How Does Contract Management Prevent Revenue Loss?
If you were to guess how much revenue you lose every year due to poor contract management, what would you say? 1 percent? Maybe 5 percent? Or maybe you don’t think that your contract management is costing you any money — after all, contracts are designed to make you money.
You might be surprised, then, that the average company loses nearly 10 percent of their revenues every year to poor contract management. That’s right: According to research by the independent International Association for Contract and Commercial Management, companies could earn 9.2 percent more revenue each year if they were more diligent in managing their contracts. Not only that, but a better handle on the basics of contract management can also reduce expenses and overall risk.
The Hazards of Poor Contract Management
A company’s contracts are its #1 financial resource, both securing revenue and protecting assets. Yet more often than not, contracts are only stored, not managed. Gathering information from contracts is often a manual process, requiring teams of lawyers or contract specialists to spend hundreds of hours searching for and reviewing information from the documents, and that typically only happens when absolutely necessary, such as when a company is involved in a major financial transaction that requires a thorough risk review. Not only is it time consuming and inefficient, but it’s also expensive and prone to error.
In recent years, many businesses have shifted away from physical storage of paper documents to electronic solutions, ostensibly making them easier to access and evaluate. While basic electronic storage does make it easier to find contracts, the same problem remains: How do you maintain visibility into the contracts? That visibility is vital, because without it, you face lost revenue, not only via the money spent on research, but also from:
- Lost or neglected contracts. When contracts are poorly managed, obligations go unmet, and the business relationship may dissolve. Unmanaged contracts may also expire, contributing to lost revenue.
- Missed deadlines. Not only do contracts contain deadlines for obligations, but also for renewals. Missing a renewal deadline for a vendor contract could result in paying more for services, paying for services you no longer need, or lost business.
- Inaccurate reports. Without accurate information for analysis, the company may take on excess risk — or miss opportunities for increased revenue.
- Errors due to incorrectly negotiated clauses. For example, contracts may be approved without conditions being met, thereby increasing risk — and losses should obligations not be met.
In short, failing to manage your contracts in such a way that you have full visibility into them and can carefully analyze and evaluate where you stand means you aren’t fully taking advantage of your greatest asset — and potentially leaving money on the table.
The Human Factor
Lack of visibility isn’t the only contributor to lost revenue; employee error could also be a factor. Consider, if you will, the typical contracting process. It often involves several different files types (Word documents, spreadsheets, PDFs, etc.) sent via email and fax between multiple stakeholders. Now imagine taking all the information contained in those documents and condensing it into actual contracts and invoices. What could possibly go wrong?
As you might have guessed, quite a bit. The potential for error when you’re moving all that data around manually is significant — in fact, research indicates that more than 90 percent of all contract management mistakes are due to human error. And when you consider that a single typo or missed decimal point can equal thousands of dollars in lost revenue, that is simply too big a risk to take. Using contract management software eliminates much of this potential for error, as it can automatically read and aggregate data collected during the contracting lifecycle. There is no need to manually enter the data, which saves both time and money.
How Contract Management Software Can Help
By using contract management software, your business can easily manage contracts throughout the entire lifecycle, from initiation to execution and beyond. Contract management software handles more than just the basics of contract management by turning documents into data, allows you to easily analyze risk from the start, ensuring that your contracts meet compliance, performance, and payment obligations, and that your company isn’t losing revenue through bad deals. Contracts can be created quickly and accurately using intuitive document generation wizards, speeding up the contracting process and ensuring that deals aren’t held up by legal bottlenecks.
Perhaps most importantly in terms of revenue production, contract management software ensures that your company stays one step ahead of obligations and deadlines. Research by the Aberdeen Group1 revealed that companies that use contract management tools renew 69 percent of their contracts, more than double the rate of companies that don’t use contract management. In addition, 66 percent of companies see increased contract compliance when they use a contract management solution, as teams are alerted to major milestones and deadlines, giving them the chance to follow up and ensure all contract terms are met.