Is Poor Contracts Management Costing Your Company?
Companies can lose about 9% of annual revenue due to poor contracts management
Many companies are focused on goals like company growth, increasing sales, hitting revenue targets or securing financing and investments. But all too often companies slow their progress, miss their target or aren’t ready when that financing event (or exit) is imminent for one big reason: they don’t have the right contracts management processes, resources and systems in place to follow through on what happens after deals and contracts are signed.
This can lead to deal terms that are not fully implemented or maintained, as well as contract deadlines and expirations that are not appropriately tracked, all of which have costly consequences. Overall, companies can lose about 9% of annual revenue due to poor contracts management.
Contracts management includes the people, processes and (sometimes) technology that enhance your business operations.
Consider this example: a company has an agreement with a key vendor and the contract expires, but neither accounts payable nor operations realize the lapse. The company continues to pay the vendor – to the tune of hundreds of thousands of dollars – until the error is identified and then begins the costly and time-consuming process of trying to recoup the expenses and unravel their working relationship. It doesn’t go well: the vendor is unwilling to return the funds and the disagreement results in significant financial losses, litigation, legal fees and, ultimately, a settlement with the vendor that does not come close to making the company whole – all due to a missed termination clause.
This example may sound extreme, but ask yourself – does your team have the necessary visibility into the status of your biggest deals and contracts? Did you hit performance milestones or price breaks that haven’t been realized? Are you executing on all those hard-fought terms? Are you getting ahead of terms that need to be renewed or renegotiated?
Having sound contracts management in place ensures that all these questions – and many more – are automatically answered on an ongoing basis. In this example, it would have triggered a notification for several departments when contracts are updated or due to expire. This would help enforce and avoid penalty clauses or sidestep litigation, leading to huge cost savings.
Contracts management can also play a material role for organizations nearing a financing event or an exit, who will need to go through due diligence and pay hourly legal fees to get their contracts and finances squared away. Any money spent on contracts management at the end of the business life cycle means less money going into the owners’ pockets. Instead, by proactively having a contracts management service in place, companies are more efficient and keep more of their own hard-earned value. Data shows that contracts management services reduce the average number of hours spent on contracts by 20 %.
Contracts management also ensures companies are prepared for financing events and exits which makes them more attractive to potential investors and acquirers. This helps deals get done more often, more quickly and with less expense and pain for all involved.
Consider what 9% of revenue is worth to your business. Are you becoming due diligence ready? Whose shoulders is all this opportunity (or risk) sitting on in your organization? Contracts management is a tough job for one person: historical information that stays with a specific employee isn’t manageable, obtainable or visible. And, let’s be honest, not many employees are raising their hand for this job.
So, what’s the solution? Work with contracts management experts who can manage contracts for you. Setting up the systems and processes once so you never have to worry about it again is more than a smart business decision – it’s risk mitigation, revenue realization and a faster and smoother process for financing events or exits.
It can also free up your team to focus on what they do best. Contracts management results in a 24 % reduction in sales cycle. In many organizations, a significant amount of contracts are renewable. If these renewable contracts are handled more effectively then pricing may be renegotiated with more foresight, generating more revenue and the reducing the effort necessary for renewal.
A contracts management service can help with day-to-day organizational challenges like missed deadlines, payments or notifications, miscommunication between departments and it can help facilitate easy identification of consolidation opportunities in contracts. Companies that are proactive in the management of their contracts are saving money now rather than companies who are reactive and end up spending significantly more in the end or slowly chipping away at the valuation of their company.
Andrea Policky is a contracts manager at KO Law Firm, a corporate and commercial law firm with an experienced team of lawyers, contracts managers and paralegals and a practical, efficient, business-focused and value-driven approach. To learn more about contracts management, contact Andrea Policky at email@example.com or (720) 477-7134.