Contract management is a process that involves the management of contract creation, execution, as well as analysis to maximize operational and financial performance at an organization. While this happens, it also acts to reduce financial risks. Organizations come into contact with an ever-increasing amount of pressure to reduce costs while simultaneously improving a company’s performance, which is a big ask. Contract management proves to be a very time-consuming element of business, which is why there is a need for an effective and automated contract management system. Here are the benefits of effective contract management and how it can improve the financial performance of an organization.
What is a Contract Management Software
Before we get into how it can improve your business, you need to understand who this software is for. This software can be used by a plethora of different industries, including nonprofits. You typically see it used in departments that deal directly with creating, tracking, and signing contracts, which is often dropped onto the HR department. It can also be used by managers and personnel who are needed for specific aspects of signing or negotiation, but as it includes calendars and communication software, most of it falls on HR.
Increases the Financial Value
There is a multitude of financial benefits when it comes to effective contract management. It is more than just expensive busywork. It offers a great return on the investment and has quantitative, financial benefits
“Moves the Needle”
When it comes to allocating budgets across the organization, executives are bombarded with demands from every corner. It is uncommon for a manager to volunteer for a smaller budget or less staff. So how do executives respond to conflicting demands for limited resources when it comes to budgeting? Business leaders want to make investments that “move the needle”, which means that they opt for budgetary decisions that have a meaningful effect on the financial performance of an organization.
This meaningful effect varies among organizations and across departments. Here’s an example – a 5% increase in sales revenue moves the needle for the sales team, while a 10% decrease in expenses moves the needle for the engineering department at a technology company. The needle moving percentage is very seldom explicit, but it is often based on a psychological number derived from the financial statements of the organization. The point here is not about the percentage itself, but rather to illustrate that we need to understand the scale of budget items.
Risk is an important element to consider when dealing with the contract management equation. Risk is concerned with unexpected losses and while it is not always quantifiable, it is something that can be measured.
Risk ties in the aspect of uncertainty that is ever-present in the business world. It is important to have the details regarding the risk of your business in order to make the correct decisions going forward.
For most organizations, it is far easier to cut expenses than it is to grow revenue, and they stay afloat this way. Revenue is important as it pays everyone’s salary as well as compensations for executives. This is one of the most important arguments that should be used to show how contract management is able to benefit the revenue stream.
Only good contract management will find opportunities to increase revenue without having to constantly rely on cutting expenses. Contract managers are also able to remind the sales department of opportunities for volume discounts or trade financing which is able to increase the revenue of an organization if those provisions exist. It is also able to identify predictable revenue, which is almost as valuable as growing revenue. Effective contract management is thoroughly important when it comes to changing the business’s model to that of a recurring revenue model.
Contract management can provide unique analysis for an organization, such as:
- All contracts listed in order of annual spending rate
- Expense related contracts with auto-renewal provisions, and
- Expense related contracts with contingent pricing or terms
Effective contract management is able to employ simple and complex techniques to help cut expenses for an organization. They are fantastic for alerting an organization to purchasing options that assist in the reduction of prices.
These points are important to be able to justify the investment in effective contract management tools as it goes beyond just financial gain. It improves the overall performance of an organization by focusing on financial value, moving the needle, identifying potential unexpected losses, increasing revenue, and decreasing expenses.