Last updated on February 3rd, 2020 at 02:02 am
Smart companies carefully track their investments in every part of their business. By carefully monitoring and managing their return on investment (ROI) on major purchases, they protect their profitability and increase their opportunities for rapid growth.
Contract management software (CMS) is a critical tool for any business. CMS makes contract administrators and contract managers more efficient. But, how do you calculate the ROI of your CMS?
This is one situation where you cannot simply click a button to generate the metric you’re interested in studying.
Understanding the Business Contribution of Contract Management Software
To calculate the ROI of your CMS, you must first understand the business contribution your CMS, and your contract management team in general, make. Contract management doesn’t fit into the standard box that many departments do because its value comes from the management of external relationships.
The function of your CMS is to make your contract management team better at their job. It streamlines the contract process, makes audits more efficient, collects data, generates easy to read reports, and serves as a central repository for contracts and contract-related documents.
Any ROI calculation will need to take into account the value generated by each of these functions and weigh them against the costs of the software, its implementation, and its maintenance.
Sometimes the value that your CMS provides is in simply eliminating unpleasant, repetitive tasks that a staff person would otherwise have to do. Or, the value may come from making contract managers more efficient. Other times, the CMS’s value will be easy to calculate because it is tied to a clear figure such as contract compliance penalties.
Traditional ROI Calculations May Fail to Fully Capture Value
Traditional ROI calculations often fail to fully capture the value that CMS provides because it looks for the value in the wrong places. The automation that CMS delivers may not be enough to result in a reduced headcount in your contract management department.
Another issue is that contract management departments often have little data available to use in a standard ROI. Often, these departments fall back on metrics like the volume of contracts handled or the avoidance of risk as measurements for ROI calculations.
But, the primary work of contract management is different than the operations part of the business. Contract management work involves reporting, support, compliance oversight, coordination inside the company, and coordination with contracting parties. All of these are tasks are hard to measure.
All of these factors make it hard to find a business use case for contract management using standard ROI methods.
But, most companies understand that contract management is essential. CMS is a valuable investment because it makes your contract management team much better at their jobs.
This isn’t to say you can’t put a number on the value generated by CMS—you can, but you need to look for that value in non-traditional ways.
Savings Provided by Contract Management Software
One simple way to start the ROI calculation of CMS is total the cost savings it produces. CMS lowers costs in four easy to measure ways:
- Fewer Compliance Penalties
- Overpayment Recapture
- Termination of Poor Performing Contracts
With the exception of automation, a strong contract management team should be producing some of these cost savings without CMS. However, CMS, when used properly, will increase the savings of what is possible without software. In running the ROI calculation, you will want to only count the increased cost savings the CMS produces beyond what the contract management team could achieve without the software.
CMS uses cutting edge AI and machine learning to automate much of the work that a contract management team used to perform manually. These automation result in cost savings over three primary areas:
- Staff Time
- Legal Costs
Some of the ways automation decreases staff time include:
- Eliminating manual filing of documents
- Eliminating time spent on searching for lost or misfiled contract documents
- Reducing the time spent on emails and other communications focused on sending reminders
- Reducing the time spent gathering data
- Reducing time spent on creating reports and tracking KPIs
- Reducing time spent monitoring contracts set to auto-renew
CMS uses AI-powered search, cutting edge database design, and automated alerts to free up the contract management team to focus on relationship building and actual management activities.
Having all of the contracts in a digital repository with searchable tags is one of the greatest time savers. Automated alerts take the place of emails staff used to send to remind others in the organization to take action at different stages of the contracting process.
Another result of the automation will be the reduction in the contract execution cycle. But, this is a different value calculation. That is value the CMS adds to the bottom line; this part of the ROI calculation is only focused on the cost savings achieved.
CMS reduces legal costs. With templates, better digital management, and better control over the entire contract lifecycle, less money will be spent having lawyers revise contract drafts.
Legal costs are also reduced because CMS reduces contract compliance issues and contract disputes. The savings from reduced legal costs will be greater for organizations that use outside counsel for most of their contract issues.
CMS also improves organizational efficiency. This means audits take less time because all of the relevant documents are easier to locate and process. Auditors spend less time generating reports. The data and analytics features of the CMS do much of the hard work for the auditor.
When audits are faster, they cost less. But, even more important, when audits are more efficient companies can undertake more complex audits that result in further improvements to the contract management process.
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Fewer Contract Compliance Penalties
CMS helps reduce the amount of money the company pays out in contract compliance fees. This is accomplished through alters and easier tracking and communication tools. Even the best contract management team is not able to manage the complexities of multiple contracts, as well as CMS, does.
Calculating the savings from the payment of fewer compliance penalties is a straightforward process. If historical data has been entered into the CMS, the software itself can generate a report showing the amount of the improvement.
One way organizations waste money is in the overpayment of contract compliance fees. A typical company does not have the resources to verify that the amount a contracting partner bills for compliance fees is accurate based on the terms of the contract.
CMS allows contract managers to have more time and resources to evaluate passed contract compliance payments and to recapture any overpayments.
Like the initial payment of contract compliance penalties, the savings CMS generates through overpayment recapture is simple to calculate.
Ending Poor Performing Contracts
The last way CMS produces cost savings is through the termination of underperforming contracts. Sometimes contracts are automatically renewed, even though they shouldn’t be.
CMS solves this problem in two ways. First, it makes it easier to see the value of every contract. It’s advanced reporting features can show any number of metrics, including cost savings for each contract.
Contract managers can easily see what contracts are not performing, and they can intervene to make sure the worst performing contracts are not renewed.
CMS also sends out automated alerts before a contract is set to renew. This kickstarts the renewal review process.
Over time, the savings from replacing poor performing contracts with better contracts with more reliable partners will significantly impact the bottom line of the company.
Market-Based Focus on Contract Management Software ROI
While calculating the cost savings generated by CMS is useful, it is only part of the ROI the company enjoys. In order to calculate the rest of the value generated by CMS, a different process needs to be used that takes into account the actual business contributions of contract management and CMS.
Instead of trying to use an internal approach in calculating the ROI of CMS, the better method is a market-based approach. This method looks at the value CMS generates from an external perspective.
CMS increases the alignment between the organization and contractual partners. The market-based approach to ROI measures things such as:
- Business Relationship Efficiency
- Revenue Increases
- Opportunities Gained by the Company
This approach treats contracts themselves as assets and evaluates the ROI of CMS based on its ability to improve contract formation and to maximize the value of individual contracts through better business relationships.
Maximizing Business Relationship Efficiency
Contracts are a function of relationships. If you want to maximize the value of a contract, you need to maximize the underlying business relationship. CMS is designed to remove internal barriers and inefficiencies to better business relationships with contracting partners.
To measure the value that CMS adds to contract assets, you need to evaluate the increase in the total performance of your entire contract portfolio. Using historical trend performance analysis, you will be able to see how much more value your contracts are generating since the implementation of your CMS.
This analysis is a useful proxy for the increase in the efficiency of your business relationships. This value is generated by a combination of better contract terms, more efficient contracting processes, and increased reputation as a result of stronger compliance processes.
There are two different types of contract compliance, and each type deals with relationships. Internal compliance is focused on your organization’s ability to honor its obligations to its customers. External compliance is focused on making sure vendors are fulfilling their contractual obligations.
CMS assists contract managers in improving the relationships with both customers and vendors.
Shorter Vendor Contracting Cycles
Another place where you can measure the business relationship efficiency produced by CMS is in the length of the contracting cycle with vendors. CMS shortens this time between the negotiation of the deal and the execution of the written contract.
Shorted vendor contracting cycles allows your organization to have faster turnarounds for your customers. The faster you can produce for your customers, the more sales you can make, and the more revenue you can generate.
Another benefit of shorter vendor contracting cycles that increase the ROI of CMS is the boost to your company’s reputation as the quality and timeliness of your deliverables increases.
Revenue Increases Provided by Contract Management Software
While the traditional focus of contract management ROI calculations has been on cost savings and risk avoidance, much of the real value of CMS can be seen in increased revenues. This increase in revenues can be measured in three different areas:
- Better Customer Relationships
- More Efficient Contract Renewals
- Shorter Sales Cycles
Better Customer Relationships
CMS leads to revenue increases by improving customer relationships. The CMS does this through improving internal compliance, using automated reminders to make sure the company is prepared for the renewal of the deal and streamlining the contracting process.
Stronger customer relationships lead directly to increased revenues in three ways:
Continued business opportunities with customers
willingness of customers to increase the volume of business
Because CMS is a relationship tool, the ROI grows exponentially over time. As customer relationships strengthen over time, the revenue generated from those relationships also grow.
Easier Contract Renewals
CMS improves the contract renewal process. While many contracts are set to auto-renew, every account needs to be reviewed for profitability before it is renewed. CMS makes both automatic contract renewals and manual contract renewals more efficient.
The CMS makes it harder for bad contracts to slip through the cracks and auto-renew without being reviewed by a contract manager. Replacing unprofitable customers with better customers helps increase revenues.
Another benefit of CMS is that it makes creating a new contract with an existing customer easier. Much of the work can be automated. Customers are more willing to renew a contract when they not only have confidence in your performance, but they know you make the contracting process easier than other companies.
Shorter Sales Cycle
The time it takes to negotiate and execute a contract is lost time for the organization. It isn’t making any money during the sales cycle. It cannot even do much to anticipate the sale. The faster deals can be closed, the sooner the sales team can find more customers, and the more revenue the company will earn.
CMS streamlines the contracting process. It makes measuring the length of the process easy. It also improves contract document organization and communication. You can calculate how much revenue is generated per day the contract cycle is shortened.
If you want to capture the full value that CMS adds to your business, you also need to take into account the additional opportunities it generates.
While costs and revenues are relatively straightforward to calculate and understand, opportunity generation is more speculative. However, it is a critical part of the value that CMS generates for businesses.
These opportunities come about because of:
- Easier Reporting
- Faster Analysis
- Better Business Intelligence
CMS is a powerful tool that gives the organization access to data and analytics it either couldn’t generate on its own or that are too time-consuming to be useful consistently.
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Reports have been a part of the business from the beginning. However, today businesses need more sophisticated reports to understand what is happening right now, not just last year. It may take a team a week or more to generate the kind of reports that your CMS can generate in moments.
Faster reporting allows the executive team to see real-time opportunities. Without this reporting, a company may not be agile enough to take advantage of limited-time opportunities.
Because of the power of modern CMS, there is an almost infinite number of reports that can be run. Any data that is tracked by the CMS can be turned into an easy to read report with the click of a button.
Sometimes having access to data isn’t enough. Sometimes what leads to new opportunities is the ability of a company to analyze and synthesize the data. Contract management professionals and data scientists are limited at the speed of their analysis.
CMS makes analysis faster with the help of cutting edge machine learning technology. You can see hidden opportunities in the market because you have better data and can analyze that data into actionable intelligence faster with the use of CMS.
Actionable Business Intelligence
The third way that CMS helps generate new opportunities is by taking raw data, processing it, analyzing it, and producing actionable business intelligence. CMS can show you the places where your organization is struggling with vendors or customers and places where you surprisingly strong.
Even more importantly, the CMS makes it easy to share actionable business intelligence with the right decision makers. You can find new opportunities because the CMS ensures the right people have the right information at the right time.
There’s a reason so many companies are rapidly moving to CMS. But, if you want to accurately calculate the value the software is generating, you need to long beyond just the cost savings produced by the automation.
While that cost saving is important, and part of the ROI, CMS provides your company with increased revenue by allowing your team to maximize business relationships with vendors and customers, and by giving you access to actionable business intelligence that cannot duplicate without CMS.