Nowadays, as much as 80 percent of legal professionals function without the help of automation. In fact, less than 10 percent have fully digitized contract management systems (CMS). So, even though the majority of legal departments have at least digitized their individual contracts, there’s plenty of room for improvement in their contract process and methodology. Those insights into how contract management is handled by today’s companies are offered in ContractPodAi’s 2020 research report, “Contract Management Usages and Practices.”
As a result, more than 35 percent of the North American lawyers surveyed said they still create and manage contracts, themselves. Twenty-eight percent said they create contracts but had legal staff members manage them. Nearly 20 percent said legal operations, whether contract managers or paralegals, maintain agreements. And about 10 percent said they leave all of this work to junior lawyers. In at least two reported cases, “lawyers create the contracts; business people maintain them.”
As such, more than two thirds of respondents revealed they spend 40 percent of their time creating and managing contracts. Another third of respondents said they spend even more time on these particular tasks. And nearly 75 percent of lawyers surveyed estimated they spend at least a fifth of their time on entirely new contracts.
The good news for the legal sector is the majority of lawyers – about 90 percent – are open to AI and automation. In fact, nearly half of the lawyers who participated in ContractPodAi’s recent study said they’re interested in investigating, adopting, and implementing an AI-based contract management solution, in particular. At the very least, lawyers acknowledge that AI and automation allow legal teams to know exactly when there’s a termination window or when contracts are set to expire. What this implies is a need for a shift in contracting activities, however fundamental.
Nevertheless, many general counsels (GCs) and legal teams have yet to include these solutions on their actionable lists. In the next year or so, only companies with more than $500 million in annual revenue are more likely to purchase such a system. That means legal teams in companies are still missing opportunities to digitally transform the ‘cost center’ – that is the legal department – into an absolute ‘value center.’
Now, here’s how to get senior leadership to buy into the acquisition of user-friendly contract management solutions – to better prepare, review, approve, execute, store, and report on agreements.
Benefiting from AI-based contract management solutions
In more than half of all companies today, senior leadership teams approve the budgets for system acquisitions within legal departments. Perhaps they would fully support CMS acquisitions, in particular, if they were made aware of the increasing value of AI-based contract management software. The benefits of a CMS, according to 85 percent of lawyers, range from providing consistency from lawyer to lawyer to finding terms that were used during the creation of contracts. Typically, contract management software:
*Automatically alerts lawyers to the deadlines and timelines associated with contracts
*Allows lawyers to work on contracts seamlessly from home or any out-of-office location
*Significantly reduces the number of errors in contracts
*Greatly improves the quality of contracts that are generated and maintained
*Frees up legal staff to complete other important work
*Saves money for the legal department in the long run
Above all else, though, 55 percent of lawyers surveyed by ContractPodAi said a good return on investment (ROI) is the strongest benefit.
Building a business case for contract management systems
General counsels (GCS), corporate legal teams, contract managers, and administration professionals spend considerable time and effort on contract management. But they seldom demonstrate a clear contract management ROI to corporate executives within their organizations: chief revenue officers, chief purchasing officers, chief financial officers, chief information officers. In other words, they fail to show its maximum value to the business. Consequently, executives are blinded to the significant benefits of a reliable process and system, instead viewing contract management as a complete administrative cost.
Let’s face it, contract process maintenance, contract compliance, and error reduction, are seldom top-of-mind when budgets are drawn up. Accordingly, contracting professionals need to be able to show a solid ROI for a contract management solution that facilitates these areas.
“Many departments really struggle with developing the business case for contract management systems (CMS),” says Paul Branch, COO and CTO of World Commerce & Contracting (World CC). “You really have to get C-suite, legal, procurement, sales, and finance teams all singing together from same hymn sheet.”
Essentially, there are two sets of benefits to consider when articulating the value of a CMS and developing a business case. Cost-to-serve benefits help medium-sized organizations make a business case almost immediately. Cost-of-quality benefits, on the other hand, are more likely to garner the attention of C-suite members.
Calculating cost-to-serve benefits
The cost to serve (CTS) is based on actual business activities and annual costs that have been incurred. For this category of benefits, simply keep in mind the increased deal velocity and efficiency that can come about through improved standards.
These days, various pitfalls of contracting contribute to an average value erosion of 9 percent, according to World CC. These include protracted negotiations resulting in competitive exposure and delayed revenues, and a failure to engage stakeholders resulting in misaligned interests and future opposition. A lack of governance also results in performance management issues, and terms and negotiations too focused on risk allocation result in economic loss. Finally, the limited use of contracting technology leaves organizations with major inefficiencies and even less revenue.
Developing new contracts is an expensive endeavor, too, in the absence of a reliable CMS. Earlier this year, World CC research revealed the average cost of processing and reviewing everyday contracts is now $6,900 – an increase of 38 percent over the past half-decade. And depending on their complexity, individual contracts can reach as high as $49,000 – with many complex agreements costing hundreds of thousands of dollars.
Calculating cost-of-quality benefits
The cost of quality – or COQ – is based on the total costs of bringing products or services up to standards. For this category of benefits, just think risk controls and mitigations, reduced disputes, and improved customer relationships.
As stated above, the average company loses more than 9 percent of their bottom line due to ineffective contract management. Now, consider a company generating $1 billion in revenue every year. Estimate that roughly 10 to 20 percent of the topline revenue will convert to the bottom line. What this means is that this typical company will more than likely net about $100 to $200 million of bottom-line revenue. If this organization loses roughly 9 percent of bottom-line revenue due to poor contract management, that amounts to $9 to $18 million. Essentially, a contract management professional can return up to $18 million to the bottom line by implementing an effective CMS and driving its adoption. How is that for revenue generation – coming out of what is traditionally perceived as a cost center?
Consider that a reasonable contract management solution may cost between $100,000 and $200,000 in annual fees. The bottom-line ROI, then, is the net at-risk revenue saved by using the CMS, divided by the annual cost of the CMS. In other words, for every single dollar invested in a contract management technology, expect to generate anywhere between $45 and $180 in recovered net revenue. Stunningly, that’s money that would have been lost due to poor or inefficient contract management practices.
Framing AI-based legal tech properly
When it comes to the digital transformation journey, contract management professionals are still “dipping their toes in the water,” according to Branch. So, it’s not necessary to oversell the “wonders of artificial intelligence and natural language processing,” he says. Instead, frame AI technology as an important tool that makes a CMS – and your contract management team – more efficient and effective.
Either way, Branch views CMS adoption and implementation as a ‘do-or-die’ scenario. He equates it to a train leaving the station and slowly gathering momentum: “if you don’t jump on board now, you will get left far behind.” But if there’s an investment by senior leadership, and a culture change around people and processes, you will have the opportunity to compete in any industry.
Besides, there are fewer barriers to entry for GCs, legal teams, contract managers, and administration professionals now. They’re not faced with single, monolithic platforms anymore. If senior leadership teams considered this, along with a contract management solution’s ROI, then they wouldn’t perceive the purchase of a new system as a huge investment. In fact, they might even see it as an attractive proposition.
Legal professionals could then take the first steps in their digital transformation journey. They could adopt and implement AI-infused solutions, and simplify the complexities of day-to-day contract management. They could acquire much-needed data and insights and, yes, have much more time for those higher-level, strategic projects.
Deirdre Leone is the VP of Sales, North America at ContractPodAi. She is responsible for client acquisitions and builds relationships with key stakeholders of global corporations. Read Deirdre’s full executive bio.
