Pandemic rewrites the future for commercial contracts
Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
Commercial contracting is so woven into everyday business activity at big companies that it is almost taken for granted. But, now, some businesses are looking to create value through better execution of commercial contracts, and analysing data gleaned from them.
This interest in the potential for technology to improve contracting has been driven, in particular, by the Covid pandemic — as it forced organisations to work faster, differently and more wisely.
Relationships became more important, says Sally Guyer, chief executive of World Commerce and Contracting (WorldCC), a trade association that represents contract, procurement and supply chain managers.
“Better — and faster — decision-making comes from a better understanding of the nature of your business relationships, and how your contracts represent — and codify — those relationships,” explains London-based Guyer. It became “utterly clear” that contracts and contracting processes within organisations were “completely vacuous”.
Faced with unprecedented disruption, contract managers, lawyers and procurement officers rushed to check their contracts — the force majeure clauses, in particular. They soon realised that these contracts would not serve them well, Guyer recalls.
There was little point trying to hold counterparties to delivery times if logistics networks had collapsed and manufacturing ground to a halt. Working with business partners and suppliers to solve problems was more important. “Yet their contracts, as written, didn’t support those relationships,” she says.
Some businesses realised they were operating in an era of “predictable unpredictability” in which contracts and contracting would not create certainty. When logistical disruption made the supply of goods and services sporadic, discussions concerned delivery times and quantities.
Guyer notes the collaboration between BioNTech, Pfizer and Chinese drugmaker Fosun Pharma during the search for a Covid vaccine as a poignant example of a “trust-based” approach to business relationships.
“There was unprecedented information-sharing in real time and a sharing of financial risk-taking in [a] time of uncertainty, all with a focus on a common purpose,” she says.
For business relationships where outcomes are important yet uncertain, contracts have become more adaptive, with terms that emphasise problem solving, mutual objectives and a no-blame culture, says Guyer.
Much of the work on systemising relationships — categorising them in terms of importance and risk, for instance — has been led by senior management collaborating with procurement departments, she says. That often involves conducting uncertainty analysis assessments of the business’s core strategies, and how business relationships and contracts affect those.
One problem they are trying to resolve is the fact that contracts are both intrinsic to a business’s goals and also time consuming, for employees.
A recent survey of procurement and contract managers at WorldCC member organisations found their number one priority was increasing their strategic value and relevance to the business. However, the chief barrier to that aim is operational workload, with 25 per cent of their time spent in low value, low complexity activities. Similarly, 26 per cent on average of a member organisation’s workforce is involved with contracting or contract management in some form — whether in procurement, budgeting, or sales.
A traditional form of contract is still appropriate if there is certainty on both sides about what they require, says Guyer: “It’s commodity and it’s transactional.” Many such contracts are now being automated, she notes.
At this transactional, commoditised end of the spectrum, technology can play a part in the form of contract management systems, says Guyer. During the pandemic, it was those businesses that had already invested in technology — contract management systems, automated contracting tools and procurement platforms — that were able to respond to the situation. “It was a matter of the haves and have-nots,” she concludes.
The challenge, now, is for providers of contract management tech to create intuitive platforms that more staff without specialist skills can use — so-called low- or no-code products.
But there is another challenge: how to make use of data derived from contract and procurement management systems — what Guyer describes as “the insight that can be gleaned from looking at contracts as a whole, rather than just as individual documents”.
“When contracts are automated and standardised, organisations can look across the entire ecosystem to identify places where they can reduce costs,” says Luigi Telesca, co-founder of smart contract automation platform Trakti.
Data from standardised contracts shows which contractual terms work well. Examples might be payment terms or delivery obligations, he says.
Defence multinational Leonardo used Trakti’s platform in creating a digital ecosystem of automated contracts that improves service performance, mitigates risk, and ensures visibility and transparency of relationships with suppliers and customers. The result is “a data-driven approach to decision-making”, Telesca adds.
Eric Laughlin, chief executive of legal tech provider Agiloft, based in Redwood City, California, agrees that so-called contract lifecycle management (CLM) products can help businesses make better use of their data.
He characterises the evolution of contracts into data-rich digital documents as akin to historic developments in drawing maps.
Traditional contracts are like old, paper street maps, argues Laughlin. They “give you a certain amount of visibility into the lay of the land, and a general route to success, but they could provide so much more information”.
On modern maps, digital overlays such as topographic information and dynamic data feeds about traffic flow are more helpful for travellers. In a similar way, digital contracts’ extensive information provides a better understanding of an individual relationship and the wider ecosystem of relationships with suppliers and customers.
For example, a company might want to analyse the negotiation terms that led to a successful outcome, or to flag underlying trends when things go wrong.
“Contract lifecycle management solutions have the potential to turn ‘flat’ contracts into data-rich decision-making tools,” Laughlin says. “Like a GPS system, real-time data feeds from contracts have the potential to show decision makers not only the direction their strategies will take them, but also where reality may be impacting those strategies.”
Six case studies
The companies below showcase different ways in which contract lifecycle management technology can be used by companies to improve speed and gain strategic insights. Source: RSGI
As Agiloft offers a no-code platform — almost anyone can work on it — customers can rapidly integrate its contract management software with existing systems. They can also experiment with new approaches to contracting as new demands evolve. During the pandemic, the legal operations team at US pharmaceutical company Moderna used Agiloft to automate its confidential disclosure agreements. Moderna told a recent conference that documents that took roughly 21 days to sign are now agreed within five days, allowing the company to accelerate sign-up of suppliers and partners for its Covid-19 vaccine.
The company’s use of artificial intelligence to help digitise contracting processes and to organise and analyse the data stands out for its pace of implementation: roughly one month. Evisort puts that down to its roots as a collaboration between Massachusetts Institute of Technology and Harvard University, where the founders spent three years training the AI. In 2021, Evisort’s revenues more than doubled and, in 2022, it received $100mn in funding, led by tech investor TCV. It recently launched Automation Hub, which enables customers to train the AI to recognise clauses unique to their businesses, using only a few examples and with no need for specialist coding skills.
The contract management business recently expanded its partnership with SAP, Europe’s largest software company. Their collaboration involves plans to work on products jointly and some direct investment by SAP. The two companies have been working to integrate SAP’s procurement and enterprise resource management systems and customer experience product with Icertis’s AI-powered contract lifecycle management offering. Benefits of joining up the systems include the automatic application of volume-based discounts, which can free up cash flow faster.
The business stands out for launching a “click-wrap” product, a step up from current esignature technology, which signs documents with one click of a button. The process automatically creates an audit trail and centralised proof of acceptance, which gives businesses oversight of all their agreements and mitigates risk. Self-storage company Extra Space Storage, for example, reports that customers now sign up much faster. Ironclad has won backing from leading venture capital firms and was recently valued at $3.2bn.
LexisNexis Parley Pro
Data and analytics company LexisNexis this year acquired the contract lifecycle management platform Parley Pro, which it will integrate with its own matter management and billing product for in-house lawyers, CounselLink. The Center For Sustainable Energy, a US-based non-profit organisation, says Parley Pro helped it win government agency contracts faster and it can now execute contracts twice as quickly as former manual processes allowed.
When US insurance company National Life Group needed a new contracting system in 2020, SirionLabs stood out for its AI-driven contract extraction and analytics system, which allows the business to quickly identify any clauses that deviate from standard business positions.
The contract lifecycle management company has raised $157mn in funding so far, much of which has been invested in product development. This helped the company to halve its average implementation time over the past year.