Sales

How the Cost of Contracts Is Hindering Growth Goals

How Costs of Contracts Hinder Growth Goals-06

How much are you spending on contracts? If you can’t pull an exact number or have a habit of throwing contracts in with other overhead costs, it’s worth taking the time breaking down your expenses. Contracts are more expensive than you might think – which means they could be impacting your bottom line.

The good news, however, is that there is a straightforward solution. Many of the costs associated with contracts are attributed to outdated technologies and signing methods. Upgrading to more efficient contracting systems carries a relatively low upfront cost but is a reliable way to boost profitability.

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The True Cost of Contracts

According to data from the International Association for Contract and Commercial Management (IACCM), the average mid-complexity contract costs around $21,300. This number has risen by 38% just in the last six years, an increase of $6,900. For high-complexity contracts, the costs are exponentially higher, easily in the hundreds of thousands of dollars.

Taking into account the cost of contracts and the number of agreements a company handles, inefficiencies can cost around $5 million per day. That’s over $1.8 billion per year in preventable costs incurred during the contracting process.

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What Makes Contracts So Expensive?

It’s hard to imagine that a document just a few pages in length could cost tens or hundreds of thousands of dollars to produce. What makes them so expensive? As it turns out, the main resource that goes into generating contracts is time – and as we all know, time is money.

Here are the main areas in which contracting costs tend to add up:

They take time to write

You can’t just ask anyone in the office to sit down and write a contract. Your company has a legal team for a reason; these professionals undergo years of training and practice to develop the skills needed to draft legal documents. This specialized knowledge commands a higher salary, which comes out of company payroll.

They require specialized review on the buyer’s side.

Just like your company has a team of legal professionals to write contracts, your business customers will have their own team to review the draft you send. You may not see these billable hours on your balance sheet, but your customer will consider it part of the cost of purchasing your product or service.

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The review process is cumbersome.

Very few contracts are accepted and signed after the first draft. In fact, 70% of time spent on contracts goes towards the negotiation, review, and approval stages. However long it takes, you’ll keep accumulating expenses as the document is sent back and forth for edits until both parties are happy with it.

They slow down the sales process

When contracts take too long, customers are more likely to jump ship before the transaction is finalized. These missed sales accumulate contracting costs but fail to recoup them, losing money overall.

Contract Costs Hurt Your Bottom Line

Depending on the value of the sale, you could be losing a large percentage of your profits to contract costs.

For some high-value deals, putting resources into an airtight contract makes sense given the amount of financial risk involved. But those with a lower value and higher volume are better served by more cost-effective contracting methods.

You can’t afford to spend time and money drafting a contract for a deal that isn’t worth the expenditure.

How to Remove the Roadblock of Expensive Sales Contracts

Contracting doesn’t have to eat away at your profits. By eliminating redundancies and leveraging more updated contracting technologies, you can bring down the cost of agreements relative to the value of each sale.  

Use pre-approved legal terms

You don’t need to reinvent the wheel every time you make a sale, especially if you’re selling the same products or services over and over again as most companies do. All you need is a single set of pre-approved legal terms that can simply be personalized to fit each sale.

Related Content: How to Make Your Contracts Cost Less and Future-Proof Your Business

Automate processes when possible

How many times do your contracts change hands from first draft to signing? Each touch point adds time and cost to the process. With automated contracting, you can send agreements automatically at a specific point in the sales cycle or give customers the ability to generate their own document through self-service. Automation reduces the number of internal resources required to complete each sale.

Choose the right type of contract

Contracts aren’t one size fits all. Choosing the wrong type of contract creates inefficiencies that can be overcome with a more appropriate agreement. Clickwrap, embedded signing, and modern eSignatures are all options to consider depending on the volume and value of sales.

Separate standardized from personalized

There’s no need to waste time on personalizing contracts that can be standardized. On the flip side, standardized contracts should be avoided in cases where personalization is needed as they may not be legally sufficient. Know the difference and apply them carefully to the various contracts in your pipeline.

Boost Revenue Growth with Efficient Contracts

There is no reason for contracts to cost you thousands of dollars a day. Being strategic about your distinction between personalized and standardized contracts, choosing the right type of contract, and automating processes when possible can go a long way in reducing the overall cost of contracts and help you achieve your growth goals. To learn how to remove the other roadblocks in your sales contract process, check out our eBook, A Salesperson's Guide to Beating Growth Goals: Contracts that Close Faster.

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