Can CLM As Legal Tech Survive A Downturn?

As I come up on 15 years at Pramata, I’ve been fortunate enough to see the transformation of the contract management industry first hand. In the early days, most people didn’t even know what contract management was or why they needed it. Even worse, the idea of buying software for legal teams was laughable at most companies and getting budget approved was like breaking rocks. 

Starting in around 2019 and escalating dramatically with the pandemic, forward thinking legal teams were empowered to innovate and modernize. 

They built and staffed legal ops teams. They streamlined processes. 

And yes, they bought a lot of software. 

With money cheap and business accelerating, companies threw money at every department to digitally transform to support remote work. Oftentimes, business cases weren’t required for CLM purchases. If one was, it was centered around improving legal efficiency to help scale to support increased demand: automating NDAs, improving turnaround time, etc. 

But over the last 12 months, I’ve seen what can be described as a reversion to the tech buying mean of the past 15 years. CFOs have reasserted their role in controlling costs, questioning spend and forcing a much higher level of justification. At smaller and even mid-sized companies, the idea of departmental budgets have gone out the window as purse strings tighten. 

As the tide of cheap money recedes and companies are no longer as worried about scaling to support demand and transforming for remote work, I’m seeing CFOs ask the same question over and over: 

Is improving legal efficiency really a top, fundable priority? The answer all too often is a resounding, “No.”

The Illusion of a CLM Budget in 2023

Don’t believe me? Stop me if this sounds familiar: 

You keep bringing CLM to your CFO only to have it shut down. Maybe next year. 

You finally get a budget for CLM. You spend months selecting a vendor. You take the final agreement to the CFO only to find the budget has been pulled as a “non-essential” expense.

You’ve bought and implemented CLM. When the CFO asks you to take 20% out of your current budget, you successfully defend your CLM. The next day, your solution provider hits you with a massive price increase.

I’ve seen these scenarios play out dozens of times over the last 12 months as I work with GCs at leading companies. 

One of the common themes when this happens is that the initiative was inevitably presented as a legal initiative. When pressed on the business case, the GCs either didn’t have one or if they did, it centered around legal efficiency. Automating NDAs and the like. 

The challenge with those business cases is that, unless you’re prepared to cut staff (hint: legal is already understaffed so no one is) they are “funny money.” It looks great on a spreadsheet or in a vendor’s ROI calculator, but won’t actually show up on the bottom line. 

So, the initiative is inevitably shot down. 

The CLM Funding Problem

The budget challenge is big enough under normal circumstances, but CLM market dynamics make it even more difficult. Between 2019-2022 dozens of companies raised billions of dollars on massive (unrealistic?) valuations. 

At the center of those valuations: that improving legal productivity and identifying & mitigating risks were a top priority. 

Now, those same vendors are under extreme investor pressure, often having to grow at 50%-60% year-over-year while eliminating burn just to get back to their valuation from 2 years ago. 

What does that mean: CLM prices are skyrocketing. 

It’s bad enough if you’re trying to get a new CLM purchase funded. It’s much, much worse for existing customers. Longtime customers are having their loyalty rewarded with huge price increases and pricing model changes. 

One prospect we talked to, had their vendor change their pricing model in a way that resulted in a 300% increase to their renewal amount!

So, just as business cases are being threatened, prices are going up! Well, that sucks, but at least everyone is loving their CLM that they bought …

Are CLMs Really Delivering on Their Promise? 

At the end of the day, companies could stomach increased prices if they were getting the value they expected from their purchase. Unfortunately, we see a lot of the same frustrations with CLM purchases, over-and-over:

• Deployments take way too long, and are too complicated
• The “Magic AI Button” that was supposed to clean up your contracts was massively oversold 
• Features that look great in demos (I’m looking at you, redlining tool) don’t work in the real world, but you pay for them anyway. 
• Business case critical items like renewal dates are wrong
• Legacy migrations cost too much, so they’re never done. 
• The solutions get overly complicated, so no one uses it. 
• The CLM process is too rigid and makes things even more complicated relative to what you do today 

On top of this, legal teams need to staff FTEs just to manage the data. BUT those FTEs weren’t in the original budget request, so they aren’t hired. Ultimately, the deployment ends up with inaccurate data and a backlog of contracts to be tagged. 

So, where do we go?

So business cases aren’t getting funded, prices are going up, and implementations aren’t delivering. 

Is there any good news? 

Actually, yes. The good news is that effective contract management is even more important in a downturn as companies look to get more revenue / savings out of their current contracts. And the right CLM can dramatically improve legal productivity! 

Legal buyers just need to reframe the “why” behind their purchase, look beyond legal efficiency and adjust their evaluations accordingly. Here’s some practical tips for Legal CLM buyers:

1. Align to your broader company goals before talking to vendors (and analysts!)

So many GC sponsors I meet have delegated their CLM purchase to more junior team members without giving a clear “why” beyond “buy a CLM” and then stay hands off in the process. So, evaluators essentially use vendor demos and analyst CLM checklists to set their requirements and uncover the “why.”

But in today’s world, there are only a handful of key initiatives that are getting funded, and the odds that your evaluation matches the company goals are low. 

Before you begin your search, talk to your executive team to understand the top company priorities and think through how better contract management can accelerate those goals. 

Then, arm your evaluation team with those objectives and have them ask vendors how they support those goals. It will lead to much more productive discussions that have a greater likelihood of getting funded. Here are some examples:

The more specific you can be, the better the outcome of your evaluation process and the more likely your project is to be funded. 

2. Prioritize the most impactful features, not the “coolest”

CLM providers have made a massive investment in their software and more importantly, their marketing. Often, we see buyers get enamored with new, “sexy” features and overlook the “boring”, but essential capabilities that drive value or are required for success.

On the flip side, I’ve seen countless 100+ feature lists from RFP with no consideration as to which ones are most important to deliver on the business outcomes. This leads to vendors loading up on “check the box” features that can make it through demos but not through production deployment. 

As you look at vendors, make sure to think through how features tie back to your objectives. After all, you’ll pay for them whether you use them or not.

Is “Online Deal Collaboration” really essential for renewals? Will a sales person actually use it? 

Probably not. 

Is the ability of a vendor’s AI to calculate the right date important?

Absolutely unless you want to be stuck with a lot of data clean up. 

Getting this right up front will help you make the case to your CFO. Here’s a simple example grid:

3. Involve other stakeholders in the process

One of the biggest fears of legal teams running evaluations is that other teams will hijack “their” initiative and they won’t get what they want. So, they wait to bring other departments into the process until far too late in the process or even worse, don’t contemplate other departments using the system. The former misses an opportunity to create broad alignment, and the latter inevitably caps the potential ROI and leads to artificially low user based pricing which breaks when the CFO asks “what happens if this takes off.”

In my experience, legal teams are much more likely to get what they want if they involve other parties. By including sales, procurement, finance, etc. you can create a much more compelling business case that ultimately leads to a funded, successful project. 

Protip: when you do engage other departments, ask them about their objective & challenges, not features. And have them prioritize those challenges. That way, you can properly evaluate vendors. 

4. Look at the “Total Cost of Ownership” of the CLM

The costs for CLM system purchases go beyond the initial license fees. Before you present a proposal to your CFO, you should look at all of the costs to support the system, including additional FTEs, consultants, temps, vendor services and user licenses. 

Specifically, you should consider the following factors:

• Vendor onboarding services: make the vendor spell out what is—and isn’t—included. Make sure to check into this on any reference calls. 
• Required FTEs: Test out their AI accuracy and ease of system configuration. Then, calculate how much resourcing you think you’d need – either legal or IT – to correct the AI data output and tag contracts. Without this, the solution won’t deliver on its ROI promise.
• Ease of Configuration: Can you make changes to workflows, reporting and templates yourself? Or do you need IT. IF you need IT, make sure to include that in your budget request. Most vendors say that you can do this, so make sure you test it out. 
• User Licenses: How many licenses do you need to start? If it takes off, how much would it cost to give everyone access to who needs it? Without enough licenses, you’ll still be stuck playing corporate librarian. Some vendors (like Pramata!) offer unlimited users for this reason.

5. Make CLM vendors bet on themselves 

With increased budget scrutiny and CLM initiatives tied to top company goals the norm, the stakes for getting it wrong have increased dramatically. It’s important to force vendors to go beyond demos and prove out they can deliver by betting on themselves. 

Here’s some ways you can protect yourself and ensure a successful deployment: 

• Ask 2-3 finalist vendors to go through a small Proof-of-Concept that includes access to a live environment. And always make sure you include entire contract families and dozens of documents, not just 1-2 NDAs. 
• Only sign a one-year contract and / or ask if vendors offer any sort of ‘opt out’ option to avoid getting locked into bad vendor relationships. 
• Ask vendors what their price increase policy is and how much they have increased prices in the past 12 months. 

By taking this approach, you can ‘de-risk’ the investment when making the ask of your CFO, making it much more likely that your project is funded and successful. 

Conclusion

First, the bad news:  I think we will look back at the 2019-2022 CLM heyday as an outlier when it comes to CFO scrutiny of purchases. Unless GCs are willing to reduce headcount, the days of CLM purchases being approved based solely on legal efficiency gains are numbered.

But the (really, really) good news is, there has never been a greater awareness of the importance of contract management in the overall profitability of a company. And CLMs are getting better and better at making legal teams more efficient! 

Savvy GCs will see this as an opening to continue to take a more active role in the strategic direction of the company and provide increasing value from the legal function. But it will require looking beyond legal specific goals when it comes to CLM investments.