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NEWS, IDEAS, AND INSIGHTS FROM THE SIRION TEAM
Leveraging CLM to Plug Contract Value Leakage
Contract value leakage is a reality. It might sound like an absurd question, but the fact of the matter is that companies, under the eyes of law, are living, breathing entities and are treated as such. Corporate personhood is what allows enterprises to enter into contracts with other entities. Such contracts form the foundation for third-party relationships with customers and suppliers, which are critical to its sustained growth and good financial health.
These contracts however can be an enterprise’s Achilles’ heel. Left unattended and unmanaged, contracts can rapidly go from a perceived win to hemorrhaging value. Without the ability to compare what has been promised to what has been delivered, enterprises are unlikely to measure ROI. As a result, enterprises slowly bleed out a portion of their bottom line as their contracts keep ‘leaking’ value. In fact, studies conducted by World Commerce & Contracting (formerly IACCM) have revealed that organizations suffer annual contract value leakage equal to almost 10% of their revenue.
How Do Contracts ‘Leak’ Value?
Contract Value Leakage can be summarized in 3 major categories: Poor contract quality, contacting costs and inefficient contract management. The most concrete and most often discussed example is the latter, which occurs at the invoice level wherein companies are likely overbilled for services (or goods) by the supplier. This is especially endemic in scenarios where contracted terms (especially obligations, KPIs, rate cards, and other financial parameters) are manually reconciled against actual delivery data and invoices produced by the supplier. Complex pricing, pricing changes as well as service level credits, rebates, earn back/claw back computations are performed on spreadsheets, which offer little to no protection against human errors. Besides being a time- and cost-intensive process, manual reconciliation is unlikely to successfully uncover 100% of invoicing errors, which in turn can lead to cases of overpayment. At the scale of multi-billion-dollar enterprise, it could translate into millions of dollars in losses. The industry recognizes this as ‘hard value leakage’ to indicate measurable erosion of value.
The other categories of value leakage can be hidden as far back as the contracting drafting stage itself and have an indirect impact on the bottom line.
A missing clause or clause deviations could mean that a buyer is unable to claim full value from a contract. A simple example: if the company’s standard position is to pay against invoices 90 days from the date of receipt but they have failed to change that in a contract draft from 30 days, the business will lose value by way of 60 days’ worth of interest. Other examples might include increased risk associated with info security or force majeure (those pandemic clauses come to mind). Since this has an indirect impact on the bottom line, the industry classifies this to be ‘soft’ contract value leakage. The avenues of soft value leakage are diverse and can range from regulatory fines levied because of non-compliance with state or federal laws to poor customer service, to delivery failure to lost business. Furthermore, without a proper contract authoring system in place, the time and effort associated with drafting, and renegotiating contracts aligned with preferred clauses is mind-numbing. The time to find, read and categorize existing contracts to address gaps by itself is enormous.
Taking a Technology-led Approach to Plug Contract Value Leakage
Common wisdom would dictate that companies should leverage the AP or invoice management capabilities of a typical P2P system to put an end to contract value leakage at all levels. While this approach can meet with some initial success, it is likely to hit an eventual dead-end because such systems miss out on a critical element in the invoice reconciliation chain – contracts themselves. Besides computational elements such as rate cards and pricing models, contracts define obligations, deliverables, milestones, and other KPIs, which are essential to figuring out if what was promised has been delivered or if you are taking on additional risk.
A purpose-built CLM platform like SirionOne – which integrates both pre- and post-signature capabilities into a single platform – can first seamlessly plug into the enterprise tech stack (comprising ERP, P2P, CRM, ITSM) and pull in raw performance/consumption data from various systems. This will then be automatically tallied simultaneously against invoices received from suppliers as well as pricing information, computation models, and other KPIs extracted from signed contracts by SirionOne’s AI engine. As an outcome, the system will automatically flag invoice discrepancies and offer the necessary data-led insights enterprises will need to seek a resolution from suppliers or preempt potential disputes and take corrective actions. In action, we have witnessed the SirionOne platform help enterprises reduce hard value leakage at the invoice level by up to 6-12%.
So what about soft value leakage?
While we have already declared that the root causes of soft value leakage are too diverse to dive in-depth into in a blog post, let’s go back an address the example of losses arising out of a missing clause/clause deviation.
SirionOne’s AI engine is the key to solving this problem. During the contract drafting and negotiation stage, the system automatically generates a base draft using pre-approved legalese and templates from a library. This ensures that the initial draft is compliant with all enterprise standard positions. During the negotiation phase, redlined drafts received from the counterparty are automatically scanned by SirionOne’s AI engine, which highlights all insertions, deletions, modifications as well as missing clauses and clause deviation (if any) along with risk scores. In our simple example, if the counterparty has changed the payment term to 45 days, the system will automatically highlight the modification and show a risk score by comparing it with the same clause’s standard position as defined under the playbook. In turn, this simplifies the legal review process and provides the insights needed to ensure that a contract is bulletproof by the time all parties are ready to sign on the dotted line.
SirionOne directly addresses soft value leakage. It can diminish the time it takes to create a first draft of a contract buy up to 90%, reduce risk by strengthening commercial contracts, and reduce contract lifecycle management costs by up to 40%.
A technology-led approach that digitally transforms how enterprises create, negotiate, and manage contracts may hold the key to limiting both hard and soft value leakage. If you’d like to learn more about how SirionOne is helping enterprises across verticals do just that and more, submit a request for more information or a demonstration.