Trying to accurately calculate the ROI of contract management software isn’t always straightforward. Legal teams are often encouraged to audit their contract repositories to identify any overlooked legal liabilities, but you need to know how to audit your contracts to identify revenue you're at risk of losing, hidden expenses, and time lost to manual work in order to prove ROI. Here’s a helpful way to break it down.
Step #1: Audit Customer Contracts
The questions you need to ask yourself when auditing your customer contracts for revenue at risk start out simple.
How many customer contracts do you have?
The legal team can tie revenue to more than customers, but also to contracts. Knowing which specific agreements represent what revenue is the first and most important step. For help on this process, check out the eBook, 4 Steps to Effectively Auditing Customer Contracts.
Example: My Company has 500 customer contracts.
How many of your customer contracts are set to automatically renew without intervention from your team?
If you have an ongoing service agreement with a customer, you need to know if their agreement automatically renews or if you need to win the customer again. Each contract should be flagged as does or does not auto-renew, and each should have a specific renewal or termination date.
Example: My Company has 200 customers set to automatically renew (and 300 who need intervention to renew).
What is the average renewal increase (upsell) with intervention from your team?
Give your sales and success teams time to work their magic and upsell customers with new products and features they need. Take the renewal increase into account here and calculate the potential revenue at risk in your customer contracts.
Example: My Company’s average renewal increase is $2,000. So, if the 200 customers that were set to automatically renew didn’t get a chance to upgrade and their contract auto-renewed at the same rate, that’s $400,000 in revenue being missed out on (200 customers x average $2,000 upsell).
Step #2: Audit Vendor Contracts
The questions you need to ask yourself when auditing your vendor contracts for hidden expenses are very similar to those you ask about customer agreements.
Do you know how many vendor contracts you have?
What vendors do you have contracts with? Legal can tie these vendor costs to increased expenses if contracts auto-renew without proper knowledge or have a clause with a renewal increase you didn’t know about.
It is likely going to take a contract audit to ensure that you know about all of the vendor contracts you have. For help on this process, check out the eBook, 4 Steps to Effectively Audit Your Company’s Contracts.
Example: My Company has 50 vendor contracts.
How many are set to automatically renew?
Just like your customer contracts, vendor contracts should be flagged as does or does not auto-renew, and each should have a specific renewal or termination date.
Example: My Company has 10 vendor contracts that are set to automatically renew (and 40 that we have the option to renew).
What is the average renewal increase?
Take the renewal increase into account here and calculate potential hidden expenses in vendor contracts. Many SaaS agreements bake in a ~7% annual price increase (SaaStr).
Example: My Company’s average renewal increase per contract is $2,500. So, if the 10 contracts auto-renew with these increases, that’s $25,000 in expenses for vendor agreements that may not have been meant to automatically renew.
By increasing revenue tied to customer contracts and decreasing expenses tied to vendor contracts, Legal can help drastically improve the business's bottom line. These two calculations are a great place to start calculating the ROI of contract management tools. However, these audits are timely when done manually. So, don’t forget to factor in your legal team’s time investment.
Step #3: Calculate Time Saved
The final step is to factor in the time that your legal team saves. It’s important for Legal to be able to provide other teams with accurate answers, quickly. The best way to set your team up for success is to save time on manual tasks. Calculate the amount of time that your team typically spends searching for contracts and reviewing agreements in search of specific terms and clauses.
On top of being inefficient, manual processes also create opportunities for human error. Here are some stats on time spent on manual processes by legal teams from The Current State of Contract Management, based on a 2020 survey of 119 legal professionals.
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40% of respondents reported that their team spends 41+ hours per week on contract creation tasks. This means that the equivalent of one full-time employee or more is spent on contract creation.
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53% of respondents reported that their teams spend the equivalent of half a day (1-5 hours) per week on the signature process.
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61% of respondents reported spending 2-20 minutes to locate a given contract.
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49% of respondents are using Excel spreadsheets to track and analyze specific contract terms. Teams cumulatively spend the equivalent of an afternoon in Excel each week doing analysis.
Talk to your team and figure out how much time is being spent on manual processes. Divide that by the average legal employee’s salary. That gives you a labor-saved ROI on your contract management solution (as well as a nice stat to tout your team's productivity).
Whitney Lyons, Director of Contracts and Compliance at Bottomline Technologies said it best, “Using LinkSquares has saved me 5 to 10 hours a week. Time is money and I think people all know that and it’s very cliché, but the amount of time that it can save you is priceless.”
Between revenue improved, expenses avoided, and time saved, you’re in a good position to calculate and present the ROI of contract management software for your legal team. And, if you're ready to learn more about the best contract management solution money can buy, contact LinkSquares today.