Role of Automated Digitised Contract Life Cycle Management in Enterprises
Published on : Monday 05-09-2022
Digitised intelligent and integrated contract management will provide companies several benefits and advantages, says Suresh Pasumarthi.
Contracts are the lifeline for almost all B2B transactions that happen. A contract is a legally binding document that defines and governs mutual rights and commitments between different parties regarding transfer/exchange of raw materials, semi finished products, completed products and different kinds of services. It contains all the clauses that should be followed in case of quality, delivery, and cost of products or services between the stakeholders. And what should be the course of action in case of breach of the contracts which is called as Obligation Management in the legal world.
In the early days, contract documents were mostly done in paper format. It used to take 3-5 months for a contract creation. Contract documents were complex, mostly drafted by legal people and only understood by them. The language used in that was difficult to understand to the execution teams. According to the Journal of Contract Management 71% of companies aren’t able to find 10% or more of their contracts. Due to not easily locatable contracts, and legal obligations, companies missed obligations, contract renewals, payment milestones, and more. There is significant cost associated with lost or mismanaged contracts. A World Commerce And Contracting Association study determined that the average company loses 9% of contract value due to mismanaged contracts, and the percentage is even higher (up to 15%) for larger organisations with greater risk. Manual tasks, such as slow negotiations and missed milestones, fragmented processes and data flows that were in the contracting process caused inevitable inefficiency and errors.
Many different players like internal teams, such as Procurement, Finance, Legal and Sales play a key role in the contract lifecycle management. Legal is still conceded as the primary executive sponsor for the contract.
With Digitisation and Platform-isation of whole contract process space, the whole landscape is changing fast. The whole Contract Life Cycle Management (CLM) space is getting transformed right from authoring, execution and governance by leveraging the latest technologies, techniques and methods. And a lot of companies are jumping into this bandwagon of CLM space. And many products have evolved in the overall process of contract life cycle management.
With digital transformation of contracts, today these contract documents are no longer limited to mutual agreement documents in digital format. It is opening new horizons and opportunities to companies. It no longer is hidden in repositories, but instead offers an advanced form of business control and a source for true innovation. Contracts are being integrated into ERP and other financial applications to provide seamless information about cash flow. Artificial Intelligence and Machine Learning is helping draft and providing better insights to execute contracts in an effective and efficient way. These Digitalised and Intelligent integrated contracts provide competitive advantage in terms of transparency and trustworthiness. Rather of late they have become core business-critical economic instruments. Without all the above there would be contract leakage.
The overall contract lifecycle management has mainly 2 stages:
a. Pre contract.
b. Post contract.
What is contract leakage?
Contract leakage is the difference between the value expected from a contract and the value realised from its implementation. Number of purchases made without contact references. By providing transparency into contract leakage companies can determine responsible purchasers, suppliers, supplying plants, product categories, or items.
Contract leakage can happen during both Pre and Post contract signing. Contract value leakage has negative effects, like financial benefits, unnecessary recurring costs, legal penalties, and lost upsell, cross-sell, and renewal opportunities from supplier side and lost business and customer commitment from purchaser side.
Pre contract leakage can happen due to the following:
1. Deviation in revenue due to forced amendments made to clauses, terms and condition as part of negotiation to make the contract through
1. Contract template is ambiguous
2. Poor quality playbook (not taking of company strategy and expectations)
3. Unclear obligations/remedies
4. Substandard contract
5. Poor quality templates
6. Lack of tools, and
7. Lack of standard playbooks.
Post contract leakage can happen due to the following:
1. Improper handover from deal team to implementation team
2. Failure to live up to expectations as agreed upon in the signed contract
3. Service provided partially as per the terms in contracts
4. Delivery failures
5. Invoicing errors
6. Lost business
7. Bad customer experience
8. Poor understanding of contracts and thereby execution of the same, and
9. Non-access to contract to the relevant people during execution of contract.
Pre contract: It is mostly the process of contract creation from the standard clauses and templates which is also sometimes called playbook in some companies. Playbooks are created with standard terms and conditions, clauses by working closely with Template managers and Legal counsellors of the company keeping the company guidelines, strategies and standards in mind. Organisations create these playbooks as a centralised source of information and guidance. It offers a source for creating contracts and ensures that all the company standards are kept in mind as part of negotiations in line with the company strategies.
The standard templates also contain fallback and alternative clauses with risk factors. Fallback and Alternative clauses are used in the event that counterparty pushes back against one of the standard clauses as part of negotiations with the supplier as part of the deal breakers. Contract Obligation clauses from both parties are also kept in mind in the contract creation process. It helps to determine if a business deal is working as per the terms and conditions or if there is a breach of contract.
Following are some of the digitised and intelligent contract authoring that provides:
1. Smoothen the contract creation process
2. Shorten the life cycle of creation and awarding the contract to suppliers.
3. Recommend clauses while define templates
4. Help in writing easily understandable languages
5. Better support negotiations through redlining & comparing
6. Searchable repository
7. Remove unfavourable clauses as part of negotiation by leveraging AI
8. AI generated risk scoring
9. Streamline approval process, and
10. Close deals faster.
Post contract: This is a period post contract is signed. Contract is required to be Monitored, Measured and Checked that whole transactions are happening in compliance with the contractual terms and conditions so that business can reap utmost benefits out of the contract. And manage the contractual obligations in case of dispute and also keep an eye that all contractual parties are following as per the clauses laid out in the contract. Mostly see that contracts are on track as per the terms and conditions and clauses mentioned in the contracts. To reap the benefits, it is very much important that the contract is well integrated and automated with different financial business processes and ERP. Otherwise, it would be challenged to create transparency and monitor the compliance with signed contracts. Automated and Integrated insight driven contract process will provide following value add to the companies.
Following are some of the value-add digitised signed contract provides:
1. Drives top and bottom-line growth
2. Enhance financial visibility of cash flow against the contract terms
3. Enhance forecasting and budgeting for the organisations
4. Better view of spend compliance and revenue
5. Track actuals against the contractual terms
6. Avoid the cost of missed commitments
7. Identity contract effectiveness through AI
8. Predict invoicing disputes
9. Reduce manual cross-checking, time and money, and
10. Extract Obligation like penalties from complex contact language embedded in contracts.
In short, digitised intelligent and integrated contract management will provide healthier cashflow, better risk control, alert expiring contracts, contract value gained/lost unused contracts. And act as shock absorbers in volatile times like pandemic, supply chain disruptions, political unrests and help companies to act in a meaningful way.
The views expressed in this article are those of the author and may not reflect those of SAP.
Suresh Pasumarthi is Director, Product Management, SAP Labs India. Suresh has worked extensively in Analytics, Mobile BI, building SAAS services and API Platform in multiple domains. He has been associated with Business Objects and SAP Labs for 18 years now, with an overall 22 years of software industry experience. He is passionate about Artificial Intelligence and Machine learning and working with customers. He has 9 patents approved at USPTO to his credit.