Welcome to part one of our series focusing on contract optimization.
The Falcon X Heavy rocket does not just arrive in space by chance. A calculated approach to success requires the necessary components, combined with multiple stages to achieve escape velocity. The cumulative effect of the stages propel it to its destination.
Your Organization Destination
Let me take you on a similar journey from a simple contract repository to Contract Optimization using the same multi-stage approach. Your organizational destination should be to increase company velocity as it pertains to Sales and Contract Management. Specifically, more closed deals with faster turn-around times, optimizing your people and processes to their maximum potential.
At first glance, achieving faster deal turn-around time seems to be a Sales function, not contract management. Not surprisingly, studies have shown that while the Sales rep can close the deal quicker, it still requires a fully executed contract in order to recognize the revenue and deliver the services or products. The Contract Optimization effort is key to overall Sales Cycle time reduction and ultimately significant savings. Evidence of this can be found as far back as 2006 in research performed by the Aberdeen Group:
- $80,000 – $215,000 – What the average 1 day reduction in sales cycle is worth, depending on the size of the enterprise.1
- 18% – Percentage of an enterprise’s sales cycle attributed to contract creation, negotiation, and approval. 1
Achieving Full Contract Optimization Velocity via Stages
True Contract Optimization requires multiple levels (stages) in order to achieve the full velocity and benefits.
Stage One – All contracts in an electronic repository.
Benefits – Cut costs of finding contracts, and/or tracking renewals
Stage Two – Analysis and reports of contracts 2
Benefits – Identification of duplicates, conflicts, terms and key dates
Stage Three – Automated contract creation
Benefits – More efficient use of legal staff, faster cycle times, and acceleration of revenue and/ or savings
Stage Four – Effective contract compliance (a.k.a. Obligation Management and Risk Mitigation)
Benefits – More effective compliance with contractual benefits and commitments
Stage Five –– Integrate transaction systems to contractual terms and conditions (e.g., billing systems)
Benefits – Maximized business value (full velocity) from contracts
Contract Optimization Addresses Common Contract Challenges
Clients that utilize contract management but have not invested in the additional stages experience common challenges that only Optimization can address. Optimization, like the rocket, builds on prior stages to increase the velocity.
Stage One addresses wasted time locating contacts –A single repository WITH metadata reduces time spent locating contracts. It minimizes the risk of multiple versions of a single contract and increases the success of locating the correct contract and its related contracts including amendments and/or renewals.
Stage Two addresses lack of visibility into critical contract details – having metadata provides the ability to find critical information such as key dates, terms, and level of risk. Without metadata, the user is relegated to reading or scanning a document to find that information. That can lead to a reactive approach of enforcing contract terms resulting in excess cost and/or revenue loss. If you haven’t figured it out yet, “METADATA IS A CRUCIAL ELEMENT TO MAXIMIZE VELOCITY”
Stage Three addresses immature contract processes – a defined process and automation are the keys to success here. Applications that can provide templates, manage legally approved clauses, provide cycle time reporting (measure request to activation contract processing time as well as interim contract steps) automated approvals, and e-signature reduce the overall time for contract processing. Having a defined process that is measurable, improves productivity, leads to process improvement, and ultimately provides visibility within the process and reduced costs.
Stage Four deals with obligation management along with contract risk assessment – having a tool to manage obligations such as SLAs or uplift at renewal time, insures that obligations are met proactively. Using standard legally approved language minimizes the rogue use of terms and conditions. Performing assessments on contracts results in a contract risk rating, identifying high-risk contracts. Effectively managing obligations and risk leads to increased compliance and minimizes exposure to unnecessary litigation and fines and increased revenue.
Stage Five is the culmination of all the prior stages and optionally provides the ability to create CLM integrations to upstream and downstream systems (i.e, billing and provisioning) – at this stage, the enterprise is maximizing all the business value from contracts. As stated in the earlier part of this blog, that directly influences Sales Cycle time reduction.
In a future blog, we will discuss the steps necessary for the desired outcome of Contract Optimization to achieve maximum velocity. Contract Optimization – “To Infinity and Beyond”
1 “Contract Management: The Quote-to-Cash Cycle”, Aberdeen Group, December 2006
2 More than 70% of CLM customers stopped at the 2ndstage. Providing funds, resources, and support enables the latter stages of CLM optimization – Forrester Research September 2016
Ken McCumber is an Architect with Statêra and a recognized SME for Contract Lifecycle Management
Special thanks to Josh Sangster of Statêra for his contributions to the information used this blog.