We asked our friends at the International Association for Contract & Commercial Management (IACCM) how much a contract costs a business. Tim Cummins, President of the IACCM, says inefficiency is pushing up the price of getting a basic contract signed.
Here we are in 2017, with businesses focusing on automation and agility. So surely operational costs in areas such as contracting must have reduced?
In fact, the average cost to businesses of processing and reviewing a basic everyday contract is only rising. The study, based on analysis of more than 700 organizations, found that business spend on a standard, low risk procurement contract from draft, negotiation, to signature, has increased 38% in the past six years, to an average of $6,900. Costs for a mid-complexity contract, stands at $21,300 and high complexity contracts run into hundreds of thousands of dollars.
The full picture of contract review and approval
This is based on data from large companies and enterprises in North America and Europe with annual revenues of $1billion or more, comparing current costs with a similar analysis undertaken in 2011.The true cost of a contract reflects the extensive (and growing) time of departments, in getting a deal through.
The contract stages include contract creation, processing, review, and negotiation. There are also substantial costs incurred due to the involvement of multiple individuals in an organization now required to iron out the contract details. This may include negotiations setting out statements of work, price or charge schedules, and security considerations (such as in the approval of a software agreement).
The breakdown of costs in a typical procurement contract involves:
- 5 hours of legal time (costing a business $500)
- Around 18 hours of contract manager/procurement time (at a cost of $2700)
- Around 12 hours of operations, engineering, or project management time ($1800)
- 2 hours in Finance (c$300)
- Up to 6 hours with compliance / risk / or regulatory functions (c$1000)
- $600 (respondents noted ‘other’ types of review or resources)
Cost data influencing these findings are extracted from the 2017 IACCM salary survey, based on our 40,000 members.
Regulation and service contracts driving up costs
One of the main factors causing an increase in contracts costs is an increase in regulation, such as anti-bribery legislation, data protection and cybersecurity rules.
Perhaps as importantly, services also now represent 58% of business-to-business spend (vs product spend). Contracts for tangible goods (the main source of contracts in the past) are much easier to, define and specify. Intangible services contracts require increased diligence, such as validating supplier capabilities through service delivery undertakings, drafting service levels, and outlining key performance indicators. The growing importance of complex services makes contracts more complex, and therefore more costly.
Growing gap between best-in-class contract companies and “laggards”
The gap between average and best has grown. While the average cost of a simple contract has risen by $1900 (38%) in six years, for the most efficient organizations this price has risen by only $300 (9%) driven by automation and more strategic processes. Smart companies are moving away from templates and into standard term databases, generating less contention, and saving time and money. This is also where Artificial Intelligence contract review is starting to kick in.
How to follow the cost cutters?
The most efficient companies adopt contract “playbooks”, codifying legal contract policies in the organization. In addition, AI solutions are eliminating the need for case-by-case discussion of clauses. The lowest costs for an individual contract is $3,800 for simple contracts, $14,000 for mid complexity contracts, and $49,000 for high risk or unique contracts.
What does this mean for your business?
Management in many companies is awakening to the inherent inefficiencies of today’s contracting processes. The extent of manual intervention, outdated methods of production, individualistic approaches to legal drafting, and error-prone production of key documents such as statements of work impose unacceptable delays and costs.
Emerging technologies should eliminate many of these problems. Intelligent systems, together with the steady development of global standard terms, will revolutionize the way that contracts are produced and managed — only then revealing the scale of costs that are associated with today’s methods.
The International Association for Contract and Commercial Management (IACCM) is drawn from 164 countries, 16,800+ corporations, has a membership of over 40,000. It is made up of contract managers, commercial managers, sales, negotiators, supply chain professionals, and attorneys.
IACCM offers training and certification service, conducts research and benchmarking to identify trends in contract and commercial management.
LawGeex is transforming legal operations using artificial intelligence, and helping businesses save hundreds of hours and thousands of dollars reviewing and approving everyday contracts. Founded in 2014 by international lawyer Noory Bechor and leading AI expert Ilan Admon, LawGeex enables businesses to automate their contract approval process, improving consistency, operational efficiency and getting business moving faster. For more information, please visit blog.lawgeex.com or tweet us @lawgeex.