The contract management process can be complex and tedious. Legal operations, which include the entire process involved in contracts, are critical to businesses: are the cogs that ensure the fulfilment of their agreements and move them towards their objectives. However, there is often a leakage of value in contracts that can lead to significant financial losses for companies. Stay tuned to this article to find out what causes this leakage and how you can prevent your company from suffering it thanks to CLM technology. Let's get started!
In this blog post you will find:
- What is contract value leakage?
- Causes of contract value leakage
- Management weaknesses leading to value leakage
- Avoid value leakage using CLM technology
What is contract value leakage?
Contract value leakage refers to the loss of benefits or failure to meet the terms of a contract due to inefficient or inadequate management. This value leakage can result from a variety of causes, ranging from lack of visibility on contract terms to inefficiency or lack of control in the processes related to contract enforcement.
It is estimated that between 5% and 40% of the value of contracts is lost due to inefficient operations.
Causes of contract value leakage
The most common causes of value leakage in contracts include:
- Lack of visibility: when contracts are managed in different formats or in different systems , it is difficult to get a complete picture of the agreed terms and conditions. This can lead to the loss of important information such as deadlines, payment terms and other commitments. This lack of visibility also makes it difficult to identify problems in contract management, resulting in lost profits and non-compliance with obligations for the company.
- Lack of monitoring: proper monitoring of commitments and obligations set out in contracts is essential to ensure compliance and avoid value leakage. If such monitoring is ineffective or absent, there is a serious risk of non-compliance with contracts. Lack of monitoring can lead to lost profits and non-compliance with agreements, which, in addition to generating additional costs, damages the company's reputation.
- Human error: let's face it. We are human and we make mistakes. Manual contract management leads to failures, from incorrect data entry to lost documents. However sporadic, has a negative impact on contract management and leads to value leakage.
- Lack of automation: the lack of automation of processes related to contract management can lead to inefficient management and loss of valuable time which could be spent on higher-value tasks. Manual and repetitive processes are tedious and error-prone. Every mistake in these can lead to serious penalties and reduce the efficiency of the company. In addition, the lack of automation also makes it difficult to follow up on commitments and obligations set out in contracts.
Management weaknesses that lead to value leakage
Generally speaking, companies suffer from four critical points that lead to value leakage. But what are the most common weaknesses, and why is this value leakage occurring?? Let's look at several points that lead to contracts to lose value or expose companies to severe risks.
What are the main weaknesses in contract management?
- 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
- Subcontractor issues.
- Inadequate or weak contract structure.
Avoid value leakage using CLM Technology
Contract Lifecycle Management (CLM) technology offers solutions that prevent value leakage in contracts. Let's take a look at four main advantages offered by this technology:
- Centralisation: a comprehensive CLM platform allows the centralisation of contract management in a single system in the cloud, facilitating full visibility of the terms and conditions agreed in the contracts. This centralisation allows access to contract information in real-time (and restricted to the user's liking by different permissions), reducing the risk of errors and ensures compliance with established commitments and obligations.
- Automated monitoring: CLM's software enables automatic monitoring of the obligations and commitments set out in the contract, ensuring compliance and preventing value leakage. Thanks to metadata, a peripheral view of all the company's contracts and legal documents are created, allowing any problems to be quickly identified and preventive measures to be taken to avoid their impact on the company.
- Reduction of human error: automated contract management enabled by CLM reduces the likelihood of human error and minimises the risk of document loss. Data entry is done systematically and consistently, reducing the likelihood of errors, and automated contract management ensures that information is stored in a secure and accessible place to avoid loss or error.
- Process automation: automating the processes involved to contract management allows for more efficient management and reduces the time spent on repetitive tasks. Manual and tedious processes are automated thanks to CLM software, allowing employees to focus on more important and business-critical tasks. In addition, process automation enables the management of large volumes of contracts, which improves efficiency and reduces costs for companies.
Value leakage in contracts can have a negative impact on the profitability and efficiency of companies. However, Contract Lifecycle Management software (CLM) offers effective solutions to prevent value leakage and maximise the potential of documents and contracts, which are part of the backbone of companies.
If you want to know more about how CLM software can help your company avoid value and revenue leakage in contracts, download our ebook "Guide to Avoiding Revenue Leakage through CLM Technology", in which you will find the keys and strategies used by large companies to eradicate these losses.