Contract management has gotten on the radar in recent years. The world’s contract managers finally gained attention in 2016 when Oliver Hart and Bengt Holmström were awarded the Nobel Prize for Economic Science. Their work on contract theory not only proves how contracts help us deal with conflicting interests, but also shows the importance of contract management.
While contract automation is not new, 63% of procurement organizations from The Hackett Group’s 2017 Digital Transformation Study are either exploring or piloting technology to advance the digitalization of contract management.
Source: The Hackett Group
As organizations look to become more digital, contract management is becoming more pervasive and sought after. Once reserved as a tool for storing contracts in a repository, contract lifecycle management (CLM) technology initiatives often got stalled while trying to get legal or other business users to expand its use for authoring or collaboration with third parties.
Imperative: ease of use
Procurement organizations today are looking to expand their CLM capabilities and decide on their technology footprint for managing contracts. The success of the next generation of solutions will be ever more defined by how easy they are to use with legal and business teams and third parties. Moreover, an improved user experience for contract authoring and management through guided and self-service tools has become a primary criterion for anyone looking to implement CLM today.
Further still, even though many organizations have already adopted contract management technology in the form of a contract repository, at present, they often cannot efficiently link contract and compliance management with broader sourcing and spend efforts. Hence organizations are increasingly looking for contract management as an extension of sourcing, purchase-to-pay, or supplier management, whereby spend compliance, risk assessments, supplier qualification, and certificate management are all part of a holistic contract management solution.
Key to unlocking the value of going digital
However, beyond usability, CLM has also gotten more touchless in its capacity as well. This means that CLM has developed into a more extensive reach by reimagining contract management as a “source of commercial truth.” Since contracts are the basis for all buyer-supplier relationships, they essentially govern any monies coming into or out of the enterprise and thus are key to unlocking value as part digital transformation. Procurement organizations are required to analyze data held within unstructured contract documents often stored in disparate locations. Consequently, managing against those documents may hold higher degrees of risk and exposure associated with noncompliance related to internal spend requirements or external government regulations.
To better manage growing volumes of data, procurement organizations are looking to emerging technologies in artificial intelligence (AI) like machine learning (ML) for refining methods of collecting, extracting, and analyzing contract-related information. In this regard, ML applies to things like contract provisions (terms, conditions, clauses) for better understanding the extent and usage of legal language contained in existing contracts. Based on new and evolving capabilities, ML will also be able to assist in the contract creation and compliance process. Conversational interfaces through the development of natural language processing will increasingly provide recommended contract terms and conditions as part of the negotiating strategy with suppliers.
New capabilities: predictive insights and risk intelligence
Contract management solutions are also offering new capabilities such as predictive insights into contract consumption based on expiring contracts or risky suppliers. Inclusion of category and risk intelligence feeds or commodity index-based triggers as part of CLM analytics is also expanding the capability of understanding the risk of existing contracts and the prospect for renewal or executing a new sourcing event.
Today, many choices exist in the market for CLM technologies. Options include everything from stand-alone best-of-breed technology and ERP solutions to spend suites that include contract management. There are even solutions focused on niche industries or use cases like services procurement. How organizations select these solutions remains varied, but it is clear that efficient contract management automation is back on the radar as part of the digital transformation imperative.
To better understand the evolution of contract management, The Hackett Group is conducting a study on the topic: Evolution of Contract Management – From Repository to AI. Participate in this quick poll and gain the following benefits:
- Identify best practices for managing buy-side contracts
- Gain insights into contract-management performance levels and related key metrics
- Learn which capabilities are needed to drive and sustain performance levels over time
- Assess how you compare to others leveraging CLM technology