After the deal: Are your biggest contracts leaking revenue?
- Andrea Policky
- August 28, 2019
Organizations we work with are often focused on a couple of key goals: (1) Hit a revenue or profitability target; (2) Secure financing, investment or exit; or (3) Overall company growth, such as increasing sales. Unfortunately, many companies slow their progress, miss their target or aren’t ready when that financing event or exit is imminent for one big reason that’s often overlooked: they don’t have the right processes and resources in place to follow through on what happens after deals and contracts are signed.
Understandably, everyone’s focus is on getting deals signed and contracts done, but very few focus on what happens next – they’re already on to the next deal. While no one is looking, too often those hard-fought terms are not fully implemented or maintained, or deadlines, expirations and changes are not appropriately tracked and there are costly consequences.
Companies can lose about 9 percent of annual revenue due to poor contracts management. We are talking real dollars here – not just a rounding error. No executive would ever voluntarily give up that kind of margin, and you shouldn’t have to. Especially when you can avoid it for just a fraction of the dollars not realized.
Consider this example: a company has an agreement with a key vendor and the contract expires, but neither accounts payable nor operations realizes the lapse. The company continues to pay the vendor – to the tune of hundreds of thousands of dollars – until the error is identified and then begins the costly and time-consuming process of trying to recoup the expenses and unravel their working relationship. It doesn’t go well. The vendor is unwilling to return the funds and the disagreement results in significant financial losses, litigation, legal fees and, ultimately, a settlement with the vendor that does not come close to making the company whole. All due to a missed termination clause.
This may sound like an extreme example, but ask yourself – does your team have the necessary visibility into the status of your biggest deals? Did you hit performance milestones or price breaks that haven’t been realized? Are you executing on all those hard-fought terms? Are you getting ahead of terms that need to be renewed or renegotiated?
This is a considerable burden on any business leader – but you don’t have to tackle it alone. Having a contracts management process in place ensures that all these questions – and many more – are automatically being answered on an ongoing basis. In our example, it would have triggered a notification for multiple departments when contracts are updated or due to expire. This would help enforce and avoid penalty clauses or sidestep litigation, leading to huge cost savings.
Contracts management can also play a material role for organizations nearing a financing event or an exit, who will need to go through due diligence and pay hourly legal fees to get their contracts and finances squared away in order to be due-diligence ready. Any money spent on contracts management at the end of the business life cycle means less money going into the owners’ pockets.
By proactively putting a contracts management service in place, companies are more efficient and keep more of their own hard-earned value. In fact, data shows that contracts management services reduce the average number of hours spent on contracts by 20 percent.
It also ensures companies are prepared for financing events and exits and become more attractive to potential investors and acquirers. In short, these deals get done more often, more quickly and with less expense and pain for all involved.
“KO’s Contracts Management Service is ideal for companies like ours that don’t have the volume and consistency to justify a full-time administrator in-house, but need the expertise and assistance in handling contract drafting and negotiation.”
What is 9 percent of revenue worth to your business? Are you working to become due diligence ready? Whose shoulders is all this opportunity (or risk) sitting on in your organization? Our clients tell us and we’ve seen firsthand that this isn’t a job for one person. Historical information that stays with a specific employee isn’t manageable, obtainable or visible. And, let’s be honest, not many employees are raising their hand for this job.
So, what’s the solution? Work with an expert to manage contracts for you. Setting up the systems and processes once so you never have to worry about it again is more than a smart business decision – it’s risk mitigation, revenue realization and a faster and smoother process for financing events or exits.
It can also free up your team to focus on what they do best. Contracts management results in a 24 percent reduction in the sales cycle. In many organizations, a significant amount of contracts are renewable. If these renewable contracts are handled more effectively then pricing may be renegotiated with more foresight generating more revenue, and the effort necessary for renewal is significantly reduced.
A contracts management service can help with day-to-day organizational challenges like missed deadlines, payments or notifications, miscommunication between departments and it can help facilitate easy identification of consolidation opportunities in contracts. Companies that are proactive in the management of their contracts are saving money now rather than companies who are reactive and end up spending significantly more in the end or slowly chipping away at the valuation of their company.
Andrea Policky is a Contracts Manager at KO Law Firm, an innovative corporate and commercial law firm with an experienced team of lawyers, contracts managers and paralegals and a practical, efficient, business-focused and value-driven approach. KO’s Contracts Management Service helps clients save time, improve efficiency and maximize revenue, while building better engagement and retention with customers and partners. KO is headquartered in Denver and Boulder, Colo., and serves the technology, life sciences, consumer products, professional services, financial services, manufacturing, energy and ancillary cannabis industries. Contact Andrea Policky at email@example.com for more information.