Part I of this two part ROI discussion reviewed Contract Life-Cycle Management (CLM) considerations that allow fast investment recovery. Part II looks at CLM ROI monetization and how quickly ROI can be achieved in a hypothetical large company implementing CLM.
Knowledgeable individuals understand that financial analysis can be manipulated to show an intended result.This article seeks to avoid that moniker. To counteract this issue, this analysis does not look at aggregated ROI benefits. Instead it looks at ROI individually, providing the reader with a more conservative assessment of how quickly return on investment can be achieved.
Apply Conclusions to Your Company
Since every company is different, with difference products, services and financial management, so too are the opportunities to receive financial benefit and a corresponding return on investment from CLM. You are invited to look at areas of saving as they relate to specific opportunities as they may exist in your own company. In general, every company has one or more opportunities available to improve its business processes, business management and financial performance as a result of CLM solution adoption.
A Hypothetical Model
The following example looks at hypothetical staffing reductions/re-purposing, improved process efficiency, missed revenue recognition, liability and penalty avoidance and other issues that allow a fast return on investment from implementing a Contract Life-Cycle Management solution. While the example shown looks at a large enterprise model, savings and commensurate ROI will generally scale up or down accordingly with company size.
Please Note: IT savings, comparing local hardware/software management to a Cloud-based service is not considered in this article and will be discussed separately.
The following summarizes financial benefits that can be derived from implementing CLM. Not all benefits are summarized below. Details of the financial model from which this summary was derived can be found at http://xxxxx.com
A CLM Model Company
Annual Revenue: $400 million (large-enterprise model)
Contracts and Related Documents: 30,000 plus
Number of Individuals Managing/Supporting/Interacting with Contracts: 182
Estimated CLM Implementation Cost and Timing
CLM Initialization/Configuration/Document Processing/Training, etc. (one-time) $40,00 - $60,000
Annual licensing - $45,00 to $60,000 (150 users)
Time to implement: 20 -45 days - typically limited by delivery of customer configuration requirements definition (will be shorter if all requirements defined up front)
Disruption to business activities: Minimal
*Cost based on estimates of a typical openSource Contract Management implementation (implementation of other contract management solutions will vary)
Note: So as not to slant the ROI results, ROI calculations only look at each item individually. ROI benefits can be aggregated to reflect additional savings. Not all possible ROI opportunities are summarized.
CLM costs that must be recovered:
Year one CLM cost is $85K to $120K (includes one-time initialization)
Year two (annual) CLM cost: $45K to $60K.
1. Staffing reduction or repurposing (staffing reduced by 2 Para-Legals and 10 Contract Managers) - $860K savings
CLM significantly improves the efficiency with which contracts are managed, requiring 15% to 20% less staff to manage the same contract volume
Year One (1) ROI realized within 2-3 months
Year Two ROI realized within one (1) month
2. Unwanted self-renewing contact renewals avoided. $90,000 in spending avoided
Unwanted self-renewing contracts are discovered and cancelled prior to renewal, as the result of built-in CLM notifications
Year One (1) ROI realized within sixteen (16) months.
Year Two ROI realized within six (6) months
3. Additional recognized revenue: $200K
Opportunities to realize additional revenue are now recognized because notifications are now tied to contract escalation events (price escalation allowances, COL escalation, infrastructure/taxation allowance, etc.)
Year One (1) ROI realized within nine (8) months
Year Two(2) ROI realized within five (5) months
4. Contract deliverable penalties of $300,000 avoided
Contract deliverables and their timing are now tracked for each contract and notifications to multiple parties occur significantly ahead of any potential imposed penalty
Year One (1) ROI realized within seven (5) months
Year Two ROI realized within three (3) months
The above representation is not based on a specific company. Instead it is based on the combined experiences of several companies. As such, only bits and pieces of the above ROI examples may apply to you. Although your company may be much larger or much smaller in size, the same concepts will generally hold true and cost and benefit numbers can be scaled accordingly. Implementing Contract Life-Cycle Management (CLM) can deliver enormous benefits in cost savings, better liability management, better business oversight, better fiscal controls and improved corporate awareness. Knowing that these benefits await, it’s certainly nice to also know that your CLM investment can also be quickly recovered by a fast ROI.
See Part I of 2
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