How to Determine the ROI of Contract Management Software
According to PwC, enterprises could save 2 percent of their total annual costs by implementing automated contract management systems to improve contract accuracy and compliance.
And Goldman Sachs concludes that an automated contract management system could speed up negotiations by 50 percent, reduce payment errors by 75 to 90 percent, lower the cost of managing contracts by 10 to 30 percent, and cut the headcount needed for contract management by 10 to 20 percent.
But statistics such as these aren’t enough to justify the use of contract management software-it takes a careful analysis of an enterprise’s unique situation to determine potential return on investment.
“While most executives now see the value of contract lifecycle management solutions, and the value of these solutions has been well documented in third-party research, today many contracting professionals are seeing their initiatives stalled or cancelled due to lack of funding,” concludes a post on the International Association for Contract and Commercial Management. “In this economy, gaining executive buy-in and receiving the green light to fund an initiative requires professionals to work harder in building a rock-solid business case that articulates how these solutions will achieve company goals and deliver a strong ROI.”
Evaluating the ROI
To adequately evaluate the potential ROI of contract management an organization, specific objectives should be developed in these four areas:
- Supplier compliance: Contract management software enables enterprises to achieve tangible savings by providing always-up-to-date data to assist with the vital task of ensuring that suppliers comply with contracts or pay penalties, as well as to avoid supplier overcharges.
- Internal compliance: The cost of mistakes, particularly legal mistakes, can be extremely high, but automated enterprise contract management systems can provide the templates and checks necessary to prevent errors.
- Better sourcing: The reporting features of contract management software provide the data necessary for more-informed, more-effective negotiating and the determination of existing contract performance in order to make renewal decisions.
- Workflow efficiency: Contract management software can improve productivity in numerous ways, such as process automation, consolidation of “siloed” contract databases, increased contract consistency through the use of contract templates, online collaboration, flagging of milestone dates, and integration with ERP and CRM systems.
To successfully demonstrate the potential of a contract management tool, proponents within an organization can calculate projected savings in all of these areas and thus arrive at a reliable way to establish the ROI of CLM. Because the ROI will be high if savings are calculated correctly, this figure will engender buy-in from executives and other stakeholders.
Then once an enterprise contract management system is implemented, the system itself will provide the data necessary for continued monitoring of ROI, which should be as substantial as PwC and Goldman Sachs project.