Defining the metrics to measure the ROI of Contract Lifecycle Management

Automation of Contract Lifecycle Management (CLM) is vital to gain intelligence and make a business more profitable in today’s digital era. A report by IACCM has cited that poor management of contracts costs 9% of an ‘organization’s annual revenue. This speaks volumes of the need for enterprise CLM deployment to enable significant savings and productivity gains. Decision-makers defer adopting a Contract Management System (CMS) due to a lack of clarity on how to measure its ROI (Return on Investment).

Effective tracking of every spend/investment is indeed vital for business success. As a CLM software deployment incurs significant efforts and investment, determining its ROI to comprehends its true merits is undeniably important. In a bid to aid organizations in quantifying the value of automating their contract management, several CLM software providers have built their ROI calculator.

Can an ROI calculator provide the right metrics on CLM adoption?

Yes, if your objective is to have a number to aid your decision to deploy a CLM software solution. So, to measure the ROI, you will have to provide data such as your team size, operational costs, the volume of contracts, value from renewable contracts, profit gains, procurement savings, penalties, sales overheads, etc. The tool will use this data to calculate how much you can gain from investing in a CMS.

This is, of course, quite a straightforward way of deriving solid proof to justify the adoption of automated CLM. But this is not the comprehensive method of calculating the ROI of a CLM software solution. The reason being that CLM is all about enhancing business performance by addressing the shortfalls in the existing Contract Management System. It is ideally a catalyzer of business growth, and there are several parameters that an organization should weigh against the cost of owning a CLM platform.

Go beyond the number to realize the Contract Management ROI

CLM solutions emerged as an aid to help companies in automating the arduous, error-prone manual processes. Embracing the digital tools eventually enabled remarkable time savings, effective utilization of resources, gaining insights on contract performance, ensuring compliance, and mitigating risks. Therefore, it is wiser to analyze the wider business contributions by a CLM system.

Suppose you are a decision-maker vested with the responsibility of CLM deployment. In that case, you should consider measuring the following to comprehend the actual cost savings and revenue growth enabled by a CMS.

Productivity: Automation means accelerating contract search, gathering data, creating reports, and seamless tracking for renewals. As per a report by Goldman Sachs, companies can save up to 20% of the time by utilizing a CLM system. This data also exemplifies the increase in speed of the contract execution cycle. The time saved can be utilized for more strategic, high-value tasks and strengthening the relationship.

Actionable Insights: Reports are essential for contract performance analysis and auditing. And, if a tool can do it on behalf of your auditors and present it in an easily comprehensible dashboard, it is worthwhile. It gathers the data from across your repository, processes the information, derives intelligence, and provides actionable insights. This helps in identifying potential opportunities, challenges and predicting the trend for strategic business decisions.

Process Improvements: The best approach to measure this aspect is the capability gained in distinguishing poor-performing contracts. By enabling you to measure the value of every contract effectively, it eases the decision on renewal based on evidence-based metrics. This allows you to relook at your business plan, optimize resource utilization, ensure precise payment of contract fees, and improve the company’s bottom line.

Team’s efficiency: With a centralized repository of contracts enabling seamless tracking of timelines, key clauses, and performance metrics, your team is empowered to operate more effectively. A transparent contract cycle mapped with the right stakeholders instills accountability and ownership, making less room for errors.

Sales Cycle: Contract management efficiency has a direct impact on the sales cycle. For instance, prolonging contract negotiation means a delay in execution. With a CMS, the cycle time is reduced drastically; case in point – a study by Aberdeen Group has revealed that CLM usage can reduce a sales cycle by up to 24%. So, your client is assured of a faster turnaround, and you are provisioned to make more sales.

Visibility: This is a significant drawback with traditional contract management. Finding a contract or key clauses and terms to support business decisions was challenging with the manual process. An automated CMS enables real-time access to the right data for informed decisions on contract negotiation and renewals.

Customer Retention: A contract is not just a document that binds two parties to execute specified services. It is the foundation of a vendor-client relationship, so making it stronger depends on your team’s efficiency. With your team’s time invested in enhancing their performance, providing better value to your clients, and ensuring compliance, the business relationship is stronger. This builds trust in your brand, paves the way for continued business, and maximizes the possibilities of customer referrals.

New Opportunities: Every contract is an abode of hidden opportunities, which can be effectively unlocked with the assistance of a CMS. For instance, it provides you the data for effective supplier management or the intelligence on your core strength, which could be leveraged for your business success.

Compliance: The scope of a CMS spans both external and internal compliance with time-tested processes and templates. While external compliance is about ensuring timelines and obligations with vendors and suppliers to enable substantial savings, internal compliance aims to aid an organization in avoiding detrimental errors.

Risks and conflicts: A contract oversight could cost your company a fortune. It could be variation in standards, missing renewal deadlines, or non-adherence to defined approvals; a minor slip through a crack can jeopardize the integrity and lead to a heavy penalty. A CMS can prevent any lapse in contract enforcement and recapture of overpayments, the savings that you can easily measure.

The list may appear extensive, but establishing a system to derive the value generated in every aspect of your business process will give you the real measure of ROI yielded by CLM. So, before you begin your CLM adoption journey, take stock of shortages in your existing system that you would like to address. This will form the basis of the scale to measure the merits your business accrued post the transition.

If you have decided on the CLM deployment, then ‘Cenza’s Contract Management Consulting service will be of great aid in ensuring successful implementation.

About Cenza

We are a Managed Legal Service Provider with over 20 years of experience in contract management. Cenza works with key technology partners, such as Ironclad, ContractWorks, Leverton, Kira, and several other leading legal tech companies. We offer end-to-end contract management, including classification of contracts, tagging & extraction of key data, loading documents onto a CLM platform, and ongoing administration of contracts in the system. Visit here to know more about our Contract Management services.

 

For queries and further information, please get in touch with our experts.

Jayashree Nair

Jayashree Nair

Jayashree has managed various engagements at Cenza for clients across the world. She led scoping and solution development for more than 20 client engagements, including some complex contract management-related requirements for clients and works on a daily basis with Ironclad and their clients on contract migration projects. She has successfully transitioned many complex projects for a variety of clients in the managed legal, AI and ML training, and Contract management space. She has an overall 12 years of experience, including previous stints at Accenture and R.R. Donnelly and has a strong understanding of project management and contract management projects.