Contract Negotiation Today: Embracing The AI Way
by: Maria Fontanazza
July 22, 2020
Ask any CEO about their business strategy in recent months and you’ll likely get a response about mitigating spend and risk at every level of their organization. But many have learned a critical lesson in managing their operations that will likely change the nature of how they handle their companies moving forward.
Simply put, today’s contract landscape is defined by a surmounting level of risk, uncertainty in the supply chain, and unforeseen expenses to doing business safely amid market uncertainty. Business leaders are faced with a new set of challenges in understanding the hidden costs, reliability, and obligations in both current and potential contracts.
The very nature of the procurement model for contract negotiation has been developed in a way that organizations end up enduring significant risk that can potentially affect hundreds or thousands of operational supplier contracts. The fault here is that contract negotiation has been historically addressed by price, but it is so much more. It’s about supplier performance and management, supply chain risk, organizational compliance and the ability to connect contract information to broader, enterprise-wide insights.
Currently, 80% of procurement functions lack critical information around contract structure or competitive terms or clauses to make smart business decisions. And legal departments are challenged by the underlying process of driving timely contract negotiation and execution in a cumbersome and complex contract landscape.
For instance, consider a leading utility company with tens of thousands of procurement contracts with various renewal and renegotiation terms, along with various force majeure and Act of God clauses. These provisions may exempt either party from their obligations in the occurrence of an unforeseen event which, depending on the language specifics, could be anything out of the ordinary, even a pandemic.
Reading these manually would require an entire team of contract managers to devoting hundreds of billable hours to review and monitor the contract data ensuring opportunities aren’t overlooked. They need to determine which governing laws apply to the contracts, and if performance obligations are excusable or if litigation is required. It’s a costly, consuming and inefficient practice that’s subject to human error and oversight.
Fortunately, progress in artificial intelligence (AI), has now made this scenario in Contract Negotiation quite different.
Contract data, such as renegotiation terms or force majeure across an unlimited number of contracts, can be quickly and automatically extracted and clarified. This enables organizations to streamline the contract review process, extend the volume of contracts they’re able to negotiate and execute while reducing the likelihood of contract disputes. In addition, contract data can be linked to other critical information, such as corporate spending, to provide additional insights to risk, revenue and savings opportunities.
With AI contracts don’t need to be in any particular format, and no manual data entry is required. Just drop a contract into the system, and clause-level details are available immediately.
The Real Cost of Ineffective Contract Management
COVID-19’s impact on supplier performance, obligations and ability to deliver has created new unforeseen revenue risks that many will be managing to mitigate for months if not years to come. Lengthy negotiations and renegotiations can also threaten an organization’s financial performance, with the impact of inadequate contract management costing organizations up to 9% of annual revenue, with subpar contract quality contributing to 50% of this leakage.
Depending on the unique circumstance, this represents a potential value loss of between 5% and 40% on a specific deal.
Given that upwards of 90% of annual revenues can be represented in vendor and supplier contracts, the repercussions and implications of negligent contract management is an enterprise-wide liability.
Clearly, organizations need a more comprehensive understanding of their contracts, so that they can alter existing terms, can account for modifications, and can monitor enforceability.
Many procurement leaders are transitioning beyond singular leakage resolution to organization-wide value generation through AI, which provides an advanced analytics-driven platform that can profoundly improve contract management by directly addressing challenges in the negotiation cycle.
During the current crisis, margins are thinner than ever and organizations must leverage their technology solutions to identify risk and find savings. One particular challenge is with existing contract management (CLM – Contract Lifecycle Management) solutions.
Existing, stand-alone CLM technologies simply aren’t equipped to handle diverse types of contracts, which will often force organizations to adopt multiple CLM tools to manage all of their varied, organization-wide contracts.
A lot of these issues are due to the narrow use of existing solutions like advanced CLMs, document storage, and due diligence, which can’t provide consistently dependable contract risk estimations and predictions.
Enterprise content management (ECM) and standard CLM solutions also lack the capacity to handle increasingly complex and voluminous contract management requirements, or extract contract terms and connect analyzed contract data to other critical contextual information, such as risk or spend information.
Companies need to be supported by contract management intelligence right now so they can pivot, rebuild their supply chain and account for critical risks – and they need AI to get them there. AI is 100 times faster than human contract review and more accurate by at least 10%.
The technology is crucial to accelerate the discovery and extraction of clauses, accurately identifying contract risk and critical elements like renewal and termination.
Additionally, enterprise-wide contracts across the organization are automatically and precisely tagged by clause, category and more to provide the information needed to gain complete insight into their contracts.
To demonstrate how powerful AI-driven contract management can be in action, take an organization with a significant amount of vendor contracts who must closely monitor variations in termination, and penalty and damage provisions within both their company contracts and their vendor contracts. With AI and ML, these provisions can be recorded and standardized for simpler identification of occurrences of noncompliance. Organizations can then leverage the entirety of their contract data and take immediate action during business-critical moments.
Smart Contract Management with Ai
Deriving more value from contracts through streamlined, AI-driven contract management leaves more time to cultivate and grow supplier relationships that can lead to improved contract value and more procurement opportunities as well.
According to Gartner, by 2023, AI will enable 30% faster contract negotiation and document completion processes in organizations that deploy leading contract lifecycle management solutions.
Organizations can start realizing competitive advantages by adopting robust tools that provide more control over contract management and performance by offering full contract visibility, driving smarter negotiations and decisions, and enabling a deeper understanding of supplier relationships.
Regardless of business industry, location or size, contract management and negotiation could be the linchpin to making or breaking a business. As we take away lessons learned from recent months, its more important than ever that the leaders but AI at the forefront of these operations to future-proof their business.