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Exactly how well have we been able to manage procurement risks emanating from the massive trust erosion in the wake of the COVID19 pandemic? What separates the ones most adversely affected by the pandemic from the ones that are marginally better off? Further, if history were to repeat itself in the future, how prepared are we to withstand such procurement risks?
The pandemic has shown that there are no takers for yesterday’s success as an insurance for the procurement risks of tomorrow. However, past behaviour regression analysis in contracting management does serve as an early warning system, thereby allowing enterprises to adjust their position in the market well in advance, work with risk-adjusted values, and in some cases, pass on the costs to the counterparty.
What Are the Real Costs of a Breakdown in Contracts in a Connected World?
In a world that is more connected than ever before, contracts among businesses represent the strategic interdependence across the global value chains. A breach of contract by either of the contracting parties has ripple effects that are not necessarily restricted to the parties themselves, but also spillover to other stakeholders in the global value chain. For some businesses, this can mean an adverse balance sheet impact, but for others that are too large to fail, a breakdown of a contract can very often mean a massive supply chain disruption with potentially grave consequences for large communities of people that are dependent on them.
Is Your Business Trying to Zoom Down the Contract Highway Despite Mist on the Screen?
In the absence of a contract management system, such procurement risks assume much bigger proportions, presumably in the form of severe trust erosion; something that takes years or decades to form and is very hard to regain even after the markets eventually recover. It suffices to suggest that the risks emanating from businesses entering into and managing contracts with mist on their screens is a recipe for a disaster in the making, not just threatening to wash away shareholder value, but also begging communities, courts and governments to question the relevance of business to societies. Probably this suffices to explain why corporations and governments across the world are seemingly upset with Chinese businesses, that according to a report by a global media conglomerate had issued 4811 force majeure certificates as on March 03, 2020, that covered contracts worth USD 53.9 billion and cost the Chinese economy a 13.5% drop in the output of diverse industry verticals constituting the core sectors in manufacturing. Add to that the extra credit costs to the tune of USD 400 billion for banks in the Asia Pacific.
What are the Risks Emanating from Gaps in Contract Management and AI-Powered Contract Analytics?
It makes enormous good sense to suggest that a freeze on economic activity at one point creates a cascading effect across all points in the B2B supply chain, thereby implying that even a two-party contract has the potential to generate negative spillover effects for all stakeholders. As such the breakdown in supplier relationships due to the COVID19 pandemic has brought the following gaps in contract management to the forefront:
Lack of visibility due to manual workflow. A vast majority of enterprises in the manufacturing sector continue to embrace a manual workflow for managing their contracts with suppliers. This is well testified by the data available from a recent report by Harvard Business Review (HBR) that at least 70% of the enterprises were still in the process of manually collecting data on their supplier capabilities and assessing supplier risks. Compare them to enterprises that have state of the art AI-enabled contract management solutions that allow enterprises to have vital information on their supplier network and contracts at their fingertips within minutes of a supply chain disruption.
Detecting anticipatory breaches by counterparties. One of the major risks facing enterprises during the COVID19 pandemic is the lack of foresight into the anticipatory breaches of contracts by counterparties. The asymmetry of information coupled with the twin issues of moral hazards by adverse selection of counterparties in rewarding contracts has led to a major erosion of trust globally, especially with suppliers that are based in the epicenter of the virus. It may appear subversive if not paradoxical that manual workflows and legacy applications fail to take cognizance of probable breaches of contracts by counterparties beforehand. On the other hand, AI-powered contract analytics have in-built capabilities to spot anomalies from the data of record and thus enable greater deterrence of risks across the cost-risk-compliance trifecta.
Detecting non-standard clauses that need to be negotiated. One of the most prevalent issues with contract management is the need to demarcate and continuously follow up on the non-standard clauses that need to be negotiated while a manufacturing contract is a work in progress. Enterprises that have a manual workflow require an investment of thousands of man-hours to detect such clauses, whereas those who continue to operate with legacy applications that run on large physical serves have discovered the perils of not being able to access their contract data while working from home during the COVID19 pandemic.
Detecting diversion of new clauses from corporate templates. Yet another risk that has been brought to the forefront during the pandemic is the lack of ability of enterprises and suppliers to detect the digression of new clauses from the status quo ascertained by their legal departments in the corporate template. The issue assumes greater significance during global supply chain disruptions when the contours of the regulatory and economic environment evolve very unpredictably. Enterprises that fail to have access to real-time contracting data are unable to respond to situations and thus fail to codify such diversion of new clauses in the rules engine of their CLM systems. Compare this to artificial intelligence-enabled contracting management systems that enable the identification, editing, and codification of such new clauses in near real-time.
Detecting the effective incidence of contractual obligations. In times of global supply chain disruptions like the COVID19 pandemic, enterprises need a clear insight into their ability to pass through the costs of an eventual breakdown in contractual obligations on either the upstream or downstream of the supply chain and charge “as much as the traffic will bear” to minimize financial risks. It is a statement of the obvious that enterprises that operate with manual workflows and those with legacy applications shall find it near-impossible to objectively assess the effective incidence of contractual obligations. AI-enabled contract analytics enable the determination of the final resting place of the burden of an eventual breakdown in the status quo of contractual obligations.
What is the Future of Contracts and B2B Supply Chains?
Given the risks of partnering with suppliers that are fundamentally not in agreement with best practices and global standards of transparency and accountability in sustaining the status quo in contracts, it makes enormous sense to suggest that agility at scale is imperative for enterprises. AI-powered contract analytics by virtue of spotting anomalies, codifying changes in the thumb rules of contracts, and recommending actions, enable enterprises to leverage the advantages of early warning systems and thus take early action to return to the status quo.
Perhaps, in a post-pandemic world, OEMs and suppliers in the manufacturing sector shall do well to place a premium on building and sustaining trust, which is not only the bedrock of contracts, but is vital to the functioning of supply chains and markets.