Unlocking the benefits of contract life cycle management
Five steps to building a business case
Before embarking on a Contract Management program, organizations should understand the value that transformation brings. Discover the importance of contract management and how to build the business case.
- 1. Price a CLM program
- 2. Identify the value proposition
- 3. Assess the current state
- 4. Start by calculating the value
- 5. True-up with actuals
Proving the importance of contract management
Only a little over 20 percent of organizations attempt to monitor or calculate the cost or benefits of contract management, according to When Technology Meets Humanity: The Future of Contract Management, a report Deloitte collaborated on with World Commerce & Contracting. That could be one reason why it’s hard for organizations to justify the cost of implementing a contract life cycle management (CLM) program.
It typically takes something more concrete than a leap of faith and some form of qualitative argument to convince the powers that be that CLM solutions are a wise investment. To ensure that your CLM program is capable of reducing costs and addressing the challenges of contract management in compelling ways, you will likely need to build a persuasive business case—or calculate the return on investment (ROI)—for that program.
Here are five keys to building your business case.
1. Price a CLM program
Quantifying the full costs of developing a contract management program is challenging because many costs are hidden. For instance, it may be prudent to factor in the effort required to drive adoption of the CLM across the enterprise; the change that accompanies a successful CLM implementation typically has a cost.
Apart from activities such as project planning, process design, and requirements gathering, a thorough CLM implementation may require a variety of ancillary workstreams. These related projects could include template optimization, possible legacy data migrations, implementation of related technology, and designing and standing up new operating models.
As you start pricing the project, keep in mind that a true CLM project goes beyond merely implementing technology. Defining the goal more broadly, as a complete contract management program, will reveal a fuller picture of costs as well as returns. These costs include the total cost of ownership for the technology, implementation costs, ancillary project costs, resourcing or human capital costs, and post-implementation system development costs.
2. Identify the value proposition
Measuring and proving the value of a CLM program is aspirational for many organizations. Only a third of those performing contract management roles measure their financial value or impact on their business, according to the When Technology Meets Humanity report. In particular, it can be difficult to measure the impact of a CLM in a siloed environment where one department lacks full access to post-signature data. For instance, many focus on metrics that can be discredited, such as negotiated savings. Similarly, it can also be hard to prove risk avoidance, because it can be difficult to collect data from other teams on contract performance.
To understand the potential value to your organization and begin the process of calculating ROI, it’s critical to understand the value propositions. Our experience shows there are three categories or levers that work well for demonstrating why your organization may want to consider a CLM transformation:
- Process efficiencies: Saving time, effort, and dollars through automation and centralization.
- Value preservation: Enforcing terms post-execution to avoid value leakage, which might consist of errors with consumption, delivery, contract deviation, or computation.
- Risk reduction: Improving visibility into contract terms to identify noncompliant and potentially noncompliant agreements.
Organizations will gain varying degrees of value from each value proposition lever based on their particular needs and circumstances. Evaluating these levers for your own organization will help you determine whether, and the extent to which, you should embark on this transformation journey.
3. Assess the current state
Before estimating the value of a CLM program to your organization, you should understand the current state of contracting in objective terms. Ideally, your team has already documented process inefficiencies, unenforced contractual obligations (from both a buy- and sell-side perspective), and costs associated with regulatory noncompliance.
If not, begin by gathering the basics such as contracting volumes (by organizational unit, contract type, and/or region), contracting resource numbers, and contracting cycle times. Then, as available, work up to more detailed numbers such as (in the case of buy-side metrics) total amount of spend under management, spend by purchasing category, and metrics for spend leakage.
If your organization lacks its own metrics needed to establish a contracting baseline, as is often the case, there’s no time like the present to start. In the meantime, draw on industry contracting benchmarks and assumptions to establish baseline metrics.
4. Start by calculating the value
The ROI of a CLM program will depend on your contracting maturity. Organizations that understand the importance of contract management and have some elements of contract management in place will likely reap fewer immediate rewards than an organization implementing CLM best practice protocols and technology for the first time. This makes it important to factor in long-term gains from continuous improvement initiatives, not just the initial benefits from the low-hanging fruit.
When conducting a cost-benefit analysis for your CLM project, you may choose to consider these factors:
- The rate at which value will ramp up or down over time based on adoption.
- Savings from retired software.
- Staffing costs, both for implementation and long-term operating model changes.
- The dates at which key functionality will be introduced into the program.
5. True-up with actuals
While projections help build a business case to embark on a CLM transformation journey, it’s important to capture the actual value of your initiative over time. By capturing and evaluating the numbers, you can validate your projections. If program savings fall short of projections, evaluate the initial numbers and identify the reason for the shortfall. Then, adjust the program to account for the unforeseen issues. For instance, because CLM implementations tend to be iterative, you can reorder the sequence of releases to push out value-producing functionality earlier or to address adoption challenges, process wrinkles, or functionality gaps.
Conclusion: More ventured, more gained
As with many things, greater investment can lead to greater reward with contract management transformation projects. Considering your organization’s tolerance for risk and potential savings in terms of time and resources is essential to enhancing benefits. This is why the scoping phase of a project and a detailed cost-benefit analysis are so critical. While there is a proclivity to build a business case that reduces the cost in order to get within budget more easily, an unintended consequence of this may be a reduction in long-term gains. Deloitte specialists can guide this process based on decades of experience with some of the world’s largest, most complex organizations and help you define and analyze a contract management transformation project that can drive both immediate and long-term value.