Supply chain as a topic is gaining increasing attention. The shift of “just in time” to “just in case” is driving supply chain personnel all across the world to think differently about various procurement processes that lead to a robust supply chain for companies. Replacing shorter and ad hoc supply/vendor contracts with long term contracts is one facet of the renewed thinking. Another novel tool concerning supply chain which is transforming the procurement function is “contract intelligence”.
In a Deloitte Survey, more than 300 procurement managers from 33 countries around the world voted contract management as the second most likely area to receive investment.
“Contract Intelligence” is more enhanced “contract management”.
We are not inventing something new here. If you are a procurement professional, you are intuitively aware of the idea behind contract intelligence. Contract intelligence is the aggregate view of the entire procurement contract portfolio from the perspectives of certain parameters that are important for testing the robustness of the supply chain of an enterprise. Harvard Business Review reports that inefficient contracting causes firms to lose between 5% to 40% of value on a given deal.
Contract intelligence helps procurement professionals to discover key vendor data right from the source document i.e. procurement contracts or purchase orders and using this data to identify opportunities to speed up vendor contracting or consolidating /diversifying vendor relationships based on commercial drivers. Key examples of commercial drivers are volume discounts, renewal on own terms, adequate payment window, right to suspend in case of force majeure, achieving compliance culture across supply chain, etc.
Contract intelligence is facilitated by migration of contracts from paper archives to the cloud. Contract intelligence is a smart tool that helps to analyse and interpret signed contracts – it has the unique ability to convert static contract data into business intelligence and thus enable decision making. Through contract intelligence, all signed / in-flight procurement contracts stored on cloud can be easily analysed with latest technology tools like AI/ ML. The ability to auto analyse procurement contracts enables a contract intelligence tool to fully transform the procurement functions by making available powerful data to procurement professionals. Contract Intelligence promotes data-driven decisions.
Organisations often under-estimate how many contracts they have signed with their vendors / suppliers – let alone the addenda and the amendment agreements. Even organisations that believe they have a good grip of their contract population vastly under-reckon the number of live contracts in operation by anything up to and even beyond 100%.
This also means that organisations are unaware of the exact concentration of specific suppliers and their respective jurisdiction within the overall supply chain mix. Bringing all procurement contracts under the umbrella of a contract intelligence solution not only paves the way to find vendor contracts more easily compared to a paper based filings but also help analyse the contracts, their performances and associated obligations for better decision making.
Whether for fixed payments or those based on calculation of time and resources, ability to visualise and analyse payment related provisions across procurement contracts is a great advantage to modern procurement teams. This ensures that payment provisions across contracts conform to the policies of an organisation. Further, intelligence of payment related provisions helps an organisation to ensure that payments are neither made nor received in a delayed manner – thus saving buyer’s own interest / penalties or demanding them from suppliers for delayed supply.
Supply chain teams may like certain contracts to be renegotiated prior to their renewal based on inputs received from wider business teams. Visibility of hidden information related to term of procurement contracts, renewal as well as termination provisions help procurement/ supply chain teams to stay on top of vendor continuity. The intelligence permits contracts to be terminated at convenience such that unviable contracts can be dealt in accordance with business requirements.
Tracking by suppliers and their geographies helps the procurement professional of an enterprise to understand any special concessions made for specific suppliers, suppliers who could be impacted by country specific risks and terms of procurement that can be reused. This helps to map contractual provisions with commercial transactions and avoiding reinventing wheels. Further, a full visibility of all supply/vendor contracts, related purchase orders and invoices broken down by suppliers and geographies helps to consolidate vendors around dependable and beneficial suppliers and weeding out ad hoc suppliers could be a strong strategy for supply chain professionals to build a robust supply chain.
During an M&A or similar event, procurement teams are required to help audit whether vendor relationships would continue post such transactions. Similarly in case of a dispute with a vendor, procurement teams may need to provide critical information to legal teams. Readily available contract intelligence will ensure that during a business or strategic transaction or a litigation or for that matter a regulatory investigation, desired outcome is not missed out due to missing documents. All documents can be centrally stored and a searchable repository can be created.
With the advent of sustainable supply chain principles, procurement professionals are required to ensure that not just direct procurement contracts but all contracts in the entire supply chain are executed keeping in mind relevant ESG principles. The necessity to turn to ESG compliant vendors and suppliers could be mandated by company policies or by funding agencies or by even regulators. One of the ways that procurement professionals are using contract intelligence today is by quickly and automatically auditing all the supply chain contracts to ensure that those contain the necessary provisions from ESG perspectives.
Events of defaults under contracts can deny enterprises benefits available under contracts or may even accelerate and cause serious business interruptions. Knowing events of defaults and mapping them with business processes and stakeholders reduces the possibility of contracts ceasing to perform midway. Software which extracts contract intelligence and help in their analysis can be used for this purpose.
A supply contract will have many general as well as specific obligations. While the supply chain/ procurement will not keep track of each and every one of them, there could be as few as 10 obligations per supply contract which both the buyer and the supplier would be regularly tracking.
For example, the buyer and the supplier both will keep track of all the delivery dates, delivery quantities, payment amounts and milestones, testing protocols and escalation mechanism. On the other hand, a buyer may not proactively track a confidentiality related obligation under a contract but it will need to keep track of an obligation let’s say which requires the seller to return, at the end of a contract term, any product specifications or formulae that may have been passed on by the buyer.
Now, even mid-size companies do not have just one or two contracts but several supply contracts. Some of them could even be short term purchase orders. All purchase orders and service orders that are executed are contracts that contain trackable obligations. Thus the whole obligation matrix for a company may easily run into 500 to 1000 obligations across various contracts. In terms of people, requirements from as few as 5 to as many as 500 personnel of a company may be involved in one way or the other in making sure that all necessary contract compliances are met on time.
Despite digitization, contract compliance for supply contracts has hardly moved beyond excel, and phones. Obligations are extracted in excel sheets manually, monitoring is done by procurement managers or finance personnel. Reminders are sent by emails and phone and compliance is monitored through word of mouth or by collecting documents from multiple sources.
Further, each contract compliance comprises internal approvals. Consider an obligation to make payment for a consignment delivered by a supplier. This will typically require confirmation from the store that goods have been received in order, confirmation from the finance that all documents (like GST invoice) are in place, confirmation from finance that no amount is required to be adjusted and a final go ahead to make payment. Each of these approvals are either taken physically or over emails or sometimes over phone. The involvement of personnel from different departments to track procurement contracts makes it difficult to get a true view of the status of an ongoing supply contract by using siloed task management tools. Proper audit trail for evidencing status of compliance of procurement contracts may not be easily recoverable in tools used thus far.
The fall out of manual task management for the supply chain has led to many problems of broken contracts and disputes. Legal Evolution reports that world GDP lost USD 2.5 trillion in 2019 due to inefficient contracting processes. Sometimes manual tracking hides the problems faced in implementing a contract from its senior management thereby losing the opportunity of curing a problem early on.
The manual process is also reliable in the event there is a court case or an investigation covering contractual transactions. These matters typically require a detailed recounting of all the dealings between contract parties and in a manual process, any number of factors – from loss of documents to account manager leaving a company- can impact the process.
An integrated, collaborative obligation platform powered by contract data is the first step towards removing manual and often in-silo handling of contract data. Procurement contracts contain a critical part of an enterprise’s goals. Ability to unite all relevant personnel of an enterprise behind these goals through a common platform is the first step towards transforming the system. What comes next is breaking down a contractual provision into smaller tasks and then assigning these tasks amongst personnel from multiple departments based on a logical workflow. Viewed thus, the completion of the tasks, the relevant documents which evidence such completion and corresponding timeline can all be tracked and become artifacts through which the status of a procurement transaction can be easily viewed.
An advanced contracting system where all participants on a supply chain contract in a collaborative manner, where all parties use one single place to express their bargains through structured tasks, where the automated tracking of performance through IoT and an immutable ledger of performance of various obligations and tasks will all become possible. A smart and intelligent platform for finding intelligence behind procurement contracts will segue into a smart and collaborative platform to unite personnel from both supplier and buyer to converge behind the goals from the procurement contracts.
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