Contract Management Basics: Preventing Revenue Loss

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How does contract management prevent revenue loss?

If you had to guess how much revenue you lose each year due to poor contract management, what would you say? 1 percent? Maybe 5%? Or maybe you think it costs you nothing to manage your contracts — after all, contracts are designed to make you money.

You might then be surprised that the average company loses almost 10% of its revenue each year due to poor contract management. It’s true: according to a study conducted by the Independent International Association for Contract and Commercial Management, companies could earn 9.2% more revenue each year if they were more diligent in managing their contracts. Not only that, but a better grip of the basics of contract management can also reduce expenses and overall risk.

The dangers of poor contract management

A company’s contracts are its No. 1 financial resource, both securing revenue and protecting assets. Yet, more often than not, contracts are only stored, not managed. Gathering information from contracts is often a manual process, requiring teams of lawyers or contract specialists to spend hundreds of hours researching and reviewing information from documents, and this does not happen generally only when absolutely necessary, such as when a business is involved in a large financial transaction that requires careful risk consideration. Not only is it time-consuming and inefficient, it’s also expensive and error-prone.

In recent years, many companies have moved from physical storage of paper documents to electronic solutions, apparently making them easier to access and assess. Although basic electronic storage makes it easier to find contracts, the same problem remains: how do you maintain visibility into contracts? This visibility is vital, because without it you face lost revenue, not only through money spent on search, but also through:

  • Lost or neglected contracts. When contracts are poorly managed, obligations are not met and the business relationship can dissolve. Unmanaged contracts can also expire, contributing to lost revenue.
  • Missed deadlines. Not only do contracts contain deadlines for obligations, but also for renewals. Failure to meet a supplier contract renewal deadline may result in payment for additional services, payment for services you no longer need, or loss of business.
  • Inaccurate reports. Without accurate information for analysis, the business may take excessive risks or miss opportunities to increase revenue.
  • Errors due to badly negotiated clauses. For example, contracts can be approved without conditions being met, increasing risk — and losses if obligations are not met.

In short, not managing your contracts in a way that you have full visibility into them and can carefully analyze and assess where you stand means you’re not taking full advantage of your greatest asset – and potentially leaving money behind. on the table.

The human factor

Lack of visibility isn’t the only contributor to lost revenue; employee error could also be a factor. Consider, if you will, the typical procurement process. This often involves several different file types (Word documents, spreadsheets, PDFs, etc.) being emailed and faxed between multiple stakeholders. Now imagine taking all the information in those documents and condensing it into actual contracts and invoices. What could go wrong?

As you might have guessed, a little. The risk of error when manually moving all this data is significant. In fact, research indicates that over 90% of all contract management errors are due to human error. And when you consider that a single typo or missed decimal point can equal thousands of dollars in lost revenue, it’s just too big a risk to take. Using contract management software eliminates much of this potential for error, as it can automatically read and aggregate data collected over the contract lifecycle. There is no need to manually enter data, saving time and money.

How contract management software can help you

Using contract management software, your business can easily manage contracts throughout their lifecycle, from initiation to execution and beyond. Contract management software handles more than the basics of contract management by turning documents into data, allows you to easily analyze risk from the start, ensuring your contracts meet compliance, performance and payment obligations , and that your business does not lose revenue through bad deals. Contracts can be created quickly and accurately using intuitive document generation wizards, which speeds up the contracting process and ensures transactions are not blocked by legal bottlenecks.

Perhaps most importantly in terms of revenue generation, contract management software ensures your business stays ahead of obligations and deadlines. A study by the Aberdeen Group1 found that companies that use contract management tools renew 69% of their contracts, more than double the rate of companies that don’t use contract management. Additionally, 66% of companies see better contract compliance when they use a contract management solution because teams are alerted to key milestones and deadlines, giving them the ability to track and follow up. ensure that all terms and conditions of the contract are met.

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