The True Cost of Contract Value Leakage

Contracts form the backbone of all business transactions. As such, it’s important to maximize the value they can bring, but most organizations don’t realize that contracts often fail to deliver their intended value. They may even lose value over time, in a phenomenon known as contract value leakage.

Unfortunately, most organizations don’t know about contract value leakage, or they think it’s unimportant. Although one or two contracts experiencing value leakage doesn’t seem like a big problem at first, over time it can stunt revenue growth considerably. 

Contract value leakage is what happens when the expected value of a contract is more than the actual value that it realizes during its lifetime. 

Contract value leakage is typically caused by poor contract management, like when organizations forgo ongoing diligence. It’s a common occurrence, since many companies fail to consider contract value leakage when creating strategic partnerships with customers, suppliers, and business partners. According to the International Association for Contract and Commercial Management (IACCM), companies lose an average of 9% of their earnings due to contract value leakage. 

To capitalize on these missed opportunities, organizations should start thinking about contract value leakage on a regular basis. The first step is to see if there are any shortcomings with your contract management methods. The IACCM has identified the main areas of contract management weaknesses leading to leakage:

• Disagreements over contract scope
• Performance failures caused by disagreement over what needs to be done
• Weaknesses in contract management
• Performance issues due to over-commitment
• Pricing disputes
• Inappropriate or weak contract structure
• Subcontractor issues.

You may also experience contract value leakage due to the following effects of poor contract management:

• Missing deadlines or milestones
• Spending too much time on projects
• Failing to adjust prices according to scope creep or other changes
• Not using or under-utilizing their existing contract management tools.

To make the most of your contracts and prevent contract value leakage, follow these steps:

1. Make sure you understand the contract.

Contract clauses are meant to express the intent of the parties, but oftentimes, one or both parties don’t truly understand what the contract says or what the scope of the contract is. There may also be disagreements about deadlines, contract structure, the use of subcontractors, and liabilities.

To make sure everyone understands the contract, establish a collaborative and communicative atmosphere when negotiating with the other party. Consider adopting technology that allows both parties to edit, redline, and comment on a contract in real-time. This will make it easier for both parties to fully and comfortably express themselves.

2. Ensure you are working efficiently.

Your organization may be experiencing contract value leakage if you’re not working as efficiently as you think you are. To determine whether you are working efficiently, ask the following:

• Are there too many people working on certain types of contracts?
  • Is it necessary to have so many people working on certain contracts? Is there a more cost-effective way of assigning work to people?

• If you answered yes to the first question, are these contracts high value or low value?
  • High-value contracts are contracts that bring in a lot of revenue and opportunities, while low-value contracts don’t bring in much. To maximize revenue and prevent contract value leakage, you need to allocate more resources to high-value contracts and simplify the process of drafting and executing low-value contracts.
  • You can simplify the process of creating low-value contracts by using or standardizing templates. Once Legal has approved templates for general use, you can delegate low-value contracts to non-Legal staff. Legal costs more and demands higher salaries, so only involve them when it’s necessary (i.e., for drafting and negotiating high-value contracts).

• How many times have you been redoing contracts post-award?
  • Ask yourself how you can avoid editing or changing contracts after they’ve already been signed. Changing contracts post-award messes with your revenue recognition, eating into your bottom line.

3. Invest in cost-effective contract management tools.

Finally, you need to invest in cost-effective contract management tools.

Traditionally, it took a lot of time and expertise to answer questions like “What’s the renewal date on that business associate contract we signed three months ago?” This is especially true if you’re still using traditional contract management methods, such as storing them in physical cabinets, thumb drives, and hard drives. However, even if you’re using a CLM software, you may still experience difficulties putting your contract metadata to use. 

Ask yourself the following questions to determine if you need a CLM software upgrade:

• How long does it take you to find contracts after you’ve executed them? Do you hesitate every time someone asks you a question about a signed contract  Do you have to spend hours to locate the contract on your hard or cloud drive? 
  • If that’s the case, you need to invest in an advanced CLM software that gathers all of your contract data into one searchable hub. With just a few clicks, you’ll be able to locate answers to even the most specific of questions.

• How long does it take you to answer questions about renewal dates? 
  • Are you aware of renewal dates for different projects and contracts, or do they come as a surprise that cost you time, money, and energy that you never intended to spend?
    • If renewal dates often surprise you, it’s time to get a CLM tool that sends you alerts for upcoming key dates.

If you don’t have a CLM solution or your CLM solution isn’t up to snuff, consider getting Ironclad Editor. Simple yet powerful, Ironclad comes armed with key collaborative features that help you address the causes of contract value leakage.

Data Repository

At the forefront of our arsenal is our Data Repository, which allows you to save and search for important contract data in real-time. It also allows you to import and gather all of your contracts and contract data into one searchable hub, making answering contract questions quicker and easier than ever. 

You’ll also be able to create:

• Intelligent alerts for upcoming deadlines
• Cross-system integrations
• Process automation

Workflow Designer

Ironclad also comes with Workflow Designer, a self-serve tool that doesn’t require coding skills to use. 

With a user-friendly drag-and-drop interface, Workflow Designer lets anyone—whether they’re from Legal, HR, or Sales—launch templates and approval processes to prevent contract value leakage. All you have to do is create and upload a template, tag fields that need to be filled, and add signers and approvers. It’s that simple — you’re done.

All of our templates are up-to-date and feature guardrails to ensure 100% automatic contract compliance. As such, anyone can use them. Once Legal creates and approves a template for low-value contracts such as privacy policies, you can delegate these templates to non-Legal staff. That way, you’ll be able to cut costs and give Legal more legroom to work on the high-value contracts that actually require their input, such as mergers and acquisitions.

Ironclad Editor

Finally, Ironclad comes with a sleek and intuitive editor. 

In contrast to other CLM platforms, which often force you to choose between desktop plugins and in-browser editing, Ironclad Editor combines the best of both worlds — it lets you enjoy the strong drafting power of Microsoft Word with the collaborative capabilities of a platform like Google Docs. All communication is done in real-time, so you won’t have to wait hours or days for the other side to get back to you. This means that if you have any questions about the language or scope of the contract, you can instantly message the counterparty for clarification.

As in Google Docs, you can: 

• Redline, accept and reject changes made by the other side or by your internal teams
• Instantly loop in colleagues with internal comments and @mentions.

Contract value leakage is a common problem that many organizations are unaware of. However, it’s important to keep an eye on it, since it can slowly eat up your realized revenue. 

As such, you need CLM software like Ironclad to mitigate and prevent contract value leakage. With powerful tools like Data Repository, Workflow Designer, and Ironclad Editor at your disposal, you’ll be better equipped to tackle the root of contract value leakage: poor contract management.

Try Ironclad for your contract management today.