Allow us to set the scene: you’re in the middle of a project with a firm deadline when you get a ping from your superior asking you an “urgent” question. This question is about an ongoing relationship with one of your vendors, XYZ Company. Your superior wants to know if a certain type of service is already being paid for, or if it would be an additional charge, according to your contract terms. Since you work in procurement, you should know this off the top of your head, right?
Wrong. But now, you’re forced to drop what you’re doing and go find the answer. Here’s where this story gets tricky (and, likely, all too familiar).
It’s time to pull up your antiquated Contract Lifecycle Management (CLM) system — or worse, a spreadsheet — and sift through the countless vendor contracts your organization holds in order to find XYZ Company’s contract. Once you find it, assuming you can find it, it’s your job to manually scan its hundreds of pages and parse through its terms and conditions to determine which services are currently included in the agreement. It’s tedious work, and your frustrations are mounting. In fact, you shouldn’t even be the person searching for this information in the first place; it should be the main point of contact for this particular contract. Whoever that is.
Fast-forward 90 minutes and you think you have your answer. It’s not totally clear, but you’re at your wit’s end and don’t know what else to look for. Your superior doesn't seem fully satisfied with your response (not to mention they wanted it sooner) but hey, at least you weren’t doing anything else important. Oh, wait, that’s right. You were…and you’re now behind on your project’s deadline.
If this scenario triggered your fight or flight response, you’re not alone. Most organizations are still using outdated CLMs that are designed for legal teams. But now, having a contract management solution for the “buy-side” is more important than ever. We’re seeing more complex supply chains and supplier relationships than we have in the past, with global brands often having tens or even hundreds of thousands of suppliers, according to Forbes.
Despite these numbers, contract management at companies across the board tends to rank from suboptimal to just plain terrible. The truth is that companies simply cannot afford to put contract management on the back burner, for more reasons than you might think. Of course, financial loss and negative impacts on your organization’s bottom line are typically the first concern — and with good reason, as studies have shown the devastating fiscal loss (up to 9% annually) accrued via missed contract renewals, duplicate spend, etc.
But what about the other costs of using an outdated CLM? Beyond taking a financial hit, there are other negative impacts your organization can experience. Some are directly linkable to your bottom line, while others can contribute to a lackluster company culture or day-to-day headaches for employees. Curious to discover a few of these hidden costs? Keep reading to learn more.
Sub-head: Hidden Cost #1: Lack of Accountability
If the details of your vendor contracts are a mystery, then it’s hard to know who you can depend on to keep contractual obligations and supplier relationships in check. Who are the stakeholders involved? Who do you go to for questions? Who is responsible for a missed renewal date? A contract typically has this outlined for you, but if you can’t locate the document or decipher its contents, then you’re left pointing fingers and having futile arguments.
And perhaps most importantly: without knowing who's involved in the contract, you'll end up creating confusion in your relationship with the supplier.
"Leaders in procurement, supply chain operations and sustainability roles all need access to contract data and people,” says Eric Pritchett, President and co-founder of Terzo. “If they aren't aware of what has been agreed with a supplier, they don't know where to start to achieve goals with the supplier."
This issue poses a major recurring challenge that procurement professionals face when working with outdated CLMs. Terzo’s solution offers a people mapping feature so you know at a glance who can be held accountable for various aspects of each of your contracts. No more guessing games or chasing down the right person. With clear visibility, your organization’s people can better stay on top of their contract-related tasks and responsibilities — ultimately saving your people from conflict and financial loss down the road.
Hidden Cost #2: Increased Human Error
Since the 1970s, society has entered the Information Age, sometimes called the Digital Age. We now live in an era where technology evolves greater and faster than we can often comprehend. There’s been no shortage of conversations about Artificial Intelligence (AI) and the many ways AI has changed our world — especially the way we work.
An outdated CLM is almost certainly not implementing the use of AI. If your contract management software involves spreadsheets or manually sifting through information, there’s an inherently increased risk for making mistakes. From ranging attention spans to environmental distractions, it can be easy to get a renewal date wrong or forget to follow up with a supplier. Human beings aren’t perfect; and though we can’t be expected to never make mistakes, sometimes the results of those mistakes can be disastrous.
So, how great is the risk of human error in contract management? Well, it’s impossible to know exactly. It could be 0%, but it could also be 100%, or anywhere in between. One NASA report states that “Human error has been reported as being responsible for 60%–80% of failures, accidents and incidents in high-risk industries.”
In fact, there’s even a scientific equation for predicting human error: Technique used for human error rate prediction (THERP), which was developed in 1983. Its methodology is tedious and frankly too technical to get into here — suffice to say, even utilizing THERP isn’t a surefire way to predict how often human error will occur within your organization.
But when you introduce an AI-powered CLM, you all but remove the risk of human error from your contract management endeavors. Terzo’s sophisticated AI-driven technology introduces Contract Intelligence to the CLM, making your documents searchable and centralized with easily extractable metadata. Basically, the computer does the hard work; you reap the benefits. Now that’s what we call taking advantage of the Digital Age.
Hidden Cost #3: Wasted Time
As you no doubt picked up from the intro, outdated CLMs lead to significant amounts of wasted time. But beyond employee frustration and lowered productivity levels, wasted time can also have some very real, tangible costs.
It’s been estimated that wasted time leads to an average of $1.7 million lost each year for every 100 employees (in U.S. companies). To scale those numbers, a company with 300 employees loses a staggering $5.1 million annually on wasted time alone. That’s about $17,000 per employee!
Additionally, one KPMG International report claims that, “Up to 80% of supplier management time is exhausted in data management and reporting, leaving less time for portfolio management and strategy development.” Vendor management teams are often forced to dedicate most of their time to administrative busywork. This leaves minimal time left to dedicate to strategy and portfolio management. KPMG states that this can lead to “value leakage,” which can manifest in the form of overpayment, scope creep, unclaimed credits and discounts, and loss of focus on innovation, among others.
If your contracts aren’t centralized, digitized, and incredibly easy to search, it’s a recipe for disaster. Nobody should have to spend their workday combing through a digital filing cabinet to find a specific contract — it’s not a good use of their time or your organization’s money. Older solutions are basically just contract storage, not true contract management. Why not reallocate funds that support outdated CLMs (i.e. those that require manual searches) towards a sophisticated, AI-driven platform that’s literally designed to do the heavy lifting and the administrative tasks for you?
Contract Intelligence, Terzo’s cornerstone, means offering fully automated searches, insights, and metadata extraction that you can glean at a glance. Personalized dashboards can be set up to show you customizable data points, helping to make the lives of procurement professionals even easier.
Efficiency is the name of the game. As demonstrated above, time is money, and if even just 10 employees are spending five hours a year each looking for contract information — well, that’s a very expensive lack of efficiency. Those same 50 hours could be better spent working towards hitting company metrics, taking professional development courses, or even fostering stronger work relationships.
The three hidden costs we covered today are just some of the many negative impacts that an ineffective CLM can have on your organization. With more emphasis on outsourced services, products, and suppliers than ever before, companies are realizing the necessity of making their contracts (not to mention vendor relationships) top priority.
Pritchett adds, "CLM1.0 isn't getting the job done in the large enterprise. It's 2022, and professionals have a right to expect the right data and people to be in the equation when they make business decisions. The more time your people spend fetching data, the less time they spend adding business value."
It all boils down to this: every company relies heavily on its contracts and its supplier relationships not only to thrive, but to survive. Optimizing your CLM and your VMO can make or break your operations. It’s time to decide if your contract management software is working with you — or against you.
Our Contract Intelligence Solution helps customers take a people-centric approach to becoming best-in-class in contract management. Improve your contract centralization, contract assignments and people mapping, contract metadata and clause library pulls, contract alerting and supporting workflows, contracting throughout and contract to people ratios using
Terzo. Contact us today to learn more.