Contract Economics: The Financial Impact of Your Contract Management Process

What Is Contract Economics?

A recent addition to business vocabulary, the term “contract economics” helps contracting professionals and business leaders determine how they can minimize their contracting costs, and whether there is potential for additional value on the other.

In practice, it could entail:

Calculating the activity and/or resource costs related to drafting, negotiating, and approving contracts
Leveraging clause analytics to identify which clauses are negotiated regularly and cause unnecessary delays, as well as any associated costs
Using the insights gained in the last point to get a bird’s eye view of contract risks for effective risk management
Monitoring contractual obligations stringently to ensure that all parties involved receive the agreed-upon value and benefits
Getting the most of opportunities such as wholesale or early bird discounts and becoming a brand evangelist
Renewing contracts proactively to ensure that low-ROI ones don’t automatically renew and the high-ROI ones are handled efficiently to maximize retention
Choosing an appropriate contract management software to streamline the entire contract lifecycle, from centralizing your contract data to integrating electronic signatures to triggering alerts and notifications for renewals and other key events

What are the Real Costs of Poor Contract Management?

Whether you’re dealing with clients, vendors, business partners, or employees, how you handle contracts can impact your company’s revenue in ways you might not expect.

This is because people are constantly entering into agreements. Hence, there is a potential for expenses or lost revenue at every stage of the contract lifecycle.

To help you narrow down your search for hidden costs of poorly managed contracts, we have listed below three areas in a contracting process where the financial impact of bad contract management is the most obvious.

1. Renewals

When a contract is renewed for the first time, and each time after that, either party may initiate negotiations to revise the terms of the agreement so that they more accurately represent the mutual benefits of the transaction.

Having a well-planned renewal process allows you to review contracts objectively. It also gives you time to renegotiate if needed. Keep in mind that your firm loses money whenever a contract renews without an assessment or renegotiation. Furthermore, when an unwanted contract automatically renews for another term, it can add up to a significant financial burden.

In the end, it all comes down to making sure the right personnel in your company stays on top of your contract renewals to avoid unnecessary costs.

2. Contractual Obligations

Reviewing a contract’s performance a few days before it’s up for renewal is not enough. While it’s in progress, a contract should be subject to constant monitoring and supervision.

The goals and responsibilities of each party are spelled out for a specified time frame in a contract. If that amount of time is too long, there’s a good chance that these commitments aren’t met.

Now this may be because of an implicit understanding between the parties involved. But, if there are no procedures in place to track contractual obligations, perform regular reviews, and oversee performance, the problem could be easily traced back to shoddy contract management.

This goes without saying that when one party fails to meet their end of the bargain, they lose out on the promised benefits, not to mention the resulting reputational damage.

3. Usage of Standard Terms & Conditions

Although there’s nothing necessarily negative about approving non-standard conditions for specific contracts, it is imperative that you carefully weigh the risks and repercussions before signing an agreement with non-standard indemnity, termination, and payment clauses.

When the process is poorly managed, it can also force us to rush contracts through at the last minute. As a result, we might accept less-than-optimal, non-standard terms just to keep the contract.

Sometimes we end up paying more for a service than we wanted to because we didn’t have enough time to look at other options in the market. You can figure out where your business is losing money here!

Also, it can be tricky to figure out what went wrong if the other party unexpectedly terminates the contract using a non-standard termination clause that benefits them.

Wrap-Up

Of course, this is not an exhaustive list. And there are many more potential sources of wasted money or missed profits because of sloppy contract management than the three discussed here. In any case, they are a good starting point for maximizing the returns on existing contracts and streamlining internal processes to cut costs.

Author Bio:

Qurat-ul-Ain Ghazali, aka Annie, is the growth manager at Contractbook and looks after all the organic channels. She has been with tech startups and scaleups for a couple of years with a B2B focus. You can find her socializing, traveling, indulging in extreme sports, and enjoying the local desserts when she is not working.