Understanding Total Contract Value (TCV):
The first step into unlocking the hard-negotiated contract value is getting a comprehensive understanding of Total Contract Value (TCV) and how companies can work at better realizing this for each of their signed agreements.
In today’s fast-paced business world, sourcing, procurement, and sales teams often spend a significant amount of time and resources negotiating favorable contract terms with suppliers and customers. However, what happens after the contract is signed is equally as important as the negotiation process. The true value of a contract lies in the ability of the organization to extract the maximum value from it. Therefore, it is crucial that teams focus on implementing strategies to unlock the full potential of their contracts.
Total contract value is a metric that encompasses the “full potential” of contracts. It measures the value of a contract over its entire lifecycle. Rather than focusing just on the initial value, which can often be misleading, this metric paints a clearer picture of the total value of a contract and its potential to generate revenue. It refers to the total value of the contract over the entire course of its life – from initial negotiation to execution, to renewal or termination.
In this blog post, we will explore the importance of total contract value realization and provide expert insights on how to make it a priority for your organization.
Why monitoring and improving total contract value is important for you
Knowing the total value of your contracts provides a comprehensive view of the financial performance of a contract, allowing you to accurately assess the potential revenue they can generate from a contract.
1. Evaluate financial impact:
Companies can use the total contract value to evaluate the financial impact that the contract could have on their business. This can help them assess whether the potential risks are worth taking on or if they need to renegotiate the contract terms.
2. Identify dependencies:
Large contracts may have dependencies on other contracts, suppliers, or resources that can increase the overall risk. By knowing the total contract value, companies can better identify these dependencies and assess the potential risks associated with them.
3. Inform future decisions:
Knowing the total value of existing contracts can enable companies to make better decisions about their future investments, as they can better assess the potential return on their investments.
4. Identify any potential areas for improvement:
Knowing the TCV of a contract can help you properly manage the contract while it is still active. Understanding if all deliverables, terms and obligations are on track.
Key components to focus on to maximize value from contracts
To get the most out of your contracts, it is important to understand the critical components that make up the total value and potential of the contract.
1. Initial Value or Negotiated Value:
The first component to focus on is the initial contract value, which is the initial amount of money that was negotiated in the contract. This is typically the amount that is agreed upon at the beginning of the contract by all parties involved.
2. Potential Revenue:
The second component of the TCV is any potential revenue that is generated from the contract over its life. This could include renewal fees, additional services, or other forms of revenue. It is important to consider all of these additional sources of revenue when estimating the total potential of a contract.
3. Potential Savings:
The third component of the TCV is any potential savings that are achieved through the contract. This can include discounts, cost savings, and other efficiencies that are realized through the contract.
4. Potential Loss due to Risks:
Finally, the fourth component of the TCV is any potential risks associated with the contract. This could include any potential liabilities that may arise from the contract, as well as any potential legal or compliance risks. It is important to consider all of these potential risks when calculating the total value of a contract. This can include tracking compliance requirements, monitoring key performance indicators, and identifying potential legal or regulatory risks.
Unlocking Hard-Negotiated Contract Value Through Contract Lifecycle Management Software
Contract Lifecycle Management (CLM) software is a great tool for companies to use to unlock the full potential of their contracts. CLM software helps companies to manage their contracts more effectively and efficiently, enabling them to identify any potential areas for improvement and to negotiate better terms and conditions.
CLM software also enables companies to get a better understanding of the Total Contract Value (TCV) of their contracts. It provides a comprehensive view of the contract, allowing companies to identify any potential revenue sources and potential risks associated with the contract. Furthermore, it allows companies to better understand the financial performance of the contract by providing insights into the total value of the contract over its entire lifecycle.
Here are a few ways in which CLM software can help unlock the hard-negotiated, full potential contracts:
1. Better monitoring of value via increased visibility:
CLM tools enable consolidation of all contract data into a central, searchable repository and can help companies gain a comprehensive view of each contract. This can enable contracts to be managed more efficiently and effectively, making it possible for companies to identify opportunities to maximize value, and reduce risks associated with fragmented contract data.
This also enables easy tracking of the contract throughout its journey via KPIs and SLAs, making it possible for companies to flag improvement areas and take corrective action before they escalate.
2. Keeping track of obligations:
Most sophisticated CLM tools on the market enable robust obligation tracking functionalities. This involves tracking the financial obligations and benefits of the contract, such as payments, expenses, and revenue.
With contract management software, it becomes easy to track the financial performance of a contract after it is signed. The software can automate the tracking of financial data, including invoicing and payment schedules, and generate alerts and notifications when payments are due or overdue. This can help ensure that all parties involved in the contract are aware of financial obligations and deadlines. For instance, you can track whether vendors are meeting their service level agreements, and if not, take corrective action to reduce costs.
3. Realizing savings:
CLM software can provide support during the contract negotiation phase, helping you identify areas where you can negotiate better pricing, discounts, or other terms. This can include analyzing historical data to determine market rates and benchmarking against industry standards.
Another way in which to identify potential savings opportunities is through analysis of current active contracts. For example, the software can identify duplicate or unnecessary contracts, which can be consolidated or terminated to reduce costs.
Best-in-class solutions also provide real-time reporting on contract spending, enabling you to identify areas where costs are exceeding expectations. This can help you take corrective action to reduce costs and improve the contract’s value.
4. Minimizing losses due to unforeseen risk:
CLM tools can generate automated notifications and alerts to ensure that stakeholders are aware of compliance and other contract risks. Notifications can be sent when certain events occur, such as the expiration of a compliance certificate or the failure to meet a contractual obligation.
Furthermore, a CLM tool can analyze contract data to assess potential risks and compliance issues, based on the contract language and obligations. It can also identify gaps between the contract terms and industry standards, regulatory requirements, and best practices. This can help you identify areas of potential risk and develop a plan to mitigate them.
In summary, understanding the Total Contract Value (TCV) of contracts is crucial for businesses to evaluate their financial performance and identify opportunities for improvement. With the help of Contract Lifecycle Management (CLM) software, companies can effectively manage their contracts, gain insights into potential revenue sources and risks, and ultimately unlock the full potential of their contracts.
Schedule a demo to learn more about Zycus iContract software for enterprises.