How Contracts Can Help IT and Professional Services Companies Weather Inflation

November 15, 2022

Inflation is the story of our time, and it is hitting IT and professional services companies particularly hard. The United States economy has experienced its highest rates of inflation in 40 years, pushing wages alone up between 4-7% since the start of the pandemic.

Prices that IT and professional services companies negotiated a year ago on the sell-side no longer cover their own labor costs associated with providing those services. A recent report co-authored by Boston Consulting Group (BCG) and Icertis underscores the impact inflation is having.

“A comparison of earnings before interest and tax (EBIT) for leading global IT companies reveals a margin drag of up to 300 bps from March 2021 to March 2022, which indicates that nearly 20-25% of the drop can be attributed to wave inflation,” the report, “Drive Margin Improvement with Effective Contract management,” finds.

The solution to the problem may be in contracts via clauses that allow IT and professional services companies to increase prices based on rampant inflation. Yet finding and exercising those clauses is easier said than done for many companies.

Contract management is key to avoiding margin erosion

Contracts are an essential part of the day-to-day activities of any services firm, and they make up the crucial underlying commitments that drive operations. Unsurprisingly, poor contract management is often associated with massive value erosion.

The BCG-Icertis report, citing the Harvard Business Review, suggests that inefficient contracting leads firms to lose anywhere between 5-40% of deal value. This is possible because contract clauses span nearly all business areas, including procurement, sales, finance, HR, Legal, and service domains. Proper authoring and implementation of contract clauses are crucial, therefore, for margin realization in IT and professional services.

In today's economic conditions, a powerful contract management solution can provide immense value across the contract authoring and execution stages. Apart from driving business agility and organizational compliance, an effective contract management solution can address key areas of concern, including revenue assurance, delivery excellence, risk management, and operational effectiveness, all leading to margin improvement.

  1. Revenue assurance

Missing or ambiguously defined contract clauses lead directly to inadequate management of obligations, negatively affecting margins. Efficient contract management can help in creating standardized contract templates to prevent further revenue leakage and monitor contractual obligations and clauses to identify and recoup revenue leakage from the clients. Such contracts can include inflation-adjustment parameters such as COLA, ECA, payment schedules, rate cards, and NRE costs, directly affecting the economics of any transaction.

  1. Delivery excellence

Visibility and effective management of delivery obligations, such as tracking milestones, tool deployments, or assigning FTE staff, are crucial for cost optimization and the avoidance of penalties. Deviation from any contractual obligations can result in significant costs. An effective contract management solution tracks delivery obligations through proactive prompts and notifications and allows managers to monitor SLA commitments via interactive dashboards, ensuring cost optimization and penalty reduction.

  1. Risk management

With new regulations such as GDPR , CCPA, etc., complete visibility into contracts can help mitigate hidden contract risks. Clauses around liability super cap, penalties, and GDPR clauses are key considerations for any services firm and the pro-active prompts on regulatory details provided by contract management software can help avoid penalties.&nbsp

  1. Operational effectiveness

In the age of ever-increasing efficiency, fast processing and turn-around time for contract authoring is of prime importance. Manually managed contracts are inefficient, scattered across the business, exposed to human error, and have low visibility. All these factors present opportunity for value leakage. Contract management solutions, however, offer to remedy these drawbacks through dedicated capabilities like a centralised searchable contract repository, collaboration apps, workflow builders, and AI-based digitization that streamline the processes of contract management, free-up human capital, and ensure that obligations by all parties are adhered to.

Conclusion

In times of economic turmoil, like the one we’re living through, it is critical that companies focus on the fundamentals. Nothing is more fundamental than contracts.

Contract management solutions have the potential to retain significant margin for IT and professional services companies who are struggling due to inflationary pressures on existing contracts. An effective contract management solution enables vastly improved visibility into contract terms by providing a centralized digital repository of contracts that can now be tracked for outstanding contractual obligations and commitments that need managing. AI-enabled solutions, backed by cloud storage, hold the key to arresting margin erosion and providing an efficient and transparent contract management solution.

For more details on how Contracts Can Help IT and Professional Services Companies Weather Inflation, download your copy of “Drive Margin Improvements with Effective Contract Management