By Lilian Caldeira, co-founder, and Olga Mack, CEO, at Parley Pro
Innovation is the real power in today’s world, and speed is the new business currency. Top legal departments around the world use modern technologies to accelerate and streamline legal and business processes. However, adopting the right software can still be a challenge.
Decision-makers expect solid proof of the expected value. This article will show you how to determine and express the financial gains and benefits your company can obtain from an investment in Contract Lifecycle Management (CLM) software, and how to do it in ways that take into account both the gains and the costs of the investment to generate the most comprehensive overview of ROI possible.
Why calculate the ROI and other benefits of Contract Lifecycle Management Software?
Legal departments look to modern CLM software to enhance their ability to make data-driven business decisions and improve the efficiency of their contracting processes, both of which ultimately result in more revenue. Taking the time to measure CLM’s financial ROI before purchasing the software will show how its adoption can help your organization deliver more efficient services while maximizing profitability. Calculating the ROI for a new CLM system will empower you to:
- Justify the financial investment and make the adoption of CLM software more appealing to stakeholders and decision-makers.
- Establish CLM ownership costs and ROI trends over time to address short- and long-term concerns.
- Engage in clear and informative discussions regarding the various elements that factor into the ROI.
- Help financial teams determine appropriate budget allocations both prior to and after adopting CLM.
First, what is the cost of doing nothing?
When should a company invest in a CLM solution? What is the cost of continuing to use the current manual—but familiar—processes? Doing nothing seems safe and inexpensive at first glance. Why not skip dealing with vendor selection and setting up a new project plan? Who could argue with what seems like a zero-cost strategy? But this way of thinking is counterproductive in today’s digital reality with its contemporary cloud-based contract management paradigm.
The first step is for everyone involved in the purchasing decision to clearly understand the “cost of doing nothing” (CDN). CDN is a real cost created when necessary actions are delayed or never taken. The primary generators of CDN include:
- Wasted time and resources. Time is our most valuable resource. Using manual contract processes causes employees and lawyers to waste hours performing duplicative work and sending, receiving, reconciling contract versions and finding and fixing errors. Each task takes time and energy away from focusing on improving contract outcomes.
- Delayed revenue. Delaying any aspect of executing a contract and closing a deal increases the time it takes to receive any value related to the contract.
- Blind spots and uncertainties. You can’t effectively negotiate and manage contracts, detect and address issues, or deliver optimized contracts on time without proper visibility into and control over your processes. The resulting business, legal, and compliance risks are major drivers of the CDN associated with legacy contracting processes.
It’s important to include the economic losses related to these factors in your overall ROI calculation. Change might not be easy, but if your contract processes and underlying technology infrastructure can’t meet your company’s growth initiatives or customer demand, your company’s survival in today’s cloud-centric world is at risk. Implementing a modern CLM system enables your company to quickly modify its contracting processes to adapt to constantly changing market conditions.
Steps to determine CLM ROI calculations:
A. Choose which variables to measure
To get started, first select which variables to measure. You might want to work with:
- The number of contracts a team works on in a given time frame
- The average number of people involved in contract initiation, negotiation, approval, and signature processes
- The number of contract requests processed
- The average time to process a contract
You can measure many different variables. To make the most impact initially, focus on the top five factors that affect key business activities. (E.g., determine the amount of annual revenue impacted by the contracts a department typically creates.)
B. Perform baseline measurements
When you know what variable you want to measure, you can then estimate how much it will be improved with the introduction of a new CLM system.
- Choose a time period (a week or a month) and document your measurements of the variable.
- Run a simulation to determine how each measurement will improve with the use of CLM software.
- Translate the resulting figures into monetary values, such as increased profit, to make the most impact during your discussions.
C. Calculate the ROI
Calculate the ROI using this formula:
ROI = (Gain from Investment – Total cost of ownership) / Total cost of ownership
D. Determine the total cost of ownership
Calculate the Total Cost of Ownership (TCO) for however long the company will use the CLM software. Use any length of time you anticipate subscribing to a CLM software service such as 1, 2, or 5 years. The TOC is calculated as a summary of all costed related to CLM software such as:
- CLM software subscription cost
- Implementation and training costs
- The value of the time your team time spent on CLM implementation and training vs doing other work
- Maintenance cost
- Opportunity costs
- Change management costs
E. Factor in the benefits and gains from your CLM investment
You also want to factor in the benefits or gains CLM software will bring to your organization. Gains and benefits often seem intangible and unmeasurable. Some are, but many gains can be measured. Use the framework below to structure your benefits calculations:
Examples of how to estimate your benefits include:
- Improvements to productivity. Process inefficiencies cause monetary and resource losses. Our clients report over 30-50% productivity increases using Parley Pro CLM without any additional resources.
- Reduction in administrative costs. CLM systems automate contracting processes, reducing the need for manual contract administration. Employees no longer need to maintain extensive Excel files or waste hours searching for the most recent contracts.
- Increased visibility. Data is the most important asset for successful business management. Fast access to high-quality data allows you to make more informed decisions. Moving to a CLM system will provide access to real-time data, which gives executive leaders greater financial control over the company.
- Reduction in risk. CLM systems significantly reduce business, legal, and compliance risks. Standardizing contract language and processes and increasing visibility aids in anticipating and avoiding risks caused by issues such as standard clause variances, agreements expiring without renewal dates, and improper approvals or vendor authorizations.
Many monetary gains and benefits will accrue and add more value as time goes on. You may be able to express this value numerically by estimating an increase in sales or company’s profit.
Are you ready to get started?
We’ve made it easy to understand the ROI calculation in practice: Use the Parley Pro calculator now!
These calculations will help you compare CLM systems and make the smartest purchase. You’ll have the research and information you need to present an intelligent argument to decision-makers and demonstrate how your choice will benefit the company going forward.
[ Artificial Lawyer is proud to bring you this sponsored thought leadership article by Parley Pro. ]