Category:
Contract Cost Optimization

Why CIOs Lose Billions on Contracts

October 10, 2022
All procurement agreements have one thing in common: a contract. And once a contract gets signed, it is the principal document that all parties must comply with. Everything agreed upon within that contract, including assumed laws and regulations not specifically defined, must be met by all parties in order to maintain both government and corporate compliance.

This probably isn’t news to you. In fact, you likely already have some sort of Contract Lifecycle Management (CLM) software in place where you work. But what you might not know is this: your current CLM is not helping the CIO or IT Departments. It’s built for the Legal team.

Despite the dynamic, critical nature of contracts, they are treated as static documents—and get locked away in antiquated CLMs.

In fact, when it comes to managing your organization’s outsourcing agreements, there’s a good chance you’re losing a serious amount of money, says multinational professional services network KMPG. “The problem is that few organizations take an active approach to managing their contract lifecycle,” they write in a 2019 article. “And, as a result, they are missing out on around 40 percent of the identified potential of the contracts.”

Considering this year’s Fortune 500 companies generated a total of $16.1 trillion in revenue and $1.8 trillion in profits, that 40% of missed potential earnings is nothing short of staggering.

Of course, there’s no shortage of challenges for those who work in Supplier Management or Procurement roles. And the truth is that virtually no CLMs do anything to alleviate these challenges. Why? Because they’re only built for one thing: storage.

But storage is (or at least, should be) the least of your contractual concerns. You don’t need a fancy platform for that — if storage was the beginning and end of managing contracts, you could just store them in a shared drive.

You need more than just a digital filing cabinet for your contracts. And you need a solution geared for the buy-side, not just for legal teams.

Three Benefits of Operationalizing Your Contracts

Organizations currently have more vendor contracts and relationships than ever before. Where companies once attempted to do as much as possible in-house, times have changed — and we’ve all seen that outsourcing is often the much more cost-effective, logical way to go.

In fact, ISM World reports, “According to research by The Hackett Group, a Miami-based business consultancy, the average company has 3,000 suppliers per US$1 billion in spend, meaning that 80 percent would be devoted to 174 suppliers.” They go on to state that suppliers end up accounting for 80% of the average company’s total spend. That’s no insignificant number. Not to mention, the scale at which most organizations operate is now global rather than local. Supply chains are more expansive than ever before because the sky is truly the limit. So why not capitalize on the absolute best services, products, and suppliers the world has to offer?

With this in mind, it makes sense that optimizing your contracts has now become a serious priority. The annual spend on Enterprise IT vendors alone is over $4 trillion. Additionally, over $20 trillion is spent on B2B suppliers per year. It’s imperative to protect your investment.

Let’s discuss three benefits of operationalizing your contracts — keep in mind, this is just the tip of the iceberg.  

1. Cost Savings | Contract Intelligence

The World Commerce & Contracting Association (formerly IACCM) has found that poor contract management costs companies about 9% of their bottom line each year. If you recall the total earnings of this year’s Fortune 500 alone, you can that this is cause for major concern.

With those numbers in mind, it’s safe to say that a lot of money hangs in the balance of having the right CLM. And with an impending recession on the horizon for the United States, organizations everywhere are looking for ways to cut costs and brace themselves for impact.

Optimizing your contracts is one of the easiest and most straightforward ways to cut unnecessary spend — if you have the right solution to help you do so. A CLM that’s designed for the “buy-side” of the business (i.e. procurement, IT, even legal teams) helps organizations increase their cost savings. Using a tool powered by Contract Intelligence, you can:

  • Reduce redundancy in products or services with a 360 view of your supplier ecosystem
  • Avoid missed renewals with alerts and real-time notifications
  • Cut productivity costs of time spent managing renewals (no more endless email chains or outdated spreadsheets)

2. Faster Negotiations | Contract Analytics

With an ever-growing pool of vendors to choose from and an industry shift to subscription-models, procurement specialists generally have less time for contract negotiation than they like (or need.)

With sourcing, procurement, and vendor management (SPVM) professionals now being pressed for time on negotiations and renewals, the right contract management tool has become truly essential. Operationalizing your contracts with the right CLM helps SPVM leaders via the following features:

  • AI-extracted metadata for actionable insights
  • Customizable dashboard for easy contract comparison
  • People mapping that easily identifies stakeholders and points of contact

3. 100% Compliance | ESG Reporting

The X and importance of compliance is greater than ever before. With ESG being top of mind for the majority of companies (as well as their boards and investors), it’s time to get serious about making sure your contracts don’t present your organization with unwanted risk.

From supplier diversity to climate-driven initiatives, it’s never been more important to look at your vendor relationships through an ESG lens. This can be challenging to do without the right software, but the right tool can transform your contracts to be digitized and easily searchable — helping you to see which contracts need to be renewed, modified, or reconsidered. The right contract management solution can help you:

  • Align teams (both internal and vendor teams)
  • Track compliance goals
  • Automate reporting with customizable views and parameters

Final Thoughts

Operations goals and objectives are constantly evolving. However, an emphasis on outsourcing and vendor management is far from a trend — this business model certainly seems here to stay. It only makes sense that contract management is a newly emerging priority for companies of all sizes and industries. The ramifications of not doing so are simply too great for most to ignore.

“At the end of the day, it’s not just about the value that could be captured; it’s also about the innovation and agility that could be gained through more active contract management,” states KPMG. “And, in today’s customer-centric environment, innovation and agility are key. It’s time for a better approach to contract management.”

We’re seeing that transactional vendor relationships are evolving into critical partnerships. And the fact is, there’s an emerging reliance on third-party suppliers that’s created a need for better ways to work and collaborate.

But sustainable, profitable relationships cannot exist without an efficient way to track them — and it all boils down to contracts.