- Inefficient contracting processes have slowed revenue and resulted in lost business at more than half of organizations surveyed globally
- 92% of organizations plan wide-ranging changes to contract management
- 99% do not have the data and technology needed to fine tune contracting processes
More than half of the world’s major companies surveyed are facing lost revenue and missed business opportunities as a result of inefficiencies in their handling of contracting processes, according to a new EY Law and the Harvard Law School Center on the Legal Profession survey.
The report – How does contracting complexity hide clear profitability? – is the second in a series of three surveys exploring the legal opportunities and challenges facing organizations globally. It encapsulates the views of 1,000 contracting professionals and leaders from law departments, procurement, commercial contracting and business development functions around the world.
More than half of business development leaders (57%) say their organizations have seen slower revenue as a result of contracting inefficiencies and 50% have missed out on business.
Although most (92%) organizations surveyed are trying to transform their handling of contracts, the majority of respondents are struggling in the face of significant obstacles. Almost all organizations (98%) say they face critical barriers while 38% say they have already tried to change and have failed.
Kate Barton, EY Global Vice Chair – Tax, says:
“Revenue growth is a fundamental goal for any commercial organization and effective contracting processes play a crucial role in making that possible. Contracting teams around the world know the value they can bring and they are making real efforts to transform, but the survey brings into sharp focus a whole range of obstacles that they must navigate if they are to make the improvements they are aiming for.”
One of the main drivers of change for contracting professionals is the pressure to cut costs. Almost all (99%) organizations are planning to reduce the cost of contracting over the next two years. The scale of their plans is also striking with one in three larger organizations looking to reduce contracting costs by 30% or more.
Lack of clarity around decision-making
Another fundamental challenge for many survey respondents is that despite the widespread agreement on the need for change, many note confusion about where responsibility for managing contracts actually sits – a problem that can complicate the contracting process and transformation efforts. Fifty-nine percent of legal departments believe they play the leading role, while a similar proportion (56%) of contracting staff believe they are responsible. Meanwhile, 39% of business development professionals think they are the decision-makers.
The technology gap
Although most (70%) organizations have a formal contracting technology strategy in place, almost all (99%) say they do not have the data and technology needed to optimize their contracting process. As a result, there is a gap between strategy and execution and many organizations face increased risk because they are unable to measure, manage and control adherence to their policy.
Organizations are also struggling with how to put technology in place. Almost half (47%) of respondents say implementation is a major challenge and around one-third (34%) say they find it hard to recruit people with the skills needed to identify and implement the technology they need.
Weak contracting processes
The survey reveals a startling gap in processes for managing contracts. Sixty-nine percent of organizations do not require staff to use a template when drafting contracts, and the same percentage do not demand adherence to any rules or guidance.
Nearly half (49%) say they lack a defined process for storing contracts after execution and almost eight-in-ten (78%) say they do not systematically monitor contractual obligations. In addition, almost three-quarters (71%) of contracts are not monitored for deviations from standard terms.
John Knox, EY Global Legal Managed Services Leader, says:
“The importance of getting contracting right cannot be underestimated. For many organizations it is something of an ‘Achilles heel’, but with the right transformation efforts focused around people, process and technology, contracting can actually become a business enabler and differentiator. The survey shows that one way in which organizations aim to tackle these challenges is through working with subject matter leaders and external providers. This type of co-sourcing arrangement can help clarify responsibilities, centralize processes and help ensure the right work is aligned with the right resources so that organizations can focus on more strategic activities.”
David B. Wilkins, Lester Kissel Professor of Law, Vice Dean for Global Initiatives on the Legal Profession, and Faculty Director of the Center on the Legal Profession, Harvard Law School, says:
“Contracts are at the core of every business. They determine how growth happens and how risks are managed. It is therefore absolutely crucial that organizations have effective systems and processes to manage every aspect of the contracting process, from negotiation and execution, to termination or renewal, as well as an accurate understanding of the obligations, benefits, and risks across the entire spectrum of their contracts. Yet as the survey underscores, the fact that so many functions have an interest in – or responsibility for contracting – makes it difficult for most companies to manage their contracts effectively. As we enter a period of accelerated growth and risk, business leaders must find new ways to balance these internal interests and manage their contracting functions for the future.”
To learn more about the 2021 EY Law Survey, visit ey.com/law.
About the survey
The survey canvassed the views of legal department leaders as well as those from procurement, commercial contracting, business development, and legal entity management teams.
The result is a series of reports from EY and the Harvard Law School Center on the Legal Profession exploring the challenges facing legal departments around the world.
This survey is part of the 2021 EY CEO Imperative Series, which provides critical answers and actions to help general counsel reframe their organization’s future. For more insights in this series, visit ey.com.