Reclaiming Value with Strategic Contract Lifecycle Management
Poor contract management costs businesses up to 9% percent of their annual revenues. Contracts determine the flow of an organization’s finances and directly impact customer satisfaction, savings, risk exposure and productivity. However, organizations can have thousands of working contracts at any given time—each with their own set of set of risks, terms and expectations.
According to World Commerce & Contracting, 60% to 80% of business transactions are regulated with written agreements and a typical Fortune 1000 company can have on average, between 20,000 and 40,000 active contracts at one time. This reality makes contract management a time-consuming and complex process that can negatively affect businesses if not approached efficiently and strategically.
While the responsibilities of modern procurement teams have grown significantly in recent years, it’s important that your organization doesn’t lose sight of one of the most fundamental processes within procurement. Adopting an AI-driven contract solution that integrates into the rest of your processes can optimize contract management throughout the lifecycle to boost your bottom line.
Three Ways Contract Lifecycle Management Drives Business Value
A strategic contract management system can help businesses uncover value in three major ways: driving down unnecessary spend, minimizing risk and improving supplier management. When paired with AI, contract managers can optimize these benefits even further.
1. Reduce Maverick Spend
In some cases, maverick spend, or purchases from suppliers outside your procurement policy, can amount to as much as 80% of an organization’s total spend. While it may be unintentional, this type of costly behavior neglects the discounts and benefits secured in established supplier contracts, can lead to higher acquisition costs and damage vendor relationships.
A contract management solution can manage this type of behavior by offering a repository that promotes better monitoring, compliance and transparency into your company’s procurement guidelines. Not everyone needs to know every detail of every contract, but a secure, central and digital repository ensures that those making purchasing decisions understand where to direct that spend.
An AI-enabled contract management system takes this to the next level by integrating directly with spend analysis and finding additional opportunities to save. The right type of CLM solution allows teams to monitor their spending behavior against their contracts and quickly calls attention to noncompliant purchases to stop maverick spending in its tracks.
By keeping tabs on benefits and new added value, an automated solution will automatically alert teams to needed contract improvements or when a contract simply isn’t providing benefit anymore. In this way, organizations go beyond basic monitoring to proactively prevent unnecessary spending and boost total savings.
2. Minimize Risk
Contracts, by nature, are vehicles of risk mitigation. But without careful or proper management and tracking, these agreements can fall flat and incur consequences for both parties. Proper contract management enables teams to monitor where their contract stands at all times, keep track of important dates and eliminate the security risks of misplacing physical contracts.
A smart contract management solution gives organizations an edge for mitigating risk more proactively throughout the lifecycle from creation to renewal. AI-enabled solutions can standardize language for more consistency and can point out risks, opportunities and even predict bottlenecks with enhanced contract data. Systems equipped with automated notifications can take the worry out of missing key contract dates, which can result in lost business, claims, warranty problems or delivery dates.
Beyond just the contract itself, an intelligent solution can flag important supplier risks that can impact your organization’s performance and bottom line. A smart CLM system that pulls data directly from contracts and weighs them against actual supplier performance (through KPI’s or SLA’s) can alert organization to changes in delivery, price or sourcing. This way, organizations are kept in the know about who’s underperforming and can proactively communicate and manage these suppliers before issues leak into other areas of the organization’s supply chain.
3. Optimize Supplier Management and Relationships
Contract management is critical to properly managing and maintaining strong relationships with your suppliers. However, organizations are often working with a multitude of contracts and suppliers at a given time, making it difficult for teams to focus on these relationships.
Advanced intelligence can alleviate the burden on contract managers and help add value to your organization. Not only can contracts draw in supplier data to make the authoring process more efficient, but CLM tools can automatically incorporate negotiated pricing and prioritize contracted suppliers, driving bottom-line savings. The ability to measure vendors against agreements and flag inconsistencies automatically can prompt also contract managers to communicate or implement a supplier improvement program.
Intelligent solutions can also ensure that your suppliers align with your organization’s larger strategy. Beyond measuring performance, enhanced supplier data can strengthen your organization’s initiatives and values by verifying whether a supplier is meeting your organization’s criteria for human rights, diversity and sustainability.
With technology automating and organizing administrative tasks, contract managers can focus on more complex agreements and build strategic partnerships with suppliers that further your organization’s mission and top-line revenue growth.
Contract management is the heart of the procurement process. It helps determine the effectiveness of the function and serves as the foundation for ensuring value. However, less than 50% of negotiated savings are realized over the life of a contract and inefficient processes and poor management can lose up to 40% of a contract’s value. With a strategic and comprehensive contract lifecycle system, contract teams can cut through the administrative clutter to get the most out of their contracts over the entire lifecycle and drive their procurement strategy forward.