The Hidden Costs Of In-House Contract Management: Time, Opportunity, And Risk

Contract review and management eating up your time and exposing you to risk? Discover how outsourcing routine contracts frees you up to focus on what matters for your business.
United States Corporate/Commercial Law
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Contract review and management eating up your time and exposing you to risk? Discover how outsourcing routine contracts frees you up to focus on what matters for your business.

Let's face it: few of us enjoy dealing with stacks of routine contracts. It's tedious, but it has to be done. Add to that the high price tag of using outside lawyers and a lot of businesses choose to do it themselves, believing they're saving money. But there's a catch – they often end up paying for it in ways they didn't expect.

Research shows that up to 40% of a contract's value can be lost without close management, while poor contract management costs businesses 9% of their annual revenue. Additionally, a recent online survey found that about 65% of the research participants spend at least 6 hours per week negotiating non-disclosure agreements. The survey participants also agreed that it diverts attention from core strategic activities.

That supposed financial 'saving' starts to look a lot less appealing when you factor in the true cost to your business.

Think for a minute about the hidden costs of doing everything yourself. It might seem like a wise financial choice to have someone in-house handle routine contracts such as non-disclosure agreements. But have you considered what else you and your team could be accomplishing if you weren't bogged down in routine contracts?

The Time Drain

One of the biggest hidden costs of managing routine contracts in-house is the time spent keeping the various moving parts together. It requires:

  • Negotiating and drafting contracts
  • Tracking and monitoring contract performance
  • Maintaining accurate records and documentation
  • Ensuring compliance with regulatory requirements

And the list goes on.

Every NDA, no matter how routine, demands a chunk of your or your team's valuable time. Reviewing boilerplate clauses, negotiating minor edits, managing revisions, and coordinating signatures – these tasks accumulate, creating a significant time drain.

Juggling contracts also takes time away from finding deals, managing your investments, or keeping investors happy. Every minute you pour into contract work is a minute not spent on those core activities. This can slow your entire process down, potentially causing you to miss out on exciting opportunities. In fact, the research mentioned earlier highlights this – 58% of participants agreed that their firm's NDA processes actually got in the way of closing deals.

The Risks of "It's Good Enough"

In addition, unless you've got a trained lawyer on staff, those contracts might not be as strong as you think. Even a tiny mistake or a poor choice of wording can come back to haunt you later in the form of:

  • Missed Value: Seemingly minor oversights in a contract can lead to lost revenue down the line. Maybe you didn't negotiate the best possible terms on an exit deal, or there are loopholes in a non-compete agreement that could hurt your portfolio company. Each "good enough" contract can chip away potential gains.
  • Unexpected Liabilities: Vague language, unclear responsibilities, or missing clauses can create unforeseen issues. You might find yourself unexpectedly on the hook for costs you didn't anticipate.
  • Compliance Nightmares: Industries often have specific regulations that must be reflected in contracts. If your "good enough" approach misses these details, you risk fines, penalties, and damage to your firm's reputation.
  • Strained Relationships: Sloppy contracts can lead to disputes or misunderstandings with portfolio companies, investors, or partners. These strained relationships can harm your firm's long-term success and ability to work effectively with others in the industry.

How to Avoid These Hidden Costs

Contracts form the backbone of business relationships but can quickly become expensive burdens if not handled correctly. Fortunately, there are ways to stop these hidden expenses from draining your resources: you can either invest in the resources, time, training, and software to manage everything in-house or you can outsource.

In house, a dedicated contract manager or team can streamline the management and monitoring of your NDAs and other routine contracts. Additionally, contract management software can help you automate contract workflows, track deadlines, and manage contract renewals. Even so, you'll still need someone to manage the software and oversee the contract review team. You also need to make sure that all team members who are involved in contract management are properly trained and equipped with the necessary resources. This can help prevent mistakes and ensure that contracts are managed effectively.

Conversely, contract management outsourcing gives you back valuable hours and increased capacity for strategic work while your outsourcing partner tackles the time-consuming task of managing and reviewing your NDAs and other routine contracts. By focusing on strategic work, you can close deals faster and more efficiently, identify and pursue new investment opportunities, and deliver higher value to existing clients, potentially leading to improved bottom line. The increased deal flow and successful transactions ultimately gives your firm a stronger reputation in the private equity space and enhances your chances of retaining high-profile clients and grow your firm.

A reliable outsourcing partner brings dedicated expertise to the table. They ensure your NDAs and routine contracts are consistent and compliant and minimize potential risks.

Clearly both approaches will cost money. But so would costly disputes and compliance violations.

The Cost of Insourcing vs. Outsourcing

Proactive contract management saves far more in the long run by preventing costly disputes, missed opportunities, and compliance violations. The question is what approach are you going to take? Insourcing (handling contracts in-house) or outsourcing (partnering with an external provider). Let's look at the costs and benefits of each:

Insourcing Contract Management Costs

  • Employee Salaries and Benefits: Hiring and maintaining a specialized contract management team or in-house legal counsel is a sizable expense.
  • Infrastructure and Technology: Contract management software, hardware, and secure storage add to your burden.
  • Training and Development: Staying current with regulations and best practices requires continuous investment in staff education.
  • Opportunity Costs: Time and focus diverted from core business functions can stifle growth.

Contract Management Outsourcing Costs

  • Service Provider Fees: You can expect recurring fees for the expertise and services you receive. These fees are often negotiable and if you, for example, look at our outsourcing solution we offer flat fees, volume discounts, and no hidden costs.
  • Integration and Implementation: Connecting the provider with your existing systems may have upfront costs such as integration and implementation costs. Our service is designed to work seamlessly with your current systems, with no implementation costs.
  • Data Security and Compliance: Ensure your provider has stringent security measures that align with your industry.

When choosing between insourcing and outsourcing contract management, consider the trade-offs in knowledge, control, integration, scalability, and cost. Insourcing offers greater control, allowing you to tailor processes to your exact needs. It also enables smoother integration with existing systems and ensures that contract expertise remains in-house.

On the other hand, outsourcing often provides significant cost savings compared to building an internal team. Additionally, it grants you access to specialized contract management professionals – often experienced lawyers – and allows for greater scalability and flexibility to adjust your usage level without needing to manage permanent staff.

The best choice for your company depends on factors like your business size, contract complexity, and budget. You should carefully weigh your specific needs against each approach's costs and benefits before deciding.

Final Thoughts

While the DIY approach to contract management may seem cost-effective at first glance, it can lead to significant hidden costs that can negatively impact your bottom line, performance, and efficiency. By outsourcing your routine contract management, you free yourself from the time drain and potential liabilities, allowing you to focus on your core strengths. Think of it as buying back your time.

Yes, outsourcing has its own cost, but it often pales in comparison to the potential expenses caused by missed opportunities, unexpected issues, and damaged trust. When handled by a reputable provider, outsourced contract management becomes a strategic investment that delivers both efficiency and peace of mind.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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