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Contract Management: Poised for Transformation

January 3, 2018

As we enter 2018, the divide between today’s outdated contract management practices and tomorrow’s technology-enabled reality is becoming starkly obvious. It was Warren Buffett who segmented the business world into innovators, imitators and … the rest. Right now, we are in a phase led by innovators. But once momentum begins, adoption movees fast and within 12 months, I expect the dominant group will be the imitators. ‘The rest’ will rapidly become history.

What is the technology impact?

When I use the term ‘contract management’, it is meant in a lifecycle context, from inception of requirement to completion or termination of performance. The new technologies – artificial intelligence, natural language processing, blockchain – are starting to impact every phase of this lifecycle. Here are a few examples:

  • A blockchain-based pilot that handles the entire contract award process, from loading of bid through supplier selection to executed agreement. In this pilot (involving some 5,000 suppliers), the award cycle was reduced from an average 110 days to 4 days, eliminating the need for manual interventions.
  • An AI system that evaluates contract terms against established standards or ‘norms’, highlighting variations for review / risk mitigation. It then learns from the mitigations and is now starting to propose responses to non-standard terms.
  • AI and NLP systems that undertake mass-scale analysis of contracts, identifying trends or extracting common elements. Analysis of thousands of agreements is often complete within hours, enabling informed business decisions, or identifying areas for update or improvement. For example, the system undertook analysis of a portfolio of real estate contracts and established relative value of leases related to operational costs and revenues, supporting renegotiation of the leases.
  • Digital technologies such as chatbots and animated videos that increase user efficiency and reduce operational costs, including a reduced the need for review and approval.

Pressure for change

A recent survey by IACCM illustrates the limitations of today’s typical process when compared with these innovations. Even when automated, systems in many cases rely on standard templates and provide limited data. For example, more than 65% of organizations admit that they do not reconcile the financial performance of their contracts. Contrast this with advanced systems that not only track precise financial data on individual agreements, but can also undertake analysis to understand how contract terms or models impact profitability.

Contract-related activities represent a major source of operational cost in most organizations and this is not only becoming increasingly visible, but also increasingly avoidable. For those who undertake contract management today, 2018 represents tremendous risk or tremendous opportunity, depending on approach. Many of the innovations are not being sponsored or driven by contract management or procurement groups – a situation which puts them under very real threat.

It is time to understand and embrace the changes now occurring, to become a visible advocate and innovator within your organization.

 

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