The price of everything has gone up. Whatever came to mind as you read that — isn’t it way more expensive now than it was a year ago? The economy is facing a steady downturn, and in order for companies to weather the storm, they need to tighten their belts and be more strategic in the way they spend money.
When cutting costs, many look in the obvious places – like laying off a portion of their workforce, cutting expenditure to increase runway, and reducing SaaS subscriptions org-wide. But few are looking towards their contracts.
Contracts can, directly and indirectly, lose value before, during, and after execution. For instance, when one party fails to meet their obligation for the contract, their breach of contract can directly decrease the potential value of the agreement. Other examples include delaying contract execution or misusing in-house counsel’s time on low-value contracts, which both indirectly eat away at potential contract value. All of these common issues create contract value leakage.
What Is Contract Value Leakage?
Contract value leakage happens when a contract does not achieve its promised value due to oversight or poor management. In fact, poor contract management can cost companies 9% of their revenue. Contracts experience value leakage when obligations are unclear or unmet, when agreements aren’t reviewed closely enough, or when they’re reviewed too closely.
Direct value leakage refers to errors within the contract itself that impact the contract value retained. Some examples of direct contract value leakage include:
- Unclear contract scope: When there is confusion about the product or service to be delivered, timing, or total cost of the transaction, coming to a resolution can be incredibly costly. One or both parties may end up having to pay more than they originally planned.
- Insufficient contract review: If your legal team does not review the contract closely enough, you might find yourself bound to terms that neither serve nor align with company goals — e.g., a hidden clause that says the first year cost will be tripled each year of your (three year term) contract.
- Not meeting contractual obligations: Failure to fulfill a contract’s obligations creates a breach of contract, which requires expensive legal action.
Indirect value leakage refers to a process or management error that indirectly causes the overall value of the contract to dwindle. Some examples of indirect contract value leakage include:
- Contract delays: Time is money, and the longer a contract takes to close, the more its value erodes. For example, excessive redlining can delay finalizing your agreement so much that it closes out of the quarter, causing your company to miss targets.
- Misappropriated legal labor: If your sales team is trying to push a standard mid-value contract over the line, but creation, negotiation, and review are taking a long time, then both the delays and cost of legal counsel’s time will ultimately deteriorate the cost of the contract.
- Contracts are hard to track down and update: In the face of ever-changing regulations, it’s important that your contracts are easy to find and amend if necessary. Delays in making updates can lead to non-compliance, which has expensive consequences.
In the current economic climate, it’s important that businesses do everything they can to retain their contract value.
How Contract Management Helps Reduce Contract Value Leakage
Contracts are some of the most expensive documents moving through your business, so reducing the direct and indirect costs of execution will be crucial to maintaining your bottom line. Contract value leakage is common across businesses, but using a contract lifecycle management (CLM) tool can significantly reduce contract value leakage.
Using a CLM solution helps you to streamline some of the more tedious aspects of the contract process and patch the more leak-prone areas in contract execution. Here are some ways CLM helps you reduce contract value leakage.
Automate Contract Review
Making sure every contract gets the exact level of attention it deserves is hard to achieve without technology. With automated contract review, you can streamline the more repetitive tasks that get in the way of a thorough review.
With LinkSquares CLM, our AI reviews the contract first, calling out non-standard clauses and allowing legal to focus on the more nuanced aspects of the outgoing (or incoming) agreement.
Contract Repository to Store and Search Agreements
A CLM comes equipped with a contract repository that stores your contacts and associated data in a way that’s easily searchable. Efficient contract storage ensures that you know where your contracts are at all times, which ones are due for renewal in the upcoming quarter, and what your agreement obligations are.
Being able to locate your agreements quickly and double-check your obligations can save you millions — both directly and indirectly. Not only does it help you keep track of whether or not you’re fulfilling your end of the deal, but it also helps you anticipate possible changes that can impact your bottom line.
Visibility Into the Contract Stages
Before CLM, sales would hand the baton over to legal; legal would do their thing and let sales know when everything was in place. But now, we know that the process goes much faster when everyone has a line of sight into the contract process.
This offers insight into contract bottlenecks and opportunities for greasing the wheels of a deal. It keeps the ball rolling and prevents delays in execution.
Takeaways
In this economy, businesses must find ways to be more selective with their spending. This means thinking outside the box for fixes that can save your company money. Addressing contract value leakage issues will save your business untold amounts of money, equipping you to weather the storm more effectively.
See how LinkSquares CLM can streamline your contract process and prove ROI. Request a demo today.
