There are a few ways this can be represented as justification for a CLM.

  1. The legal team will be able to handle 200 more contracts a year with the same team
  2. The legal team will be able to close 1000 contracts 20% faster, meaning a faster time to value for procurement savings or revenue-generating contracts
  3. The company will be able to reduce its outside legal costs by X because our Attorneys will have more time to address matters currently handled by outside counsel
  4. We will be able to redeploy 5 or 6 non-attorney professionals to ensure entitlements and obligations on negotiated contracts are delivered, resulting in Y savings and Z incremental revenue.

I think we can all agree that the latter two will hold up under scrutiny better than the first two.

With these objective numbers, we can assign direct costs.

We can go even further and quantify the average contributory revenue or profit per sales contract, and the average negotiated discount associated with each procurement contract to get a full story on the hard dollar impact.

 
2

Cost Justification – Operational Efficiencies

At a personal level when it comes to assigning costs we can look across a few broad categories.

For internal legal teams let’s look at attorneys, non-attorney legal professionals, and administrative legal support people when it comes to legal operations.

For sales operations, we can look at loaded costs for sales executives.

For procurement, we typically see a mix of contract negotiators and contract managers.

For US-Based people, an average “loaded” cost should be between 1.8 and 2.2 times the annual salary. For estimates sake, divide the loaded annual cost by 2000 to get an approximate hourly cost.

With these costs in hand, we can start plugging data into formulas for hard dollar values associated with team reallocation.

Reallocating team resources is often preferable to the alternative of staff reduction. With the costs of recruiting, training, and mentoring, new employee acquisition may be much more expensive than reassigning team members – even if the reassignment may be viewed as underemployment. Afterall that is often only temporary.

We can use this framework to look at some real-world examples:

ACME Roller Skates Company
Team Focus on Contracts:
  • For a company with 10 Attorneys and 20 Non-Attorney Legal professionals.
  • Each of the 10 Attorneys spends 12 hours a week on average on contract review and negotiations.
  • The average loaded (benefits included) hourly rate for an Attorney at ACME Roller Skates Company is $220/hr.
  • The 20 Non-Attorneys each spend 24 hours per week working on contracts.
  • The average loaded (benefits included) hourly rate for Non-Attorney contract professionals is $120/hr.
  • ACME Roller Skates Company has 50 dedicated sales reps taking orders at an annual loaded salary of $95,000.
  • There is 10 administrative staff supporting the sales and legal teams at an average loaded annual salary of $95,000.
The Math:

First, we look at where the manpower is applied today

Pre-Award

  • 35% Renewals Review and Negotiation
  • 25% Reporting and Analysis
  • 20% Tracking and Monitoring
  • 20% Oher Post Award Activities

Post-Award

  • 35% Renewals Review and Negotiation
  • 25% Reporting and Analysis
  • 20% Tracking and Monitoring
  • 20% Oher Post Award Activities

Then we can evaluate where CLM and AI Analytics improve team effectiveness in both pre- and post- contract award phases:

Pre-Award

Percentage of Time Task CLM Improvement CLM & AI Improvement
30%  Contract Intake 18% 23%
25% Contract Authoring 27% 33%
35% Contract Review and Negotiations 22% 27%
10% Other Pre-Award Activities 19% 23%

Post-Award

Percentage of Time Task CLM Improvement CLM & AI Improvement
35% Renewals Review and Negotiation 22% 27%
25%  Reporting and Analysis 18% 21%
20% Tracking and Monitoring 32% 39%
20% Other Post Award Activities 19% 24%

From this, we can calculate how these improvements directly relate to saved manpower costs.

In our example above the first-year manpower, savings range from 22% to 27% depending on usage of AI Analytics, with a conservative 3 YR NPV savings of $4,250,000.

These team members can also be reallocated, re-assigned, and re-engaged to replace outside vendors or to more fully support revenue resiliency or supply chain agility efforts.

While internal numbers are used in many cases it is often a more accurate look at external equivalencies – for instance: retainer-based outside counsel or transaction-based Legal Services firms; can both be converted to loaded hourly costs. Re-allocation allows you to but effectively reduce outside spend faster than you can cut internal costs.

Focus on what matters
3

Cost Justification – Revenue Resiliency and Revenue Growth

For a deeper analysis of the hard dollar impact let’s look at contributory revenue a bit closer.

While initial impacts can be gleaned from internal discussions it is important to go beyond a simple survey of your revenue teams and do some old-fashioned primary research. This allows you to fully understand the impact.

As an example, how important is advanced notice? To determine this we need to look at customer contracts where the revenue team had advanced notice of renewals, what was the average revenue increase per contract? As a comparison, what was the average revenue increase for customer contracts where the revenue team did NOT have advanced notice of renewals? The difference between these two percentages could be thought of as contributory revenue that comes from managing renewals effectively with a CLM.

To put a finer point on it, our findings show an average of 4.5% increase in revenue when the sales team had 30 days advanced notice of an upcoming renewal, and a 5.3% increase in revenue for contracts renewed when the account team had 45 days advanced notice of the upcoming renewal.

Another comparison would be to see if account teams that had easy access to customer contracts were able to increase customer revenue by taking advantage of contractual entitlements. This happens at any time during the contract’s operational lifespan.

Entitlement management can take many forms. When encapsulated in post-award management, entitlements from contracts are mapped to milestones and metrics and the CLM provides reminders, tracking, and threshold triggers to notify key stakeholders of due entitlements. While the amount and frequency of missed entitlements may vary, it is not uncommon to see between 5% and 7% revenue recapture empowered by post-award compliance management.

 
4

Cost Savings through
AI-Infused Contract Management

If we look for the cost savings demanded by CFOs then we need to take a different approach.

Certainly, CEOs and Chief Revenue Officers will appreciate net new revenue, recaptured revenue, and incremental revenue overall. However, in slowing markets, these potential revenue sources may not be enough to convince conservative controllers and CFOs.

Finance may be looking for hard-currency savings that go beyond human capital optimizations, or even personnel cost reductions. They may perceive these as hard to achieve, or that reassignment and redeployment will be chosen over team size reductions.

Hard currency savings that impact the bottom line are more likely aligned with improved costs associated with procurement or purchasing. And there are a lot of ways contracts, and specific contract management contribute.

Vendor and Contract Consolidation

  • Contract Analysis finds an Average of 10% of the total procurement budget that may be consolidated to fewer contracts or vendors which increases the volumes on individual contracts to take advantage of volume level discount tiers.
  • As an example – if you have 800 million in addressable spend, 80 Million may be consolidated and the net savings due to volume tiering maybe 3% to 4%, which translates to $24 to $32 Million dollars.

Bringing off-contract expenditures onto existing contracts

  • By providing greater visibility and transparency of contracted line items to e-procurement users through simple integrations, you can realize 17% to 19% savings as compared to an off-contract purchase.
  • As an example – if you have 800 million in addressable spend, 120 million may be off-contract spending.  If 20% of that can be moved to existing contracts than you could expect 18% savings on that $24 million, which translates to $4.3 million dollars.

Renegotiation of Auto-Renew Contracts

  • By providing both advanced notice and contract details to contract managers you can expect to save an additional 5% through renegotiation of auto-renew contracts.  If 25% of your procurement contracts are autorenewal and the value of those contracts is 100 Million, then you can reasonably expect to see a net savings of $5 Million.

Avoiding Penalties and late-payment fees

  • Late payment fees can be avoided by having solid contract metadata on payment terms and payment discounts that are accurately transferred to your accounts payable system. This works well for basic goods and simple services.  However, more complex services may have milestones and metrics that can create variable payments that can be difficult to keep track of.
  • Quantifying this can be straight forward and we suggest using a five year average of late payment fees and then setting a realistic reduction goal, a 25% to 50% reduction should be a good start.
  • Similarly using a five-year average for other penalties can help with quantifying the savings potential.

While these 4 different methods are substantial, they are not mutually exclusive and are in fact cumulative.

While finance teams will give more credence to justifications for cost reductions that are driven by fact-based decisions, they may still be hesitant to jump in with both feet.

We have found that an initial exercise – perhaps a sizable category or two makes a good pilot. We say pilot as compared to proof-of-concept since a pilot will drive real savings and validate the approach.

The results of the pilot can be extrapolated to the larger spend volume and targeted savings plans can be set in place.

Of all the justifications, labor reallocation, cost savings methods, etc., the proof in the pudding is being able to acquire the same goods or services for less money than you did prior. And as most CFOs will tell you, every dollar saved is the same as ten dollars sold.

Manage Contracts in a Whole New Way
Focus on what matters
5

Converting A Good Business Case Into Good Business

So how do you move from an accepted business case (Good first step!) into adding quantifiable undeniable value to your company? The say every journey begins with the first step so let’s think about that first step.

You have convinced leadership to carve out budget for an enterprise CLM to help your organization improve its financial performance. You offered (like a sacrifice to the MBO gods) a savvy mix of:

  • A– Team performance optimization of the inside account team by 10%
  • B– Labor re-allocation of the contract management team by 10%
  • C– Reducing outside counsel spend by 20%
  • D– Cost reductions in indirect procurement of 5%

with the hopes that one or two would echo true with the controller.

When you asked “A, B, C or D?”, she said “Yes, thank you.  And please have the results on my desk before we do your next performance review.”

The first big decision – big bang approach (and if so how big!)? or start small and grow?

In our opinion, this decision is based on a few factors (and time is one of them) and has as much to do with organization culture and openness to change.

  • Time– If you have the time to get a pilot running to not just prove the value but to also stress the organization’s willingness to change – it’s a safe bet and can make heroes out of the project team if done right.
  • Scope– Piloting a few categories in procurement, or a region or two in sales mazy be the right approach.  For the first pilot, align with friendlies within the organization and keep your critics for the second pilot round.  You may find that converting a critic is the same amount of work as supporting 2 friendly teams but may drive political value equal to 5 friendly teams!
  • Risk/Reward– Different phases of the contract lifecycle leverage different technology and organizational approaches.  For instance, streamlining intake through a wizard-driven, AI embracing portal is a great time saver but best for broader rollouts (or pilots with more than 50 requesters)  This is a low-risk, high-reward approach.  For more complex contract management challenges, i.e. using AI for analytics and triage work may yield significant cost savings in outside counsel costs, streamlined internal review processes and meaningful reduction in cycle times – however slightly more commitment will be needed by the core team to “train” the AI Engine to understand the contract nuances and expectation setting of power users will be a necessity.   This is a slightly higher risk approach – but the incremental per contract value may be very high – as well as high exposure for teams looking to embrace technology enablers.
  • Resources– While pilots may seem like a lower resource draw, the incremental resources for a division (North America) or domain (Channel Sales) level initial roll-out may be well worth the additional project overhead.  This comes down to the level of the current maturity of the target group.  Have they worked in a CM environment before?  Are they using a high level of automation in their CRM or E-Proc workstreams?  Is the contract review process an afterthought or part of the main workflow?
 

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