4 Ways to Improve ROI from Your Contracts
Research from the International Association for Contract & Commercial Management (IACCM) suggests that organizations lose 9.2% of revenue every year due to poor contract management and/or oversight. From missed renewal dates to clauses exceeding approved ranges, there are many reasons why organizations are unable to maximize their contract revenue.
Lawyers and contract review specialists, for example, are responsible for not only minimizing the legal risk from contracts but also maximizing their ROI. In this article, we will discuss 4 specific ways to improve ROI from your contracts, based on recommendations from members from the IACCM.
1. Negotiate Multi-year Deals for Better Pricing
The contract lifecycle is a complicated process that has several steps, so why would you want to start it over again every year? If you are planning to use the same provider or vendor for several years, you should establish a multi-year deal in a single contract instead of creating single deals using multiple contracts. That being said, members of the IACCM recommend limiting multi-year deals to 3 years because starting at the 4th year mark, most markets need to be re-evaluated. In order to hedge against inflation or other price hikes (or drops!), you should identify a fixed rate or publicly available index.
2. Itemize Milestones in the Statement of Work
While contract templates are useful and time-saving, they should be reviewed on a case-by-case basis to avoid future billing problems. Often, account managers may underestimate the need to provide specifics about milestones and percentage of completion when dealing with repeat or long time customers. In the event of a disagreement, a customer may decide to terminate a contract before the term is fulfilled. In that case, unless properly detailed in the contract, they may leave you with no legal recourse to bill for milestones or percentage of completion.
Just like a customer may want to withhold a portion of payment until full delivery, you should protect your revenue by clearly establishing on the Statement of Work (SoW) what milestones entitle you to a payment from the client. Consider detailing and itemizing items on the SoW as insurance for future billing.
3. Establish Early Payment Discounts
Contract managers always remember to include a clause that details the penalties for late payments. If the final objective is to enforce payment within 30 days from receipt of invoice, contract managers would also benefit from adding a clause that incentivizes early payment. Even a 1% to 2% discount for payment within 10 days from receipt from an invoice date could entice a party to provide you with funds earlier. Additionally, you can use an early payment clause as a negotiation tactic that lowers your price when doing business with another party. Training other parties to provide timely payment will allow your company to have a more reliable cash flow. These discounts could also save you money off large vendor agreements, impacting your bottom line by quite a bit long-term.
4. Include Renewal Terms in Initial Contract
Contract renewal is one of the lowest hanging fruits to improve the bottom line of your firm. However, it is a process that is often rushed and negotiated from a less than optimal standpoint. In order to improve your odds at the time of renewal, you should establish the renewal terms upfront and include them in the initial contract whenever possible. This way, your company will have a clearer understanding of whether or not it makes sense to renew the contract, and whether or not your company meets the requirements for renewal.
To help you prevent losing a percentage of your revenue due to poor contract management practices, you should negotiate multi-year deals for better pricing, itemize milestones in the SoW, establish early payment discounts, and include renewal terms in initial contract when possible.