How do you justify investing in contract management software, especially when COVID-19 has your entire organization tightening its budget belt? You find your "magic ROI number" and then shop for a contract management solution that's guaranteed to pay for itself. Here's how.
Finding Your Magic Number
In sports, a "magic number" is the number of games a team has to win in order to clinch a spot in their league's playoffs. Software solutions that improve employee productivity have magic numbers, too -- contract management solutions included. That number is easy to calculate.
Contract management software has a monthly subscription price, P. Your legal team has an hourly value or rate, R. How many hours, H, does a contract management solution have to save your legal team each month before it breaks even? That's the ROI "magic number" for any contract management solution you're considering.
Subscription divided by hourly rate equals hours you need to save. P / R = H.
Your magic number is the H.
Evaluating Software Solutions with a Magic Number
Now, how do you estimate the number of hours a contract management solution will save your team? Let's take a simple use case: Trying to find some specific terms or clauses in your contracts. (In the era of COVID, force majeure is a really salient example.)
You have a certain number of contracts under management, C, in your contract repository.
It takes a certain number of minutes, m, to manually read a contract to locate a key legal term.
Every month, you need to look for a certain number of terms, t, to stay on top of your liabilities and opportunities.
Multiply all those terms together, then divide by 60 (the number of minutes in an hour), and you'll find the number of hours the solution will save, S, your legal team each month.
(C * m * t) / 60 = S.
If hours saved, S, is greater than your magic number, H, then the contract management solution is worth it.
If S > H, you win.
Let's plug some typical figures in to show you these magic numbers in action.
Outside Counsel Example
A top-of-the-line contract management solution would usually charge you a subscription price, P, of $75,000 per month to manage 10,000 contracts, C.
Let's say you use an outside law firm to review your documents. A typical rate, R, for a paralegal is $100 per hour.
If P / R = H, then $75,000 / $100 = a magic number of 750 hours that must be saved each month to justify the contract management solution.
Now, let's say you need to review each contract in your repository for five different terms, t, each month, and that it takes a trained paralegal three minutes, m, to review an agreement to track down each term.
If (C * m * t) / 60 = S, then (10,000 * 5 * 3) / 60 = 2,500 hours saved each month.
Hours saved, S, is 2,500. The magic number of hours needed, H, to break even on a solution is 750. Since 2,500 is greater than 750, not only does the solution pay for itself, the contract management software pays for itself more than three times over each month!
In-House Legal Team Example
Now, let's take those same numbers, but for an in-house legal team. According to Glassdoor, the average corporate counsel makes about $145,000 per year. The average in-house paralegal makes about $52,000.
Assuming each employee works 40 hours per week, 52 weeks per year (2,080 hours per year), and you get a corporate counsel hourly rate of roughly $70 per hour, and a paralegal rate of $25 per hour. Let's assume your legal team is one general counsel and three paralegals, and you get a "blended rate" of $36.25. So, let's do the same equations as above, but change our outsourced R from $100 to our in-house $36.25.
If P / R = H, then $75,000 / $36.25 = a magic number of 2,069 hours that must be saved each month to justify the contract management solution.
Hours saved, S, is 2,500. The magic number of hours needed, H, to break even on a solution is 2,069. Since 2,500 is greater than 2,069, the solution still pays for itself, even for lower cost in-house teams.
More Than Just Time Saved
Now, contract management solutions do more than just save your team time. They automate grunt work and free your legal resources to focus on more strategic, high-value tasks. But even with a crude productivity equation, you can nearly always justify deploying a modern contract management solution. It all comes down to the magic number of hours saved.
If you're ready to adopt the most time-saving contract analysis and automation solution on the market -- with the best magic numbers in the business -- then contact LinkSquares today.