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In a time when everyone is scrambling to find new ways to cut costs while increasing revenue, there’s never been more of a focused effort for legal teams to optimize everywhere possible. Starting with contract value leakage.
eBook Download: The Economics of Contract Design
Contract design mistakes can cost your organization up to $5 million every day. The International Association for Contract and Commercial Management found that the average cost of a contract has increased almost 40% over the last six years. That means your simplest agreements cost an average of $6,900 to manage, your mid-complexity agreements cost roughly $21,300 to manage, and your most complex legal terms can see price tags that rise into six-figure territory.
So, even if you’re helping sales bring in major business deals, it’s important to remember that the contract design and management processes required to get it out the door will account for a significant portion of the cost of the contract, and therefore contract value leakage.
No matter how you handle agreements, the truth is that managing legal terms takes time. And that means substantial costs that continue to rise the longer you take to finish the job. Inevitably, any contract brings friction into a transaction – so looking for a solution that completely eliminates this potential isn’t possible.
Your goal should instead be to build a contract design process that actively works to avoid disruption and delays caused by deal friction wherever possible. The creation, review, and approval stages are especially likely to create problems. Which is why they account for 70% of your total contract costs.
Beyond expensive negotiations, however, there are three primary things to consider for any legal department looking to avoid contact value leakage:
A few years ago, CLM tools were all the rage across legal departments. But today, they actually exacerbate the cost of contracts. In many cases, they actually cause more friction than they relieve.
CLM uses a linear process that always follows the same path: create, deliver, negotiate, review, approve, and store. That means one step can’t be started until the one before it is complete – creating the potential for costly delays that could even lose deals entirely. CLM often results in more time than necessary being spent at each stage, so a non-linear process (while maybe more complex than its counterpart) can actually be key to saving substantial time and money.
In most cases, there’s no need for legal to create terms and build a contract from scratch. So, why not standardize the bulk of your agreements to give sales and your customers the speedy, simple, and negotiation-free agreement process everybody wants?
A lengthy deal with overly complex language is one of the most common reasons a contract gets delayed – and ultimately costs your team far more than it should. Kingsley Martin, President and CEO of KMStandards, found that as much as 70% of the time spent on contract execution is dedicated to negotiation, review, and approval. But by standardizing your terms, you significantly lessen the amount of time a contract process takes, and therefore the costs associated with it.
WEBINAR: THE ECONOMICS OF CONTRACT DESIGN
Using standardized agreements has added efficiency side effects, too:
In today’s world of online shopping and instant gratification, a contract that takes weeks or months to go through the entire linear contract creation process is more likely to lead to lost deals than ever. Even if a buyer isn’t scared off by an inefficient deal, delays and wasted time costs your business a significant sum in the long run.
Related Content: Why Are Contracts So Expensive?
Deal fatigue is a threat to businesses everywhere, and can often be traced back to inefficient contract processes. But when businesses ask customers to take one-too-many steps or jump through unnecessary legal hoops to prevent liability, deal fatigue is bound to happen. Whenever a deal is lost, your business’ bottom line is impacted twice. Not only is the potential for new revenue lost, but finances are wasted by the time and legal resources invested into a deal that never happens as well.
Avoid contract value leakage in your enterprise contracts by rethinking the way you standardize and present your agreements. This means getting rid of contract lifecycle management tools that increase the cost of contracts, optimizing your sales process, and differentiating between contracts based on their value.
To learn more about how to properly manage the cost and value of your contracts, check out our eBook, The Economics of Contract Design.