A widely cited 2019 report from the IACCM notes that poor contracting practices lead to value leakage of ~9.2%* of a company’s revenue on average. Despite this, improved contract workflows don’t typically rank as a high priority for companies looking to reduce waste. In this newsletter, we’ll outline some quick and effective tips for better contract management hygiene to help you reduce or eliminate that leakage.
What is Contract Management?
Contract Management involves managing contracts from initiation and beyond their execution. It is partly administrative in that it involves monitoring key dates, effective storage, and document review. But it’s also strategic in that contract management involves effectively identifying and managing risk and operational efficiency.
Factors Driving Contract Management Value Leakage
Value leakage occurs when the expected revenue from a contract is higher than the actual value. The IACCM identified the following ten risk factors that contribute to a 9.2% reduction in expected revenue resulting from poorly managed contracts:
- Lack of clarity on scope and goals, resulting in a higher likelihood of claims or disputes.
- The legal team getting involved too late in the process. This can result in an extended lead time and/or the wrong type of contract being distributed or even executed. Both of these drive up costs.
- Failure to engage stakeholders, resulting in misaligned interests and/or opposition.
- Protracted negotiations.
- Focusing on the wrong terms and risks during negotiations.
- Inflexible contracts, resulting in poor contract performance in practice.
- Contracts are hard to understand or use, making them impractical or causing them to be viewed as a ‘legal necessity’ not a critical business tool.
- Poor handover at the point of implementation.
- Lack of digital transformation and/or technological intervention.
- Poor post-execution governance.
A Few Key Tips to Improve Your Contract Management
Implement Approval Workflows.
Why it matters:
- Contract management workflows can help to ensure that the right people are looped in at the right time. The process can ensure your legal team is brought in early enough to reduce lead time and avoid issues associated with the wrong documents being sent/used. The workflow can also help to reduce negotiation delays, engage relevant stakeholders, and ultimately focus the attention on delivering a working business agreement that protects all parties.
Track When Your Agreements End.
Why it matters:
- Auto-renew clauses are prevalent, and these terms mean that your contract term keeps going unless you give proper notice. For your customer contracts, this can be great as they keep going. However, in your vendor contracts, you can end up in a bind if not properly managed. There is usually a pretty significant notice period – 30 to 60 days prior to the end of the term. If you miss the window, you are on the hook for another term. This is especially relevant when you are dealing with vendor agreements for software licensing and subscription services. These agreements normally do not allow for termination for convenience. We have seen a number of clients get ‘stuck’ in a contract for another annual term because they are not tracking this provision. When every dollar counts, you do not want to have to spend money in areas that no longer serve the company simply by not being on top of the term.
- For your customer contracts, you want to be aware of the end of the term so you can check in with the customer at the right time. It’s valuable to schedule an email or call to make sure your customers are happy and encourage them to continue through the next term and avoid churn to your business
- For leases, the notice period for non-renewal can be 6 months to a year prior to the end of the term. You want to track these key dates, including setting a reminder to reconsider and purposefully renew the lease at the right time. We suggest setting the reminder at least one month before the notice period commences.
Why it matters:
- You should incorporate your customers’ and your team’s feedback into your contract management process. Listen for key themes in terms of things that are working well, things that aren’t working, and clauses that are unclear or unhelpful. This way you can continue to improve the quality of your contracts, thereby reducing the potential for lost revenue (e.g. poor payment term language, not clear when amounts are due, clarity of when a credit or penalty would apply).
For help improving your company’s contracts, reach out. Our commercial attorneys would love to assist.
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