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  • Amit Sharma

Contracting Efficiency: Importance of Efficiency In Contracts

Updated: Aug 25, 2022

As a business leader, how important is the efficiency of your legal processes for you? Probably, nowhere as important as its effectiveness. However, no one could say the same thing about sales process efficiency and deal pipeline flow. And contract drafting, review, and negotiation processes are key steps in any deal. So, you would always want to avoid a situation where a business deal gets delayed and turns sour because one or the other party could not get its act together in reviewing or approving terms in time.


Business leaders need to ensure that their sales, legal, and procurement teams are not only focused on risk management (effectiveness) but also on the efficiency of the contracting process.


How much does a lack of efficiency cost in contract management?


Deals involving significant revenue, cost or intellectual property, etc. impact are the high-risk contracts, where your best and most experienced business minds need to spend the maximum amount of time. A conservative approach in risk assessment and management is the recommendation while reviewing and negotiating these. However, the same cannot be said of the medium-risk or low-risk contracts.


Let us look at some industry metrics (based on a World Commerce & Contracting study) around the contracting process:


Average cycle time (actual time worked upon contracts, not elapsed time) is approximately in the range of 11–21 days


Average cycle time of contract
Average cycle time of contract


Note that the difference in costs between the higher and lower end of this range is a significant business impact at the enterprise scale (taking the most conservative end of the data, a typical Fortune 1000 co. negotiates around 5k low complexity contracts every 2 years, i.e. approx 10 contracts per day).


Hence, transactional cost differential = 10 contracts/day*$3.5k/contract = $35k/day = $87.5 Million/year.


This is the most conservative estimate for the cost of lack of efficiency at an enterprise scale. Add in estimates for any loss of business due to delays or disagreements in the contracting process, this becomes a serious headache for any sizeable business.


Now, let us look at what drives complexity in a contract and how to drive it down.


Over-reliance on legalese drives qualitative complexity because the reviewer is unclear about the meanings of certain terms. A large number of terms (nested and referenced) and clauses drive quantitative complexity in a contract.


How do you handle contract complexity within your organization?

  • Developing a clear internal process (with roles and handoffs). This entails a clear description of how various steps in a contract’s life are executed. Sample illustration:


Contracting lifecycle
Contracting lifecycle

Standardizing the usage of contract language. This is usually achieved through the use of repositories and templates. There are many sources of contract language like federal / state/case laws, organization policies, historical precedence on agreements, operating principles of the businesses, contract terms, and structures


What is the role of legal experts in contract efficiency?


A legal and procurement professional’s experience and nuanced understanding of the domain are critical in assessing and quantifying the risk, as well as ensuring the enforceability of the contracts. However, one should be aware that striving for perfection or adherence to age-old templates can add complexity which ends up increasing review cycle times and ultimately reducing sales efficiency.


Many leading organizations have implemented Contract Lifecycle Management (CLM) software to streamline the processes and standards around contracting. While this helps reduce the complexity immensely, it can also add to the burden of change management — training and adoption. Also, not all software platforms have the power of machine learning embedded and end up merely automating the existing manual practices. This increases frustration and skepticism of the business users and reduces RoI.


We believe that technologies like Machine Learning and AI should be delivered right into the dominant tool/platform of working for contracting professionals, rather than pushing a new system as the promised land. Platforms that are well integrated with industry standards like MS Word, Docusign, and Salesforce have a much higher chance of broader adoption and success in increasing efficiency while maintaining high effectiveness of contract reviews.


Sources:

  1. https://blog.iaccm.com/commitment-matters-tim-cummins-blog/the-cost-of-a-contract


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