Contract management is a discipline and a series of actions from which every company can benefit.
The key question that a lot of prospective customers ask us is “What are the benefits?”.
One of the easiest ways to answer this and provide the high-level context they seek is to share some of the commonly understood statistics and data from this industry.
Here, we share those statistics in one place to help you understand the positive impact of implementing effective contract management throughout your business and how choosing the right technology is crucial to achieving these outcomes.
Revenue, Cost-Savings & Leakage
If you’re looking to build a business case for a contract management solution, the first area to look at will usually be around measurable financial impacts.
Increases in revenue or a reduction in costs, which are directly attributable to the implementation of a contract management system are what you’re looking for.
So what statistics are there to help you appraise your current situation?
- The International Association for Contract and Commercial Management (IACCM) calculated that poor contract management practices are costing businesses an average of 9% of revenues each year.
- A KPMG survey of outsourcing suppliers found that without close contract governance, businesses stand to lose up to 40% of a contract’s value.
- According to procurement consultancy, The Faculty, less than 50% of negotiated savings are typically realised over the life of a contact.
- Based on the average salaries of the parties involved, the IACCM estimates that the average cost of a simple contract is $6,900, rising to more than $49,000 for more complex agreements.
Reducing the time spent reviewing contracts and getting them signed off, through the use of a contract management system, can significantly reduce these associated costs.
- Administrative costs associated with contracts are reduced by 25%-30% through implementing automation according to Aberdeen Research.
Consider how these calculations might apply to your business.
- What is the total value of your business’s contracts?
- What’s 9% of your business’s annual revenue?
- How often are existing contracts reviewed and the obligations within them checked against actual delivery?
- How many different people get involved with agreeing a typical contract, and how long do they spend working on it?
As well as direct revenue and cost benefits, the ability to save time and, by extension, costs is also an important consideration.
Contract management can be a particularly time-consuming process if it’s conducted without clear processes. This not only applies to sign-offs and other milestone events like renewals but also to unscheduled contract management actions.
Prospective customers from in-house legal teams will often describe to us the difficulty in maintaining control over their workload due to irregular interruption for contract and vendor questions.
Colleagues without access to contract documents will request answers to comparatively trivial questions (Do we have an NDA in place? What’s the renewal date? Who signed this originally?), which can end up taking focus away from more significant work.
- 65% of Legal professionals identify time lost on administrative tasks as their biggest pain point according to a global legal survey.
Automation and sensible application of Artificial Intelligence have the capacity to dramatically reduce the amount of manual administrative work required in contract lifecycle management.
- It takes, on average, 20-30 days for a company to create, negotiate and finalise a contract according to Aberdeen Research. Clearly, this average will conceal some large variances but it’s worth considering the steps that could be taken to reduce this time period.
- Contracting cycles are cut in half through the use of automation according to the same Aberdeen report. The quicker that contracts are signed, the quicker that parties can move on either to delivering the expected benefits of the specific contract or reviewing the next contract for approval.
- Best in class companies renew 56% of their contracts annually, according to Aberdeen Group. This is more than twice the percentage of those companies outside of best in class (25%).
The remaining contracts either auto-renew or simply end. In many cases, this is not the intended action and this can have serious consequences in terms of cost and risk for your business.
Why is the proactive renewal of contracts a positive metric? It means that the processes for assessing vendors up-front are robust, leading to good decisions and long-term relationships. Adding new vendors each year or having to replace existing poor performers is a time-consuming process.
By using a contract management system to automate your processes and to ensure best practice is followed, you minimise vendor turnover and annual renewal processes as well as saving time.
Consider the following questions for your business:
- How much of your legal team’s time is spent doing non-specialist administrative work?
- How long does it typically take your business to get new contracts drawn up, agreed and signed?
- What percentage of your contracts are proactively renewed annually?
- How many of them undergo a pre-renewal review allowing for an informed decision about their future?
Compliance & Risk
Key to monitoring compliance and mitigating contract risk is having visibility of as much of the contract and vendor portfolio as possible in one place.
This means that risk strategies can be applied across the portfolio
Setting markers for compliance and then automating the periodic checks is also a key application of contract management solutions.
So what are the relevant statistics that apply to these areas?
- Aberdeen Group assesses best-in-class companies have 78% of their contracts in a searchable, central repository vs 34% for the rest.
Not only do these companies benefit from having the vast majority of their contracts in one place, thereby being able to pull together high level data and trends, they also save time on having to locate contracts for specific queries.
- The Journal of Contract Management estimates that 71% of businesses can’t locate at least 10% of their contracts.
Again, this has a material impact on a business’s ability to assess its contract risk levels and apply a cohesive vendor strategy across their portfolio of contracts.
- £183 million - the amount British Airways was fined by the UK’s Information Commissioner’s Office for its 2018 data breach.
When trying to weigh up the potential risk of failing to comply with legislation, or failing to assess your vendors’ level of compliance, the potential fines to be incurred should be a key consideration.
GDPR fines can be up to 4% of annual global turnover or €20m, whichever is greater. There are similarly punitive fines for data breaches in other territories as well.
Important to consider for your business are questions like:
- How many of your business’s contracts are stored and searchable in a central location?
- What steps have been taken to locate all your business’s contract documents?
- What specific legislation does your business and/or your suppliers need to work under in order to be compliant?
- Do you track suppliers’ compliance with this legislation?
- What are the potential risks in terms of fines, supply chain failure or public perception that you need to be mindful of?
Statistics like those above will provide some context and benchmarks for the impact of a contract management system on your business.
The true impact will obviously vary depending on your business’s exact processes and level of maturity when it comes to contract management processes.
Contract management takes up significant amounts of resource and time, so by making efforts to measure and then optimise the different elements of it, you can make a material impact on:
- The business’s top-line revenue
- Overall business costs
- The efficient deployment of internal resource
- The overall levels of business risk
If you’d like to understand how your business processes and metrics could be improved with contract management then get in touch with us today.