Contracts secure and protect assets and, while doing so, should help organizations generate revenue, not lose revenue. Regardless of the intent of contracts, lost revenue is a significant challenge for contract managers. CobbleStone launched the “Mastering Contract Management Blog Series” to address the problems that contract, legal, and procurement professionals face when managing contracts. In the fourth blog post in the series, lost revenue is discussed.
What are Revenue-Losing Contracts?
Revenue-losing contracts are contracts losing revenue through contract failure. Contract failure has many causes that fall into three main areas; increased risk, lack of compliance, and missed opportunities. Research shows that the average contract failure rate is 10-15%. Don’t rest on the laurels of an average contract failure rate because 10-15% of hundreds, or thousands of contracts can lead to millions, or even billions of dollars in lost revenue.
See how quickly lost revenue can add up with this formula where x represents annual contract volume, y represents average contract value, and z represents average contract failure rate.
(y*x) z = LOST REVENUE
If your average contract value is $50K, and you manage 200 contracts per year with a 10% failure rate, you stand to lose $1M each year!
How Do Contracts Lose Revenue?
It’s evident that lost revenue can add up quickly; however, in many cases, contracts aren’t directly responsible for lost revenue. The culprit is how contracts are managed. Research reveals that more than 8% of yearly revenue is lost due to inefficient contract management processes. Beyond dollars and cents, lost revenue can lead to lower profitability, underperforming stock, decreased market share, and less capital for investments, growth, and innovation.
Does your contract management process resemble these scenarios?
- Contract Visibility: Your team spends too much time searching for contracts, faces confusion over document versions, and struggles to track the status of contracts. Time has been wasted, and bottlenecks have given your potential clients time to find the solutions to their problems with your competitors.
- Contract Management System: You’re using a manual contract management process with spreadsheets and emails that may have worked when your department managed 20 contracts per year, but it’s clear as your organization grows and your contract volume increases your contract management strategy won’t scale.
- Contract Performance: Your contract performance data requires manual collection and review that is prone to human error. Manual contract management processes and electronic document storage don’t support the contract reporting and analytics necessary to drive revenue.
- Contract Risk and Compliance: You lack the visibility and automation to ensure obligations are met, making you fall behind and not meet contract terms, resulting in penalties and fines.
- Sell-Side Contracts: Your sales process is broken. The sales team spends too much time drafting contracts that get held up in legal review. Your sales team is struggling to build their pipeline while nurturing contracts to close. They miss key dates, renewals, and other revenue-boosting opportunities.
- Buy-Side Contracts: You miss key dates and milestones leading to unintended contract renewals or cancellations that cause service/supply chain disruptions or that lead to less favorable terms/volume discounts.
Stop Contract Revenue-Loss
To reverse the pattern of revenue-losing contracts, you need to improve your contract management process. Spreadsheets, shared drives, and email won’t suffice. A contract repository alone is not the solution. To stop revenue-loss, you need to manage the entire contract lifecycle. Contract lifecycle management can help you:
- Reduce cycle times, taking you faster from contract generation to signature to execution.
- Take advantage of opportunities with a consistent renewal, negotiation, and cancellation process.
- Draft contracts faster with approved templates and clause libraries.
- Complete tasks on time, meet obligations, and speed up the review and approval process
- Control document versions, updates, approvals, and permissions history, creating an audit trail.
The path to achieving success with the five areas outlined above, and more, is advanced contract management software. Research shows that 12% of an organization’s total costs may be incurred from contract management and administrative tasks. Surveys report that organizations using contract management software can reduce annual contract management expenses by up to 50%.
Reduced incurred costs and reduced annual contract management expenses are a way to combat lost revenue. Contract management software can help prevent revenue-loss by providing advanced features that support your contract lifecycle, including:
- A secure contract repository with text searching and status tracking capabilities
- Automated calendar and email alerts to ensure tasks are completed and milestones are met
- Intelligent workflows to automate contract reviews and approvals
- Electronic signatures to make it convenient to obtain signatures faster
- Contract management reports to provide transparency into contract performance
Take control of your contracts so you can stop losing revenue. CobbleStone’s Contract Insight™ is an award-winning, user-friendly, fully configurable contract lifecycle management solution that has helped thousands of users shorten contract cycles, decrease risk, increase compliance, and find more opportunities with the contracts they manage.