sales velocity

Why Are Contracts So Expensive?

Why Are Contracts Expensive-08

Contracts are not only tedious, but often, expensive, and can eat a significant portion of a business’ revenue if not managed correctly. In a time when most businesses are trying to figure out how to rapidly recover their revenue or spend less money, the focus is on optimizing all areas of business. 

In fact, contractual inefficiencies can cost up to $5m per day. 

According to the International Association for Contract and Commercial Management (IACCM), the average cost of contracts has increased 38% in the last 6 years. That pans out to about $6,900 dollars more per contract. From start to finish, contracts of mid-complexity cost about $21,300, while highly complex contracts can cost somewhere in the hundreds of thousands. That means that even when business deals bring in a lot of money, a big portion of it will go out the door in the contracting process.

Related: VIDEO: The Economics of Contract Design

The Cost of Friction in Sales

However you slice it, contracts throughout your business and particularly in your Sales department will be expensive unless you optimize them. 

Contracts naturally introduce friction into whatever transaction is occurring: they are legally binding agreements between two parties that usually end in an exchange of money. The more friction you introduce into the signing process itself, the greater the cost. Not only in creating the contract, but in the review and approval stage, which account for 70% of the total contract cost. Additional costs can be found throughout the negotiation phase, which can at times cause you to lose business.

There are several reasons why your current process for handling contracts is costing your business a lot of money.

Related: Sales Velocity: Identifying Bottlenecks and Improving Inefficiencies One Variable at a Time

Contract Lifecycle Management tool makes contracting too linear

Contract Lifecycle Management tools, while innovative in the contract technology space years ago, can create more friction in the sales process than they relieve. Using this system, all contracts follow the same path: Create, deliver, negotiate, review and approve, store. 

Screen Shot 2020-06-15 at 3.23.30 PMThis means that before one step can be completed, all the others need to be done as well. That is, before the contract can be reviewed, it needs to be negotiated, and before it’s negotiated, it needs to be delivered. As a result, more time than necessary is spent at each stage of the process, thereby racking up quite the bill. A non-linear approach to contracting can save time and money in execution.

Complex Contracts Take Away Crucial Time from Sales Teams

Chances are, most of your sales agreements are standardized agreements that ought to be presented with no real need for negotiation. One of the key measurements used to determine the complexity of a contract is its length and the language within it. This is also one of the most common causes for delays and negotiations in the contracting process. 

According to Kingsley Martin, president and CEO of KMStandards, 70% of the time spent on contract execution is spent on the negotiation and review and approval stages. This means that your contract lifecycle management tool - and its linear process of contract execution - is not doing anything to reduce the expenses of your contract.

Related: How the Acceptance Mindset Can Help You Run an Efficient Organization

When a contract is too long and mainly written in “legalese,” that increases the complexity of the contract. More complex contracts have numerous points of inefficiency from creation to signing:

  • More time is spent writing it 
  • Reviewing it will require specialized personnel, not necessarily your buyer
  • More material, especially intense legalese, increases time to redline
  • Making changes in accordance with those redlines will take time, again from specialized personnel.

More people reading it, more time spent reading it, and people with higher pay scales being paid to read it. Most of these steps are born from unnecessary complexity and inefficient processes.

Imagine if contracts were standardized upfront and Legal gave the okay for certain addendums. Imagine if those contracts did not include any unnecessary legalese or unnecessary clauses. Suddenly, your contracting process looks a lot different, and so does your cost structure. 

Delayed or Lost Deals

Apart from the costs associated with the process itself, another cost factor can be the revenue lost from deals that fall through from inefficient contract processes. When prospects or late stage opportunities have to do too much negotiating or spend too much time reviewing and waiting for internal approval, they are more likely to drop out of the deal altogether. 

Taking forever to complete a contract can cause deal fatigue. The process that is supposed to prevent liability will end up causing you to lose the deal altogether, thereby wasting the sales person’s time, the money spent to attract the deal, and the time spent trying to figure out the contract. 

Related: INTERVIEW: The Transparency Sale author Todd Caponi Shares How to Shorten the Sales Cycle and Increase Velocity

The last thing you want after having a potential client agreeing to move forward with the deal is to then spend hours or days putting together the contract. Use the momentum created throughout the sales process for quick and effective signing. Instead of taking days to write the agreement, review, negotiate, and sign, have agreements ready to roll whenever you need them. Capitalize on the experience you provided during the sales process. 

Apart from the obvious efficiency gains, standardization in the sales process has other benefits. Ensuring a standard, repeatable, and scalable process that 1) enables sales velocity while 2) preventing them from going rogue is important to a maturing business.

Contract simplification is now a business imperative. To learn more about how to approach this, read our eBook, Making Contracts the Key to Unlocking Revenue Recovery.

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