Unlock Cost Savings Through AI Contract Benchmarking
Benchmarking contract spending against industry standards is crucial for organizations looking to optimize their contracts and secure cost savings. Despite its importance, many businesses still struggle to extract actionable insights from current benchmarking tools. The next generation of AI-powered solutions promises to change that by offering more detailed, data-driven insights to help companies make strategic contract decisions.
Benchmarking contract spending: a strategic approach for cost optimization
Benchmarking contract spending against industry peers has become a widely acknowledged strategy for optimizing pricing, realizing cost savings, and maintaining a competitive edge. A significant 63% of businesses highlighted the importance of benchmarking to enhance their contract management processes, in our Agreement Intelligence Market Report. However, despite its recognized value, many current benchmarking tools fail to deliver truly actionable insights, leaving organizations with only partial data to work with.
The value of benchmarking in contract management
At its core, the strategic value of benchmarking lies in understanding prevailing market rates. By comparing their contract spending against industry standards, finance teams gain valuable insights that help them negotiate better terms with vendors, avoid overspending, and ultimately maximize value from their business contracts.
As David Morgan, CFO at Loop Returns, explains, “I really, really like the idea of being able to benchmark your contracts.” However, he points out a major flaw in many benchmarking tools: “It sounds more useful than it is. It conflates volume and rate.” This issue—where total contract value masks essential pricing details—can make benchmarking data less actionable for organizations.
The need for granular insights
For benchmarking to be truly effective, finance teams need more than just average contract values. They require granular insights that reveal specific pricing tiers, available discounts, and other cost drivers that influence the total contract value. This nuanced approach ensures that organizations can make informed decisions about contract negotiations and vendor relationships.
Sean Weingarz, Senior Global Procurement Manager at Iterable, echoes this sentiment, emphasizing the need for “apples to apples” comparisons. This demand for specificity highlights a critical limitation of current benchmarking tools: they often fail to provide a level of detail necessary for making precise, data-backed decisions.
The future of benchmarking: AI and machine learning
The future of benchmarking contract spending lies in the integration of artificial intelligence (AI) and machine learning. AI-powered benchmarking tools can move beyond providing simple averages and instead offer tailored recommendations based on an organization’s unique needs and market conditions. This evolution transforms benchmarking from a high-level overview into a powerful tool for strategic contract management.
By leveraging AI, finance teams can access more granular and actionable insights. These insights not only provide an in-depth view of market rates but also offer guidance on how to adjust contract terms to maximize savings and improve overall contract value.
However, as promising as AI-driven benchmarking tools are, they are not a “set it and forget it” solution. Continuous monitoring and updating of AI algorithms are necessary to ensure the accuracy and relevance of the data, as market conditions evolve and business needs change.
Unlocking the true potential of benchmarking
AI-driven benchmarking will unlock the true potential of this strategy, enabling finance teams to make informed, data-backed decisions that optimize contract value. By using more detailed, tailored insights, organizations can drive significant cost savings, enhance negotiation leverage, and improve their overall contract management processes.
In conclusion, while traditional benchmarking tools have their limitations, advancements in AI technology are opening up new possibilities. By embracing these innovations, businesses can transform benchmarking from a simple reporting tool into a powerful driver of strategic decisions in contract management.
