Organizations need to adopt a focused approach to identify the root causes of points of friction, observe performance to identify improvement areas, and deploy tools and technology to streamline processes and eliminate friction
Contracts are the lifeblood of an organization, as they contain the rules of engagement of all commercial relationships- with suppliers, customers, and partners. To realize the maximum value from such relationships, the contracts and the management of these contracts is essential. However, the process through which contracts are designed, created, and managed is far from straightforward. This isn’t surprising given that contracts cater to various interests and purposes, with internal (procurement, legal, finance, risk management, sales, etc) and external stakeholders (analysts, customers, suppliers, regulators, etc) involved in the process. As a result, over the years, contracting has been characterized by growing volumes and complexity, with attempts at streamlining the process proving challenging. This has made it difficult to manage and improve contract performance.
While there is a lot of focus today on deploying contract lifecycle management (CLM) technology to optimize the contracting process, tactical application of technology is not going to yield the desired results. For digital strategy to be effective, it must be based on understanding where the problems are. Research by World Commerce & Contracting and SirionLabs shows that there are 40 such problem areas or ‘friction points’ that cause delays, inefficiencies and lost value across the contracting lifecycle. Many of these can be avoided; and at the very least, their impact could be minimized.
Examples of friction points & their impact
The end-to-end contracting lifecycle starts with the recognition of a need that can be fulfilled by an external party (a supplier) and ends with the successful completion or closure of that need. To identify the friction points in this process, the contracting process can be broken down into the following 6 phases.
- Phase 1: Evaluation
- Phase 2: Assembly and approval
- Phase 3: Negotiation and approval
- Phase 4: Implementation
- Phase 5: Performance
- Phase 6: Close out/termination
Let’s take an example. For the evaluation phase, the quality of requirement definition is an important friction point. This activity involves a lot of stakeholders on both, the buying and selling side working together to broadly shape the scope of the engagement. This is a complex yet critical step. It is imperative that such items are determined in a timely and accurate manner. If not, it is inevitable that there will be friction points at downstream phases of the contracting process, like disagreements on whether a particular activity is within the scope or not. Great care should be taken during the initial phases of the process, as taking shortcuts here can result in downstream friction points which may have far greater consequences, in terms of both time and cost.
Another critical friction point that organizations often neglect occurs during the contract's progression from negotiation/signature to implementation; this involves the ‘handover’ of the contract from sales/procurement to contract management upon signature. It is critical that this handover is managed seamlessly to ensure the benefits negotiated in the contract are realized during execution. Clear communication is needed between stakeholders (especially between those setting the contract and those executing it), with clarity over contract ownership and associated accountability. It is not uncommon for activities to be stuck due to disagreements over who is responsible for what. Such disagreements can be within an organization (between departments) or externally between the buyer and seller. Until the issue is resolved (which usually takes time), the corresponding activity is halted delaying the entire process. Ensuring a smooth ‘handover’ is key to realizing desired outcomes during contract implementation.
WorldCC research has shown addressing friction points can help organizations realize added value of upto 12-15% of contractual spend. Having said this, the impact of friction points varies widely. There are a few reasons for this. Some of it has to do with varying efficiency levels in an organization for an equivalent type of contract, i.e. organizations have well-defined processes and automation for a particular type of contract and not another.
Approaches to overcome friction points
As mentioned earlier, friction points are entirely avoidable. Organizations need to adopt a focused approach to identify the root causes of points of friction, observe performance to identify improvement areas, and deploy tools and technology to streamline processes and eliminate friction. CLM tools are helping organizations standardize and automate the contracting process reducing the impact of friction points. Modern CLM tools leverage Artificial Intelligence and Machine Learning to take the digitization of the contract management process to the next level and enable advanced analytics and process optimization.
Equally important as technology is the need for a holistic, integrated approach to overcomingfriction points. Far too often organizations have taken a narrow view to eliminate friction at a particular phase of the contracting process. For e.g. deploying point solutions for automating repository or automated contract negotiations. While this will help reduce the impact of certain friction points, they offer a limited RoI.
Role of AI/ML technology in addressing friction points
Initiatives in Artificial Intelligence and Machine Learning to address friction points have focused on three objectives- efficiency gains, transactional effectiveness, and commercial intelligence. Let us take a deeper look at each of them.
- Efficiency gains: Focusing primarily on pre-award phases. Includes a mix of basic and advanced applications, like automating the back and forth in negotiating and drafting contracts by leveragingautomated playbooks. These applications help reduce time-to-contract by reducing contract review cycle times and automating the creation process.
- Transactional effectiveness: These look beyond the pre-award stage to focus on post-award. Include using AI for ongoing obligation extraction and proactive management to track performance and improve contract implementation. Such activities also include algorithm-based risk management and invoice validation to reduce value leakage.
- Commercial intelligence: This is where the transformative impact of addressing friction points can be realized and entails using contracts as a strategic source of business value. This involves leveraging smart AI-powered clause and template recommendations for greater self-service contracting and includes data mining and modelling to critically analyze the past performance of contracts, terms, etc to identify value optimizationopportunities across contract portfolios.
Given the convoluted nature of contracting, it is rather surprising how little automation it has undergone. That is about to change. The uncertainty, disruption and challenges posed by the COVID-19 pandemic have created an urgent need for digitizing business processes, with digitization no longer considered optional. Given the critical role of contract management in ensuring a resilient commercial value chain, it is a key priority on the digital transformation agenda for most businesses. It is recommended that the foundation of this digital strategy must be based on an analysis of the friction points.
The author is COO at SirionLabs