Why AI-Powered Contract Analytics is the Answer to Curb Future Procurement Risks
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.
Could Artificial Intelligence Have Helped Your Supply Chain in this COVID19 Crisis?
Long before the COVID19 pandemic hit us, the digital transformation boom set us on the road to alter our supply chains with the help of technology. The procurement organization in partnership with IT started investing in digital solutions to help them streamline their information, process, and workflows, enabling easy integration, improved data visibility and increased compliance and collaboration between stakeholders.
In 2019, a Deloitte Global CPO survey in 2019 found that CPOs were at various stages of the digital maturity curve in their understanding and implementation of the digital procurement transformation. The survey also found that two-thirds of CPOs are adopting digital technologies to automate their contract management, e-procurement, sourcing, invoicing and payment workflows. Of the remaining, only 14% of the CPOs were planning to invest in advanced technologies such as cognitive computing, IoT, augmented reality, among others.
However, the pandemic has aggressively accelerated the need for CPOs and their supply chain organization to get on the hyper-digital wave. COVID-19 has shown that our supply chains are broken, our workers vulnerable, and restrictions and delays at borders have impacted our contractors and suppliers’ ability to implement contracts and fulfil customer commitments. The pandemic has given rise to a number of theories and speculations in support and opposition respectively. Ever wondered if AI could have prepared us to handle our supply chains better in the COVID era? Can AI prepare us better to handle a future pandemic?
Data before intelligence
Even as we prepare to address this possibility, CPOs have realised that the value of insights is as good as the data used. Therefore, it is to realise early on that a company’s digital journey should start with driving a single source of truth and ensuring that all stakeholders trust that data. For this to happen, our contract repositories and performance tools must be:
- Automated
- Digitized
- Deployed enterprise wide
- Integrated
Even though digital procurement transformation initiatives are implemented company wide, one big challenge that CPOs still face is streamlining inconsistent contracting processes across regions, especially when companies are geographically spread and distributed in nature.
It can be frustrating for CPOs and CIOs/CTOs alike – who lead this transformation and are still unable to streamline the process and people inconsistencies even though they are using exponential technologies to recalibrate and redefine traditional roles and functions to drive operational efficiencies, enhance user experiences and increase savings, combined with artificial intelligence and automation. All this can lead to a high inaccuracy of data, leading to massively reducing the potential benefits of artificial intelligence. Therefore, with good data across systems, AI can probably learn from our actions we take now to handle a current crisis.
Leveraging intelligence
As CPOs today gradually embrace digitization in contract management and use basic AI & ML capabilities in spend analytics, it is mostly limited to collating, classifying, and visually representing data for identifying patterns and savings opportunities. However, the application of artificial intelligence in contracting goes wide and far.
Contract Management
Intelligence can help identify relevant terms and conditions hiding in the contracts that might be exposing the business to higher risk. It can help automate recurring processes such as monitoring expiring contracts, demand-procurement gaps, price negotiations, etc. The use of AI in contracting has the potential to change the way organizations create contracts in the future, leverage contracting data for evaluating overall procurement and supplier performance, and gradually influence the existing contracting processes in their respective organization. Take for instance, C-Vantage can help you resolve exceptions in a timely manner, and thus, improve efficiency, reduce risk exposure, to help you stay informed and drive key decisions. It helps you realise the real value of your contracts by lowering procurement costs, reducing commercial risks, and enabling you to derive continuous value from your contracts at every stage of your contract life cycle.
Sourcing Strategy
Teams can leverage ML & AI to assess the multiple market trends and customer behaviour to predict future changes in demand of products and commodities. Using technology, teams can analyze not only unstructured data but also diverse data from multiple external factors such as commodity pricing, economic fluctuations, geopolitical fluctuations, etc. In our conversations with customers, we have seen that procurement teams often want the arsenal in market intelligence, supplier suggestions and product comparisons product comparatives to ensure that purchase is most optimum.
Enhanced Buyer Efficiency
The CPO of Michelin, Helena Paul, once said that she believes that intelligent procurement is all about creating value and enhancing the user experience. ML & AI can add value to businesses as well as consumers by enabling buyers to focus more on the high-value-added activities and swiftly swim through the low-value-added activities. Intelligence can guide buyers to the correct purchasing tool, such as defining the correct request for proposal. ML & AI can propose recommendations to buyers on multiple aspects from supplier assessments and performance management, to risk management and compliance. The use of AI -based tools in procurement decision-making can help you create and analyse past contracts to ease supplier negotiations and purchase decisions.
The pandemic may have given rise to new theories and speculations, but the truth is that a quarter of companies and CPOs surveyed in 2019 are already betting big areas such as AI/cognitive technologies in contract management, price comparisons, discount predictions, alternative product recommendations. However, whether AI could have helped us better in the COVID-19 crisis, or it can help us prepare better for a future pandemic, the answer relies on the old principle of ‘garbage in is garbage out’ or looking inward and asking: How good is my data?