Understanding Contract Management Costs

Understand Your Costs

Have you ever considered how much your organization spends to manage its contracts?

Don’t just think about sales contracts. Think about ALL documents you use to engage another party such as NDAs, Teaming, LOIs, LOAs, Consulting, Subcontracting, License & Technology, Sales, Purchase Orders, Offer Letters, other HR documents etc.

You might say

  • “We have no costs, we use Microsoft Word, Docusign, Outlook and Share Point.

  • “Our contracts are cookie-cutter templates so we really don’t spend much at all.”

  • “We have a contracts department so the cost of that department is the cost of our contract management”

If this is your thinking, continue reading for five minutes and prepare for a shock. This article will open your eyes to the real costs of a manual contracting environment.

The total cost of contract management equals the direct and indirect allocation of resources attributable to contract management tasks.

Screen+Shot+2018-12-23+at+10.51.00+AM.jpg


Seems reasonable, right? Now let’s dig deeper for a closer look.

Contract management effort and tasks

The following shows an example of an organization’s allocation of direct vs. indirect resources towards the contract management lifecycle. While this will vary based on an organizations, size, structure and industry, you can see that contract management touches about every function of an organization during its lifecycle.

Screen Shot 2018-12-23 at 11.04.50 AM.png



Now, consider adding contract volume to the mix. You’ll find that the direct and indirect man-hours really begin to add up!

Think about this: Typically, B-to-B transactions are managed in-house and are only outsourced for challenging legal issues because of the higher effective rates charged by law firms. It’s simply cheaper to do it in-house. HOWEVER, the effective man-hours spent by the organization (whether outsourced or in-house) are still the same! Even if you’re paying lower rates to in-house staff, you’re still paying!

To summarize, the primary cost of contract management is in the direct and indirect salaries for anyone who has an interaction with a contract.

If you haven’t automated your contract environment, you’re paying even more!

When the contract management process isn’t automated, team members are forced to execute a series of manual, decentralized and often divided processes using a variety  of disparate tools to accomplish each task. This costs additional time, and time = $.



Screen Shot 2018-12-23 at 11.06.34 AM.png

Real-life manual processes/occurrences “bottleneck” and add unnecessary friction to the entire contract management lifecycle are discussed below. GOOD NEWS: These are problems that are eliminated with Contract & Transaction Automation! See below!



Screen Shot 2018-12-23 at 11.09.29 AM.png

Problems with manual contract environments

Email

In a non-automated contract environment, email is utilized as a means for delivery, receipt, negotiation, review and general communication throughout the contract lifecycle. Below  are a few problems Email presents in the Contract Lifecycle. The good news is that Contract & Transaction Automation eliminates all of these problems!

  • Forgot to CC / CC Too Many. Because email is decentralized, it’s imperative that the user remembers to CC the right people when appropriate. At times the user will forget to copy the right person which creates a bottleneck in the review and negotiation process that could go on for days. To make matters worse, often a user won’t know who they should copy. As a result, they copy distribution lists and send to numerous people who don’t need to know. The result is many people having to read an email that has nothing to do with their role and thus it distracts them from focusing on their tasks at hand. This is a huge waste of resources and happens to be my biggest pet peeve.

  • Sent to Wrong person. Microsoft outlook does a great job of remembering who you send emails to, and with the striking of a single key, can pre-populate the recipient of a new email. Unfortunately, many people we interact with have the same first or last name, and as a result, contracts are easily delivered to the wrong person with no way to reasonably recall them. Sending a contract to the wrong person is not only a security issue, it can delay a process for days until the sender realizes the mistake or someone lets them know.

  • Searching / Email Threads. Do I really need to explain this? Prior to automating our contract environment, I spent way too much time sorting and searching through email threads to figure out statuses and versions, discovering if someone else had a copy, and so forth. Lots of wasted time here.

Drafting:

  • Template Management. Which template to use? Too often, users realize they’ve been using an older version of a template that was recently authorized by their legal team. This can cause complications and days of delay in the drafting and negotiation process.

  • Track Changes. Many people use Microsoft Word’s “track changes” functionality to show changes between versions during drafting and negotiation. Unfortunately, Word also gives you the ability to accept your own changes before any other user sees the document. It’s imperative that users compare the newest version they’ve received against the most recent version they’re familiar with. Not taking this step can result in delays and confusion.

  • Comparing Versions. When comparing versions, the user must

  1. Ascertain the right versions to compare

  2. Download them from the company’s network drive, the cloud, or email into a local machine

  3. Navigate through a personal filing structure to identify the same files to compare

  4. Finally, click “compare” and then review. This process can take 10 to 15 minutes for comparison only once they’ve identified the right contracts to compare.

Repository.

Repositories are one of the biggest problems in a manual contract management environment. This is because storage of the most current version shifts from one repository to another during the lifecycle on devices such as:

  • Cloud

  • Network

  • Thumb drive

  • Email servers

  • User’s local Email

  • User’s local machine

This kind of storage complicates the process because it requires the user to understand the all of the repositories “in play” and do the following:

  • Be aware of all new versions either drafted, sent to, received from or executed with the other party and their locations

  • Know where to find the version they are looking for

  • Know the status of each version

  • Understand the policy for naming convention

  • Understand the policy for uploading to and downloading from the right tree structure

  • Strictly follow the policy

As a result, version control issues become inherently problematic, including but not limited to

  • Negotiation Version Control

  • Drafting Version Control

  • Template Management

As an organization scales, these manual procedures governed by policy fall through the cracks and eventually collapse, especially when existing team members leave their department and new team members join. Without automation, there can be no cost-effective continuity of contract management for scaling organizations.

Negotiation

Status. So what’s the status of the deal? That’s what we all want to know. Typically organizations track this by looking into their CRM and they see that “it’s in legal” or someone maintains a spreadsheet of conversations and meetings held with team members to ascertain exactly what’s going on with the other party.

  • This time-consuming effort is a result of decentralized communication, delivery and receipt of contracts via email.

  • In instances where you have a gate keeper who chooses not to CC other team members, negotiations and deal momentum can come to a complete standstill when this user is on vacation or out of the office. This is a huge obstacle to getting a deal done, and one that can cost days or weeks of delay.

Review & Signoff. Review and internal signoff typically involves one or two of the following processes that can be time-consuming for everyone involved:

  • Corralling all of the reviewers into a meeting simply to ascertain if they have any issues

  • Searching through numerous email threads to ascertain the same.

A manual process typically require periodic reviews as opposed to real-time, further delaying time to close.

Numerous Signature Tools. Most available signature tools are neither compatible nor secure, allowing pretty much anyone in your organization or the other party to sign on behalf of the respective organizations. As a result organizations must take extra precautions by checking to ensure that the individuals who signed were in fact authorized to do so for both parties.

Summary

From endless email threads to duplicate versions to simply knowing the status of a deal, a manual contract management environment is cluttered with inherent problems that drag down productivity and your bottom line.  See more here.