What CEOs and CFOs Want.
Whenever making a corporate expenditure of any significance, in addition to understanding the problem that will be solved and the benefit that will be derived, savvy CEOs or CFOs want to understand how quickly their investment will be recovered and what its return will be. This is both expected and reasonable. Unfortunately, the somewhat spotty record of enterprise software returns, and what can frequently be viewed as an indeterminate Return on Investment (ROI), even after a solution is finally in place, makes solution adopters cautious.
ROI Need Not Be Elusive
Each and every business is unique, with different challenges, even those operating in the same market space. So while Contract Life-Cycle Management (CLM) ROI might be 100% over the period of one year for one company, it might also be 60% or 200% for a similar company. It depends on many factors, most of which can be understood and analyzed. While enterprise software solution ROI can be elusive, it need not be.
Breaking Down the Constituent Elements of CLM ROI
To be realistic, most companies complete the execution of a contract, noting its obligations, and it is stored in a desk drawer or on a network drive, only to be reviewed once a year, if that. Without any formal means to track obligations and dates, it is a bit of a crap shoot whether all the obligations have been accurately recorded, whether the responsible contract manager will even be with the company a year later, and if he or she is, whether the contract and its obligations and additional revenue recognition opportunities will be understood and reviewed, or whether the agreement is even capable of being located. Having a comprehensive CLM solution with a central repository and all the attendant capabilities to alert and remind stakeholders of important dates and obligations can bring enormous benefits and very fast ROI.
To gain an understanding of CLM ROI opportunity, it is first important to understand the CLM elements that contribute to investment recovery. Here are some of the most important elements to driving fast ROI.
Central Repository. Even large established companies have agreements stored in desk drawers, file drawers and in ditigal silos that are not widely known and cannot be easily accessed. Unless your documents are stored in a central repository where they can be quickly, accurately and easily accessed, the expense to your organization can be enormous. Not only will you spend countless hours manually searching for the document(s) you are looking for, but you may never know that you have found all the instances of an agreement. The additional exposure this can represent is unknown and can be significant.
Version Control. Any time a document is sent via email to another party, the chance that the document will be lost, unknowingly changed or misplaced grows tremendously. Modifying an existing document without keeping the previous version (despite the best of intentions) compromises the integrity of the steps a document must complete to be fully reviewed. Good CLMs focus on maintaining review of documents versions within the CLM system only and controlling document versions, so as not to allow changes to an existing document version to occur. Instead they require that any change requires the creation of a new document version. In this way a complete audit trial is maintained for every document and previous versions cannot be inadvertently changed.
Meta Data Search. Searching through MS Access and Excel meta data document files to glean contract information may work marginally well for small businesses, but this methodology quickly falls apart when dealing with hundreds or thousands of contract documents. Not only does a spreadsheet approach invite inaccuracies, but it also results in questionable integrity as related to the document to which it is associated. Change the name of a file or the location of a file and any meta data association becomes broken. One of two things happen. Either the meta data becomes associated with the wrong document or it results in an indeterminate file association and countless hours must be spent recreating the correct association. Good CLM solutions manage meta data by directly associating it with each specific document, assuring that the two are constantly linked, irrespective of a file name change or the changed location of a document.
Internal Document Searching and Discovery. It is not uncommon that over a span of time, a contract term or specific language will be discovered to be disadvantageous to an enterprise, requiring extensive forensics of all contracts which could possibly contain similar language. Whether you have no CLM or a CLM that is incapable of doing internal document searches, the result is the same; countless hours must be expended, by highly paid employees (usually lawyers) to manually inspect all suspect documents. At the end of this exercise, a CEO cannot have complete confidence that all instances have been discovered and properly assessed. Advanced CLMs provide internal document search abilities, allowing the accurate discovery of all instances of a word, term, phase, language or value, providing results in a context sensitive manner and reducing to minutes, what could otherwise easily be man weeks of effort.
Revenue Recognition/Remediation. Most contracts contain escalation clauses, price increases, discount breakpoints and penalties that are often forgotten or ignored because they are too difficult to track and follow up on. In addition most contracts are no inspected, but infrequently, even by dedicated contract managers. The are filed and effectively forgotton. Once a escalation opportunity has been missed, and this can happen over consecutive years, it may be impossible to recover what you are owed. More typically, and even this can be difficult, changes are only imposed moving forward. This can result in the loss of hundreds of thousands of dollars in lost revenue. CLMs can capture, search and report on this information because it is contained in meta data or can be searched internally within documents (including within PDFs if so enabled). In addition, good CLMs can also create tasks, reminders and alerts that a document needs to be reviewed at a particular time and can automatically generate and send reports to stakeholders that such events require their attention.
Document Data Discovery and Extraction. An adjunct to revenue recognition and remediation is the ability to discover data within documents that is not contained within existing meta data. Most companies, even those with existing CLMs only record small meta data subsets. This is particularly true when legacy documents are up loaded, where little or no meta data exists. While most CLM solutions do not provide a discovery and extraction service, a few do and their service can be invaluable. Such companies can provide the ability to identify, extract and populate meta data associated with documents where none exists, henceforth making this data completely searchable and reportable. This creates the opportunity to discover unrecognized revenue recognition opportunities and liability exposure.
Document Routing. The lack of a structured, disciplined and enforceable document routing process invites a variety of problems and errors. Emailing of documents makes the problem even worse. Issues include documents lost in emails, lack of version control (which document version was actually reviewed), inability to provide a complete audit trail and severely extended review times can mean lost money and business opportunity. In addition, re-creation/authentication of documents lost in a flawed review cycle is extremely labor intensive.
Document Alerts, Tasks, Reminders and Calendars. When managing hundreds, thousands or tens of thousands of contracts and associated documents without a CLM it is inevitable that contract obligations will be missed and auto renewing contracts that you did not want to renew will renew, among other potential issues. CLMs can provide not only a means to automatically generate tasks and reminders to cognizant parties in the form of emails and calendar items, but also notifications to other stake holder to alert then to contract progress status.
Contract Negotiations. The length of time it takes to negotiate an important contract can take from several weeks to many months as contract language changes must be sent back and forth between legal departments. During that process, typically handled via email, documents are lost, version changes are not incorporated as intended and occasionally final contracts are executed with different language than was previously negotiated. Good CLMs can cut negotiation times by 30% to 40%, which relates both to expended manpower and to a reduction in lost opportunity costs. By strictly managing how documents are accessed by the reviewing parties (typically by providing a secure repository or “deal room”), document turn-around times are greatly reduced. In addition, CLM solutions that provide an easy means to compare document versions, one to another, assure that contract changes either intentionally or unintentionally imposed, do not unknowing make their way into final documents submitted for signature.
What About ROI Monetization?
We have completed our discussion of the factors that can accelerate ROI, but how do we understand actual investment recovery. Unfortunately, ROI determination is often only valid as a hypothetical in hindsight, after the horse is already out of the barn, so to speak. The events that can devastate the bottom line, events that a good CLM can avoid, are only discovered when it is too late and expenses and losses have already been incurred. It is only then that the proverbial lightbulb goes on and CLM benefits are fully appreciated. The solution is of course to act pre-emptively, before bad things happen.
What we can do is look at some ROI hypotheticals as a means to start to understand how quickly a CLM investment can be recovered. This will both look at efficiency and labor savings improvements which are predictable, as well as the avoidance of unrecognized financially damaging events. Part II of this paper will build a case for cost savings resulting from a hypothetical CLM investment.
See Part 2
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