The Financial Case for CLMs: How Unmanaged Contracts Create Hidden Risks—And What Leading CFOs Can Do About It

It’s easy to think of contracts as strictly the General Counsel’s domain, but there’s one person in the organization who should care more about them: The CFO.

Your contracts are the foundation of your business’ financial commitments, making them an important cash flow and risk management tool. Whether you’re buying, selling, or hiring, your contract represents the financial performance of the future. But many organizations lose visibility into their financial obligations after a contract is signed. What’s worse, organizations lose an average of 11% of post-signature value, according to WCC. 

This is all hiding in your contract data.

That’s why we sat down with John Beringer, Managing Director at Spaulding Ridge, to discuss how unmanaged contracts create hidden risk and what leading CFOs are doing about it.

Your contracts are a window into your financial commitments

If you know where to look, your contracts can give you key insights into your finances. But the problem is, even if your contracts are in a single repository, they remain static, unstructured files you can’t search. On top of that, historical negotiation details are somewhere in email or Slack threads or on files on an individual’s computer. To find the hidden risk requires detailed, manual work to understand compliance, overall financial commitment, or important upcoming milestones like renewals.

A CLM can change all that. 

“Without a CLM, you have obligations out there you know nothing about,” says Beringer. “For example, many CFOs come to us because they’re in the process of an M&A transaction, and it’s not an accident that a core part of the due diligence process is to understand every contract that exists within an organization. Without this, you don’t have a complete picture of the risks you’re undertaking, and more importantly, you can’t make good decisions to mitigate those risks.”

Why CFOs make a CLM a priority

A CLM takes a holistic approach to the entire contract, so you can automate management processes, and more importantly, extract business intelligence from your contracts instead of letting them languish over time. This means searchable, traceable, and actionable clauses, obligations, changes, and approvals that your team can use to get a better picture of risk, like your supplier exposure or whether or not you’re on the hook for a price increase in the following year.

1. A CLM brings a new level of financial insights to your reporting

“A huge part of the value of the CLM is the data you can receive,” explains Beringer. “This gives you a complete inventory of your contracts so you can understand the financial obligations that exist within each of them, but also the patterns that exist across the organization. You can’t make good decisions as a CFO without the right data.”

Going back to that M&A example, think about your termination clauses. When you acquire a business, you know that every revenue stream is tied to a set of contracts. “This is where termination clauses and M&A clauses are very important,” Beringer emphasizes. “If those contracts can’t be moved to a new company, for whatever reason, you’re missing out on revenue and potentially a big reason why you wanted to acquire that business in the first place.”

Another scenario that keeps CFOs up at night is bankruptcy. If a supplier or customer goes out of business, will you ever see any of those paid obligations? “When something like this happens, it impacts your ability to collect revenue, and it’s just one example where you might be creating a forecast without understanding all of the data points that should go into it,” says Beringer.

2. A CLM helps manage hidden costs

The other side of the financial equation? Costs. 

Take auto-renewals, for example. “A contract with an auto-renewal clause commits you to years of payments, and if you’re not actually using it, or you have no effective way of tracking that, you’ve got cash going out the door you’re getting no value from,” says Beringer. “A CLM is so important to an effective procurement function, which often falls under the CFO’s purview.”

With a CLM, not only can you easily see your upcoming auto-renewals, but you can create reminders and flags to make sure your team is reviewing each one with enough time to re-negotiate or change. Adds Beringer, “Being able to highlight them in time really matters, because some suppliers take 90 days or more to get through the contracting process, so it changes the math on whether or not you’re able to receive that value on a realistic timetable.”

3. A CLM integrates with tools you’re already using every day

Where a CLM can be really valuable to a CFO is in its connections to other systems—specifically, a finance team’s ERP or procurement management software. 

“The data generated in a CLM can easily be incorporated into the systems of record you’re already using every day, which makes that data much more valuable,” says Beringer.

How a CLM makes a CFO’s job easier in real life

Beringer recalls a client that after adding a CLM, realized they had several untapped revenue streams available they’d overlooked. Says Beringer, “This client wasn’t enforcing late fees for their customers. Now, they’re not going to track down every single customer for something minor, but simply by being able to better track which customers consistently paid late, they could have more productive conversations and get ahead of the issue, which ultimately generated eight figures in net new revenue.”

Learn more about how to realize more savings and better manage risk with a CLM or chat with a member of our team to see it in action. 

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Ironclad is not a law firm, and this post does not constitute or contain legal advice. To evaluate the accuracy, sufficiency, or reliability of the ideas and guidance reflected here, or the applicability of these materials to your business, you should consult with a licensed attorney.