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CLM Platform Fee Misalignment
Mark Voytek |
February 29, 2024 |

 21,728 total views

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An overindulgence in contract lifecycle management platform fees: a call for alignment and efficiency

In the rapidly evolving landscape of Contract Lifecycle Management (CLM), an in-depth examination of procurement practices reveals a concerning trend: clients are routinely purchasing far more from CLM platform providers than they genuinely need. With over 225 CLM platform providers competing for market share in an aggressive sales environment, companies often fall victim to being persuaded into committing to three-year contracts or longer, leading to a surplus of underutilized licenses, with this ranging from user accounts to contract volume capacities. This discrepancy between investment and utilization underscores a pressing need for a paradigm shift, where the cost of CLM platforms is more accurately aligned and consistent with the value they deliver to clients.

This misalignment is not trivial. In one glaring instance, a company deployed a mere 1% of the licenses that they had purchased after two years. Another case saw less than a 5% deployment after 18 months, with no robust use case or strategy for their CLM objectives in sight. These example scenarios underscore a stark reality: businesses are entangled in a costly mismatch between their needs and the solutions they are sold, driven largely by CLM companies’ pursuit of higher annual recurring revenue (ARR). The story gets more interesting from a customer success perspective and the objective to experience ‘zero-churn. Which means these platform providers can’t lose a client, or even experience in churn-down, where the company renews or extends their contract, but does it for less ARR. These make for unpleasant Board meetings with the investors and are avoided at all costs.

Drawing parallels from the early days of outsourcing, I want to highlight a scenario I encountered in the mid-2000s where a company outsourced 4,000 positions to India from NYC. On paper, and initially, the savings were significant and compelling. However, the contract was structured in such a way that the company paid the top hourly rate for Full-Time Equivalents (FTEs) even though they were buying FTEs in large groups. This arrangement ignored the principle of volume discounts, leading to significant overpayment & lack of value realized. This example of Gen One outsourcing mirrors the current state of Gen One CLM, where a lack of strategic purchasing and deployment insight leads to inefficiency and waste.

As one can imagine, the financial implications for not deploying a CLM plan with earnest and focus are significant. Normal CLM implementations suggest that every dollar spent on software should yield $1.5 to $2 in services. For more complex deployments, this ratio can escalate to $4 to $5 in services per dollar of software. The definition for normal versus complex, and the exact ratios suggest that “your mileage may vary”, but the net is it’s not free. These metrics serve as a crucial consideration for clients, prompting a deeper evaluation of their business case, key stakeholders, quick wins, and the inherent value of their CLM investment. Good program planning with executive support, a project plan, a dedicated team, a very good SaaS platform partner, picking the right Systems Integrator are all just table stakes at this point, but often are missed in the rush to deploy a CLM platform. As I sometimes say, “How’s that working out for you?”!

The journey toward efficient CLM procurement and impactful deployment requires a structured approach and process. Clients must fully understand their business needs, identify key stakeholders, and pinpoint areas where CLM can deliver value. Looking at this as a multi-phased engagement is important and quick wins will appease the steerco and the executive sponsor. This strategic alignment ensures that organizations do not find themselves in a common situation where clients realize well into their contract term that they have deployed a fraction of their licenses without realizing corresponding value or frankly any value.

This calls for a significant market shift. From the lessons learned in Gen One outsourcing, smarter, more informed procurement strategies are essential. Clients need to shift their focus away from quick wins and consider the broader implications of their CLM investments. This involves working closely with platform providers, service integrators, and possibly third-party consultants to right-size their CLM program, ensuring that the purchase and utilization of licenses are in harmony with their actual needs. This starts in the strategy phase but sadly many clients today missed and are now working to recast their project plan, budget, change management plan, etc. All this while executives and board members are reading headlines about ChatGPT, LLMs and other technical disruptors are coming. But details on how to position for that is a different article.

To this end, the CLM industry and its clientele stand at a crossroads. The market’s aggressive pursuit of ARR, coupled with a lack of alignment between cost and value, demands a new model of engagement. Clients should not be paying for licenses they do not use. Instead, they should demand pricing models that reflect the true value and utility of the services provided. This shift requires not only a change in how contracts are negotiated and structured, but also a fundamental transformation in how clients and CLM providers envision the lifecycle of contract management.

By adopting a more strategic, informed, and collaborative approach to CLM procurement and deployment, businesses can avoid the pitfalls of overspending and underutilization. The alignment between cost and value not only enhances operational efficiency but also empowers organizations to leverage CLM as a strategic asset rather than a financial burden.

In conclusion, the journey toward efficient and value aligned CLM practices is both necessary and urgent. As the market matures, clients and providers alike must embrace a paradigm that prioritizes strategic engagement, transparency, and a keen alignment of costs with benefits. By doing so, the industry can transcend the limitations of Gen One CLM, paving the way for a future where contract lifecycle management is synonymous with strategic advantage, operational efficiency, and financial prudence.

Author: Mark Voytek

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