Contract Lifecycle Management (CLM) Software helps to generate, review, execute, and manage all contractual agreements – buying and selling. It optimizes the processes of creating new contracts, updating existing contracts, and renewing expired ones. Quality CLMs also track contract work by displaying an interactive dashboard to easily understand the status of contracts being requested, drafted, reviewed, signed, and soon to expire. Ideally, your CLM can also extract contractual commitments, pricing terms, and invoice details to help with compliance throughout the contract and help mitigate risk, avoid penalties, leverage discounts, and provide historic data to better inform future negotiations.
The most common question is, “How do you calculate ROI on CLM software?” Including all the value contributing factors can be a bit intimidating. After all, if there is one thing I’ve learned over the years of doing business, there are many different ways to look at things and various tools out there to help analyze results. To help make sense of this, we have put together some metrics typically used in the industry, including hard and soft dollar inputs:
→ How much time is being spent on each task (hours)
→ Average number of employees assigned to each task(number)
→ How many tasks are being worked on per employee (tasks/hour)
→ Average pay rate for each type of task? ($$$)
→ Any additional costs could include outside legal services, overtime costs, or other expenses such as travel. ($$$)
→ An estimate of opportunity loss cost due to missed negotiation window, unrecognized discount leverage, or penalty due to unfulfilled commitment ($$$)
→ An estimate of the time spend on non-work-product tasks like chasing contract input details from stakeholders, pushing review and signature reminders, verifying and sharing status updates for internal and external reporting (hours)
What is Return on Investment (ROI)
Return on investment (ROI) is the ratio of money returned to money paid. It is a way of measuring the effectiveness and success of an investment or project.
For example, if you license a software solution for $100,000 and the software results in time and cost savings of $200,000, your ROI would be 200%—the software license paid for itself twice.
How do you calculate the ROI of a new CLM Solution?
The calculation of ROI is easy. You need to calculate the current state costs using the inputs listed above and then compare it with the future state total cost of ownership (TCO) for the planned CLM solution to determine whether it’s worth your time, money, and effort.
To calculate future-state CLM TCO, you will need to know the following:
- The total cost of your CLM license and payment timing
- Any additional implementation fees
- Expected efficiency due to eliminated manual effort
- Expected efficiency due to automated workflow and review routing
- The time gained by having a consolidated, searchable contract library
- The time saved through automated contract generation
- The time saved through automatic dashboard tracking of status and expirations
- The money saved through rebates, price discounts, and penalty avoidance
Now that you have all these numbers, we can start calculating!
Why is it important to track ROI?
It’s simple: if you don’t know how much money you’re putting into the system and how much it has returned, what are you doing investing in a contract management system? How can I tell whether my project will positively impact or not? Many benefits are associated with tracking ROI, such as knowing when projects have reached their projected goals and adjusting accordingly to avoid wasting resources (money and time).
iQuantum can help you determine your current costs and where there are opportunities to use a CLM solution to optimize your corporate legal department and take advantage of a large ROI.