5 Steps to Calculate the Return on Investment (ROI) of a Contract Management Solution

Integrating a contract management solution into your organization can significantly shorten deal cycles, enhance efficiency, and lighten your workload. The benefits of contract management software can be substantial, but understanding how to calculate the return on investment (ROI) from such an investment is crucial before deciding which solution works best for you. This guide will help you navigate the process and offer helpful tips when it comes to evaluating a contract management solution.

1. Calculating costs

To understand the value of contract management software, you must first identify all associated costs with your chosen contract management solution:

• Software subscription fees: A recurring expense, often based on the number of contracts or users.

• Implementation costs: All initial expenses for integrating the solution with your existing systems.

• Training costs: Resources allocated for training your team to use the software effectively.

• Ongoing maintenance and support: Additional costs for customer support, updates, or necessary maintenance.

2. Quantifying benefits

Next, evaluate the key areas where your organization will enjoy the benefits of contract management software from pre to post implementation of your chosen contract management solution:

A. Time savings:

• Faster contract creation: Utilizing templates and workflows can significantly reduce the time spent drafting contracts.
• Reduced contract review time: Automation minimizes manual efforts, shortening contract turnaround times.
• Operational efficiencies: Reduced administrative time liberates resources. For instance, if you save two hours per contract and process 100 contracts monthly, that equates to 200 hours saved. At an hourly rate of $150 for legal professionals, that's a monthly savings of $30,000.

B. Risk reduction:

• Error reduction: Standardization minimizes errors, reducing contract disputes or renegotiations.
• Compliance and audit: A contract management solution helps avoid regulatory fines or non-compliance penalties. If the average cost of a compliance breach is $50,000 and you face two incidents annually, a 75% reduction in risk from the CLM system saves $75,000 yearly.

C. Increased revenue:

• Faster contract execution: Accelerating contract negotiations speeds up revenue generation.

• Improved contract terms: Enhanced visibility into contract terms leads to more favorable outcomes. If the average deal size is $100,000 and the closure rate improves by 10%, it results in an additional $500,000 in annual revenue.

3. Quantify total potential benefits

Use the formula below to quantify the total benefits of contract management implementation.

Example:

• time savings ($360,000/year) + risk reduction ($75,000/year) + revenue increase ($500,000/year) = total benefits ($935,000/year)

4. Calculate your potential ROI

Calculate your total potential ROI with the formula: ((total benefits - total costs) / total costs) * 100. For example, if total costs are $50,000 and total benefits are $935,000, the ROI is 1770%. This means that for every dollar spent on the contract management solution, you receive $17.70 in benefits.

5. Consider additional qualitative benefits

While calculating ROI, you should also account for qualitative benefits of contract management software, such as boosted legal team morale, improved reporting and analytics, and enhanced customer experience.

Conclusion

The potential ROI of the right contract management solution can be substantial. When leadership asks you, “what are the values of contract management software” or “what is the importance of contract management software to your business,” you will now be prepared to present bottom-line numbers that could truly help transform your organization.  A well-integrated system is more than just a legal benefit; it drives efficiency, mitigates risks, and accelerates revenue. It also enhances legal operations, boosts team satisfaction, and improves the customer experience. Connect with LinkSquares today and discover contract management solutions tailored to your organization’s needs.