A simple question but do you really know what it costs your organisation to process, review and put a contract in place and which factors determine the cost? A recent study by the IACCM covering 700 major organisations mainly in North America and Europe found the average cost for a basic, low-risk contract to be 6’900 USD which represents an increase of 38% over the past 6 years. Costs rise significantly depending on risk and complexity with a medium-risk, medium-complexity contract costing on average 21’300 USD and a high-risk, high-complexity contract costing on average 49’000 USD.
What is driving the increasing cost, at a time when cost optimisation is a key corporate requirement? Factors include the move from products to services which impose different and more onerous requirements on the contracting process, such as with service level agreements (SLAs) and statements of work (SOWs), as well as pressures brought about by compliance and regulation.
It is interesting to note that the review and approval process consumes 45% of the time taken compared to actual negotiation (30%) and contract creation (25%). However, it is a fact that the contracting process and its associated costs have drawn too little management attention in the past. Companies are waking up to the advantages e.g. of automating their contracting process and thus extracting enhanced business value in terms of lower costs, reduced cycle times, improved visibility and better compliance.
Smart companies are thus able to cut their costs by up to one-third compared to the average. These companies drive efficiencies by using ‘playbooks’, standardisation of clauses, collaborative and workflow-driven review processes, e-signatures and the use of technologies such as artificial intelligence embedded in their systems to support the process and reduce the level of manual intervention. Indeed, the level and application of technology is the main factor separating these smart companies from the rest. These companies are currently enjoying a competitive advantage in this area – how about your organisation?
Do you agree with my point of view? I would be interested in any feedback you may have.