Contract Management Systems and a More Profitable Business

Thursday, March 18, 2021

Contract management plays a vital role in saving money for your business over the long-term. Unfortunately, contract management is often a major problem for businesses working with other companies. A small accounting error can quickly add up over time and result in significant costs. Investing in contract management software is one way to overcome this issue and help transform your organization into a much more profitable business.

Contract Management Process and Solutions

A recent Bain & Company survey found that only 16% of executives had confidence that they had the right system in place to audit clients to ensure they stay in compliance with their contracts. Understanding how to address business revenue problems due to a weak contract management system is only further amplified with the coronavirus crisis. Many companies in the business to the business sector will see minimal or no growth for the foreseeable future. Noncompliance problems with client contracts can also increase, as many of these customers are already asking for discounts.

 Unfortunately, legal teams often agonize over the details of a contract before it goes into a drawer where it's not easily accessed or tracked. Many times companies miss out on seat licenses, stipulated price increases, and fail to modify prices due to fluctuations in costs.

 Ultimately, this results in B2B companies losing out on a significant amount of money each year.

 Increased Business Revenue

Looking at ways to improve contract management can often result in 100 basis points of additional revenue, which is essential in improving the bottom line. Smart contract management will keep paying big dividends once the economy bounces back from the pandemic. Optimizing contracts will often provide at least 100 basis points in extra revenue. These benefits can begin almost immediately, such as manually making an effort to improve the enforcement of existing contracts.

Finding value from existing contracts isn't possible without a robust fulfillment and strong contract structure. Different parts of a company are responsible for maintaining a contract management system. Using contract management software is a great way to keep things organized and ensure everyone is on the same page with each other.

A mature organization throughout each area will include detailed templates for each new contract while also including contract lifecycle management software. Using a dashboard is helpful in developing contract management solutions to improve annual business revenue.

Organizations can further improve contract lifecycle management capabilities by considering a few important steps: 

  1. Organize Data: Create a single source of information for all client contracts, with simple access for relevant teams.
  2. Evaluate the Opportunity: look at revenue leakage for each contract while also developing a plan to take care of gaps once conditions become more stable.
  3. Use Digital Tools: Using the right contract management software and digital tools is essential in creating a sustainable process.
  4. Discuss New Expectations With Sales: Sales representatives need to understand the importance of creating compliant contracts by using the right tools and processes.
  5. Hold Everyone Accountable: Always holding people accountable by monitoring and enforcing the terms of each contract. A contract management system allows you to track performance and find ways to improve returns on contract concessions and client investments.

 The recent experience of a tech company illustrates the importance of a contract management system. The service contract allowed customers to download software upgrades, but it also enabled client access to all software offered by the company without paying extra for it. For example, a contract made it possible for clients to upgrade the existing product while also obtaining new copies of additional software.

The tech company used a segmented approach to enforce the new rules of a contract, which resulted in the organization capturing over $300 million in extra revenue while also identifying over $500 million that was already entitled. 

As the tech company's experience highlights, contract enforcement needs to be weighed against maintaining a strong relationship with each client. B2B suppliers can find ways to obtain their fair share of value without causing any long-term damage to customer loyalty. Ensuring that clients are aware is a good place to start, as many customers may not realize that they are not in compliance. Penalties for past noncompliance violations can be waived if the supplier provides a notice on how these contracts will be enforced for the future. 

Depending on the customer, it may be worth discussing an upgrade to a premium package if their use of the product greatly increases, while others may need to consider signing a long-term contract renewal. 

Sometimes you can maximize contract value by simply changing the process from an "opt-in" to an "opt-out." For example, an equipment manufacturer included a 3% annual price increase in each contract but had only been enforcing these price increases on one-third of the agreements. Individual account reps often did not implement these terms, as it required an uncomfortable conversation with the client, and it had minimal effect on their compensation. However, the manufacturer solved this problem by creating a dedicated team to enforce these price increases. Account reps had the flexibility to appeal these price increases, but most of them did not object to the change. This modest investment of time allowed the manufacturer to execute price increases on more than two-thirds of each contract, which resulted in 100 basis points for profit growth. 

Clients often view these actions as fair if a company openly communicates with them about these changes. These actions may also create a greater appreciation for the service brought to each organization, as that's a great way to increase business revenue with effective contract management.

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For a deep dive on a similar topic, announcing the Accounts Receivable Binge Day on April 8th at 11am-2pm EST.

Join us for this free, two-hour immersive digital event featuring real-world discussions that focus on the impact, metrics, and outcomes of applying an AR Automation strategy to business.

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