Building A Business Case For Contract Lifecycle Management Software: A Buyer’s Guide
According to a 2006 annual survey completed by Federal Executives International, the average company failing internal 404 audits spends twice as much resolving contract-related SOX issues as companies that pass these audits. Fortunately, these costs can be substantially reduced by improving the way contracts are managed, a task most cost-effectively accomplished with contract lifecycle management (CLM) software. These solutions streamline compliance not only with 404 audits, but with many other types of audits as well.
The reduced exposure to audit risks and their high associated costs, while conventionally viewed as a “soft” benefits, can be so significant with CLM solutions as to eclipse the “hard” dollar ROI. Still, this ROI—which is derived through the automation of otherwise manual contracting processes—is also a significant factor when building a business case.
It is also important to note when building a CLM business case, that both hard and soft dollar advantages can be obtained from a single functional benefit. For example, a CLM solution’s electronic repository saves measurable time by eliminating the need for corporate counsel to manually search for contracts required to resolve customer disputes. But affixing a dollar amount to the benefit of instantly resolving the complaint of a sizable customer, instead of putting them off for days or weeks until the appropriate research can be completed, is not as straightforward—and may well be far greater.
I. Benefits Of Contract Lifecycle Management Software
Contract Lifecycle Management Software is fast becoming an essential business tool for increasing numbers of enterprises because the technology offers a broad range of benefits. These include the ability to:
- Ensure ready access to all contracts and supporting documents;
- Achieve instantaneous access to contract documents and data required for resolving disputes, improving negotiating position, and analyzing business results;
- Reduce workloads for corporate legal organizations
- Minimize corporate risk by ensuring all contracts meet corporate and regulatory mandates;
- Optimize revenues by eliminating non-standard terms and pricing in sales contracts;
- Shorten the sales cycle and decrease time-to-revenue;
- Empower non-contract professionals to execute basic contracts;
- Create visibility into contract obligations not captured by ERP and CRM;|
- Discover unrealized revenue buried in sales agreements;
- Prevent unwanted contract renewals.
It should be noted that this is by no means meant to be a comprehensive benefits list. The business case for any individual company may contain a selection of these, or include entirely different ones based on operating requirements, existing procedures, and new processes which may accompany implementation of a CLM solution. Also, it is important to recognize that benefits do not exist in isolation; there is frequently synergy across departments.
II. Key Factors In Building A Business Case For CLM
Start building the business case for CLM by identifying operational and strategic needs. Consider, for example, a scenario where the starting point for a CLM business case is a need by the corporate counsel’s office to streamline contract approval processes. Identifying this as an operational need points, in turn, to the requirement to replace current sequential approval processes with hierarchical ones so that contracts can be reviewed concurrently by multiple approvers.
Recognizing that these issues can be resolved with a CLM solution begins a cascading realization that solving these basic needs can resolve many other strategic ones as well. Specifically, by enabling multiple individuals to access a single electronic copy of a contract stored in a repository, a CLM solution can also enable fast access to contracts to ensure that all language is in accordance with internal and regulatory requirements. In turn, achieving this benefit underscores the need for a reporting capability that allows for identification and presentation of contracts that do not include specific clauses. And so on.
Although CLM solutions provide a waterfall of benefits, there are five key needs that are most commonly addressed when building a compelling business case for a CLM purchase. These include the need for:
a) More cost-effective handling of legal department workflow;
b) Reduced risk of costly audits;
c) Shortened sales cycles;
d) Reduced lost revenue;
e) Increased access to critical business data.
1. More cost-effective handling of legal department workload—Legal departments may well be the most over-worked entities in an enterprise, frequently resorting to high-priced outsourcing services to pick up the slack (often at $200 to $300 per hour) . Even worse, in many cases, corporate legal team members are so bogged down with day-to-day tasks that it becomes difficult to squeeze in the time required to fulfill corporate strategic roles. A CLM solution can resolve these issues by enabling legal departments to safely and cost-effectively push contract creation and initial approval tasks out to operational areas such as procurement, sales, human resources, or IT. Built-in template and clause libraries ensure that contracts meet risk management and legal compliance issues, while automated workflows streamline approvals and restrict redlining activities in a pre-determined way. As a result, legal department members are freed to become more proactive in addressing corporate strategic issues, even while the need to outsource tasks to expensive outside counsel is minimized—or even eliminated.
2. Reduced risk of costly audits—According to the Federal Executives International survey mentioned above, companies that fail internal 404 audits spend, on average, almost $6 million for SOX compliance. These costs can be cut in half with a CLM solution that provides quick and easy access to the contract tracking information and revenue recognition controls required to pass these audits. A CLM solution, for instance, can ensure that clauses to protect revenue recognition practices are never altered during contract redlining processes, or if they are, that the corporate counsel is duly alerted. As a result, the risk of more length audits—and the need for costly external auditors--are eliminated.
3. Shortened sales cycles—In the average company, 18 percent of the sales cycle is spent on contract creation tasks, according to an Aberdeen Group report entitled “Contract Management: The Quote to Cash Cycle” (December 2006). The report also indicates that each single day reduction in the sales cycle saves the company anywhere between $80,000 and $250,000 (depending on the size of the company and the complexity of its operations). This is critical in building a business case for CLM because, Aberdeen reports, companies relying on contract management solutions have sales cycles that are 10-15 days shorter than their peers who do not rely on CLM solutions. This reduction can be attributed to the ability to rely more heavily on “boilerplate” contracts that include pre-approved clauses, terms, and conditions, and that therefore, minimize approval cycles. In hard dollar terms, this means that companies relying on CLM solutions can expect to save somewhere between $1 million to over $3 million every year by shortening sales cycles alone.
4. Reduced lost revenue—The previously mentioned Aberdeen report also provides solid data for relying on contract management to reduce lost revenue. The report states that the typical company loses nine percent of revenues for various reasons, but that companies relying on CLM can cut these losses by 20 percent (1.8% higher revenue retention). The reason is that CLM solutions can ensure that only pre-approved pricing, discount, rebate, and revenue recognition clauses are included in contracts.
5. Increased access to critical business data—An inability to easily and quickly access the data required to resolve customer inquiries, audit requests, regulatory mandates, or business reporting needs is a common problem in companies that do not rely on a CLM solution. Simply put, searching stacks and stacks of paper contracts for critical business information is no way to achieve productive results. CLM solutions eliminate this problem by indexing and storing all contracts in a single centralized electronic repository. With sophisticated alert and reporting systems, these solutions ensure visibility and access to any contract, or any section of any contract, at any time. As a result:
a) upcoming contract renewals that are unfavorable to the company can be automatically identified and cancelled;
b) contracts with clauses that need to be changed to reflect new legislations can be instantly identified and modified;
c) contractual obligations that companies may want to update can be similarly dealt with.
III. CLM Solution Costs
CLM solutions may be purchased on a subscription or license basis. In the first case, a monthly fee is paid to a vendor who hosts the solution in their data center; in the second case, the solution is licensed and installed in the company’s data center, behind their firewall. Although there are obviously differences between these two types of implementations, there are also similarities.
Annualized costs, for example, are comparable whether the CLM solution is subscribed to or licensed. For a growing enterprise where the CLM system is implemented to meet a specific departmental or functional requirement, this cost is likely to range from $100,000 to $225,000. Smaller companies seeking an enterprise-wide CLM solution can expect costs ranging from $225,000 to $350,000, while enterprise solution costs for large companies with revenues exceeding $1 billion will range between $350,000 and $1 million. In all cases, costs will be closely linked to the complexity of the implementation.
Expenditures for internal resources needed to ensure proper change management and a high adoption rate will also be comparable for CLM solution subscriptions or licenses. For smaller or less complex implementations, these costs are likely to be minimal, with the issues being handled effectively with, at most, vendor assistance. But, as complexity and size of the implementation increases—regardless of whether the solution is a subscription or a license—ensuring the success of the implementation will drive these costs substantially higher. In fact, third-party systems integrators and/or consultants may be required.
Solution servicing costs will also be similar regardless of the implementation method, ranging from 20 to 30 percent of the annualized cost. However, when it comes to upgrading a licensed solution, service costs may be higher than those for a subscription solution where upgrades are included and generally transparent. It must be noted, though, that simply because a vendor offers an upgrade does not always translate into an immediate need to implement that upgrade. Also, the need for upgrades is likely to be lower for licensed solutions that are highly configured for the implementation although in this case, when an upgrade is required, the process can add substantial servicing cost.
Nevertheless, even when this higher cost is factored in, the total cost of ownership for a licensed CLM solution over time is likely to be less costly than a subscription solution in the same environment. The reason is that with licensing, the initial investment is greater, but over time licensing costs decrease. Subscription costs, on the other hand, do not decrease over time, and may, in fact, be increased.
IV. Next Steps
It is apparent from the discussion above that CLM solutions can provide a wide range of benefits, adding visibility to otherwise opaque processes that create audit risk, streamlining compliance tasks, boosting productivity, and ensuring that all contracts meet corporate standards for revenue recognition. Nevertheless, whether a solution makes economic sense for any individual enterprise is a function of the bottomline returns these benefits provide as compared to solution costs.
Download the this full whitepaper (PDF) to get a worksheet that will help you build a business case for a CLM solution.