As a legal team, how can you showcase the true worth of your efforts? How can you prove that investing in contract lifecycle management (CLM) software is a game-changer for your team's efficiency?
That's where evaluating contract management ROI comes in!
By evaluating the return on investment (ROI) of your CLM solution, you'll be able to unveil the cost-effectiveness of the software while showcasing the efficiency gains your legal team can achieve.
In this blog post, we'll explore how to calculate contract management ROI and how it empowers in-house legal teams like yours to make informed decisions that wow the C-suite.
How to calculate contract management ROI?
To calculate ROI, you need to determine the net financial benefits gained from implementing contract management software and divide it by the investment cost. You may multiply the result by 100 to express the ROI as a percentage.
ROI = (Net Financial Benefits / Investment Cost) x 100
Net financial benefits: This includes the total savings and revenue generated from cost reductions, time savings, risk mitigation, and revenue generation attributable to the contract management software.
Investment cost: This includes all costs associated with acquiring and implementing the contract management software, such as software licenses, training, implementation, maintenance, and any additional hardware or infrastructure required.
A positive ROI indicates that the benefits outweigh the costs, making the investment worthwhile.
Key components to consider when calculating contract management ROI
You need to consider a few elements of how your contract management software helps you be more efficient. These include:
#1 Time & cost savings
One of the primary factors contributing to contract management ROI is cost savings. Contract management software reduces costs by:
- automating tasks such as contract creation, tracking, and storage
- minimizing errors through standardized templates, approval workflows, and automated notifications, saving costs associated with rectifying mistakes
- helping you identify and capitalize on opportunities such as contract renewals, renegotiations, and early termination clauses
Evaluate the number of contracts your team was able to create in a month without a CLM solution. Now compare this with the outcome after the CLM was implemented.
You can now see how many hours of work it needed to create contracts, fix errors, and manage renewals before a CLM. Once you have the number of hours you’re saving, you can easily calculate the cost associated with these saved hours.
#2 Risk mitigation
Contract management software plays a vital role in mitigating risks associated with contracts. By ensuring compliance and improving overall contract management processes, the software minimizes risks in the following areas:
- Legal issues: It ensures contracts are legally sound, reducing the chances of disputes and potential legal expenses
- Compliance breaches: Automated compliance tracking and notifications help organizations stay on top of contractual obligations and regulatory requirements, reducing the risk of non-compliance penalties.
- Data security: Robust security features provided by contract management software protect sensitive contract information from unauthorized access, reducing the risk of data breaches and associated costs.
Now evaluate the cost associated with tackling legal disputes, tracking compliance, and ensuring contract security without a CLM.
Once you have these metrics, you can add up the costs the CLM has helped you save and divide it by the total cost of the CLM solution to get contract management ROI.
“Done right, CLM can generate massive ROI. But please, please talk to someone before jumping in head-first. Many companies will try to sell you just tech, or just people, or something else alone. But what’s really needed is a well-tuned mix. That’s the secret to success. The first step is to figure out what works for you. When you get the mix right, that’s when you’ll really see the results.”
~ Craig Conte, Lead Partner Legal Operate - Deloitte Legal
Contract Management ROI: Tools, Process, People, all of the above?
5 Steps to improve contract management ROI
There are a number of ways to improve contract management ROI. Most of it has to do with measuring metrics and reducing costs associated with repetitive tasks. But there’s more. Let’s find out.
#1 Assess contract management metrics
The following metrics provide insights into contract efficiency, effectiveness, and risk.
- Contract efficiency: Evaluate factors such as contract cycle time, trends based on vendors, customers, or geographic locations, contract value assessments, and identification of missed milestones
- Contract effectiveness: Analyze metrics like the number of contracts per type, program, customer, or vendor, remaining value of terminated contracts, annualized contract value, order value variance, and historical trends of legacy contracts
- Contract risk: Examine standard clause variance, the number of agreements expiring without renewal dates, delays in approvals, improper signature approvals or vendor authorizations, and the number of disputes resolved
#2 Reduce outside counsel spend
Outsourcing legal counsel can be expensive. To improve contract management ROI, explore ways to minimize reliance on outside counsel.
- Build internal legal expertise: Develop a strong in-house legal team capable of handling routine contract reviews, negotiations, and legal advice
- Implement self-service contract templates: Provide standardized contract templates and clauses that non-legal staff can use, reducing the need for external legal support for routine contracts
- Negotiate favorable legal fee structures: Negotiate cost-effective pricing arrangements with external legal firms for specialized or complex legal matters
#3 Enhance contract visibility and tracking
Improving contract visibility and tracking is vital to streamline processes and increase efficiency. Consider the following actions:
- Integrate the CLM with other software: Integrate the CRMs and communication software your sales and marketing teams are using with the CLM, so they can gain visibility into the contract lifecycle
- Establish contract milestones and alerts: Set up automated alerts for critical contract events, such as renewal dates, important deadlines, or contract terminations, to proactively manage contract obligations
- Leverage the CLM’s reporting capabilities: Generate comprehensive reports on contract data, facilitating informed decision-making
#4 Strengthen collaboration and communication
Effective collaboration and communication among stakeholders are essential for successful contract management. Enhance collaboration by:
- Implementing collaboration tools: Utilize project management and collaboration software to streamline communication, share documents, and facilitate real-time collaboration among contract stakeholders
- Encouraging cross-functional teamwork: Foster a culture of collaboration by encouraging close cooperation between legal, procurement, sales, and other relevant departments involved in the contract management process
Also read: 8 Top Contract Management Software Platforms
#5 Train departments on leveraging the CLM solution
To maximize the benefits of contract management software, provide comprehensive training to departments involved in contract management.
- Educate users on how to effectively navigate and utilize the features of the contract management software to streamline workflows and improve efficiency
- Train departments on industry best practices for contract management, including standardizing processes, maintaining data accuracy, and adhering to compliance requirements
- Promote a culture of continuous learning and improvement, encouraging users to share feedback and identify areas where the CLM solution can be further optimized.
Leverage SpotDraft to increase contract management ROI
When it comes to optimizing contract management ROI, having the right software solution can make all the difference.
SpotDraft is a powerful contract management software designed to streamline your contract processes and maximize efficiency.
#1 Intelligent contract creation to save time
SpotDraft simplifies the contract creation process by automating the generation of contracts. Using its intelligent contract creation capabilities, SpotDraft enables you to create customized contracts quickly and efficiently. By leveraging pre-approved templates and intuitive editing tools, you can significantly reduce the time spent on manual contract drafting.
#2 Advanced contract analytics to analyze problems with processes
This powerful feature allows you to gain valuable insights into your contract management processes. By analyzing key metrics and contract data, SpotDraft helps you identify bottlenecks, detect patterns, and spot areas for improvement. This analysis enables you to optimize your workflows, minimize risks, and enhance overall efficiency.
#3 Collaborative workflows to save time in collaboration
SpotDraft has collaborative workflows, where multiple stakeholders can seamlessly collaborate on contracts in real time. From negotiation to approvals, SpotDraft keeps everyone on the same page, reducing delays and improving efficiency.
#4 Contract repository and tracking to save time in search
Searching for contracts can be time-consuming without a centralized repository. SpotDraft addresses this challenge by offering a comprehensive contract repository and tracking system.
Take the leap with SpotDraft and unlock the true ROI of contract management. If you want to see SpotDraft in action, request a demo today!