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Contract Management: Why Technological Applications Boost Outsourcing Results

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Contract Management: Why Technological Applications Boost Outsourcing Results

Overall, technology is improving the way we work. When it comes to managing contracts these improvements – mostly automation related – have a positive impact on  business results, supplier management as well as on customer and employee satisfaction. Technologies like artificial intelligence (AI), robotics and blockchain can improve contract management issues like compliance, data management, invoice settlement and contract analysis.

Technology does not need any sleep, it is not bound to a nine to five mentality and it doesn’t get sick. It offers a 24/7 availability and, when implemented well, it is more accurate than humans can ever be as long as it is bound by rules and repetition. As like almost everything in our professional lives, contract management is being influenced by digitisation. Contract managers are changing their way of work and are eager to embrace the technological developments surrounding them. This is only logical, because technology carries a lot of potential in the contract management field, and I will explain how.

A contract is more than a piece of paper

Let’s start at the beginning. What exactly is a contract? A contract is a legally enforceable agreement between two parties. In practice this translates to one party demanding a good/service, and the other party supplying this good/service. The catch in good contract management carries a good methodology with it. A great example of such framework I have seen is CATS CM®, developed by the Dutch contract experts of  CM Partners. It defines a set of rules and tools needed to achieve contract goals and get the most out of collaborations with suppliers.

According to the CATS CM® method the demander and the supplier experience a different contract lifecycle. The contract lifecycle starts when a demander specifies a certain need. What the demander then does is contact a potential supplier. The demander will contact enough suppliers, until he/she has found the right supplier for him/her. After the contract is agreed upon, the actual execution starts. This is where both parties perform the acts described in the contract.

Integrating technologies like RPA and AI

Currently the operational phase makes  limited use of technology, resulting in loss of efficiency and value. Some organisations have a contract administration system in place, but that is mostly not more than a central source for all documentation. It does not facilitate good contract management nor does it automatically validate purchases.  To carry out a contract organisations should look for the ultimate synergy between methodology and technology.

Next to the value technology can add in terms of taking advantage of contract terms and renewing on time, digitization of your contracts is already a huge step in the right direction. Nowadays most contracts are still on paper within organisations and often unstructured. Searching for a specific contract can proof difficult, and browsing through the contract for a piece of information can be time-consuming. A good contract manager should avoid spending time on tasks like these. When contracts are stored as online data you increase contract visibility, improve document management, and enhance accessibility. This is a nice feature of technology, working digitally has more to offer. We have for instance seen that in preparing for Brexit automation has helped a lot of organisations to get to understand the effects fast.

Contract Lifecycle Management (CLM) software takes contract management a step further in efficiency, since it helps to manage the process end-to-end. This software can partially automate and enforce process elements across the full contract lifecycle in relation to requests, collaboration and signing for every purchase. CLM simplifies and streamlines the process for contract managers, but it does not fully prevent ‘value leakage’.

Emerging technology like Artificial Intelligence (AI), and robotics can have beneficial influence on the way of work in contract management. A KPMG study states that when technology is not optimised in contract management that there is a ‘’value leakage’’ in contracts. This means that there is no advantage taken of full contract terms, renewing on time, etc. This can reduce a contract’s value by 17-40 percent, which is not the goal when trying to optimise your contract.

A framework creates transparency, technology unleashes value

In general there are three people involved in a contract, these are; the contract owner, the contract manager, and the service manager. The contract owner makes the demand and determines the budget. The contract manager handles ‘all other contract matter’, which are variables of the contract like price,duration, progress, and how to anticipate on potential issues. And the service manager keeps busy with the tasks that belong to ‘work to be done’. From the supplier’s side this generally means; installing, executing, servicing and transferring the good/service. From the demander’s side this means; facilitating that the good/service can be supplied and reassuring the quality of the good/service. The contract management process entails the execution of a contract; this process is based on six fundamental steps; Initiate, Plan, Do, Check, Act, and Closure.

The CATS CM® method gives instructions on what tasks need to be done per step. Studying and analysing the contract, drawing up the risk factors, and planning and execution of the intake interview with the contract owner are part of the ‘Initiate’ step for instance. Although this is the traditional way of contract management, and it works, there is room for eradication of inefficiencies through the use of technology. Technology becomes more important because a lot of industries are moving at a fast pace. This is mainly caused by rapid technological changes and high consumer expectations. This fast paced business environment needs a fitting agile contract management approach.

Robotics for real-time information gathering

When ContractLifecycle Management (CLM) software is integrated with Robotic ProcessAutomation (RPA) it will be able to automate tedious tasks like approvals and notifications, this is resulting in short cycles and higher productivity. Gartner did a study on this matter and found out that 85% of companies do not have effective CLM, resulting in long cycle times, stakeholder frustration and lost deals.

Figure 1 – Supplier’s contract lifecycle experience

Artificial Intelligence to grasp and interpret data

Artificial Intelligence is a technology that knows various applications in numerous sectors. Contract management is no exception. Including Artificial Intelligence in CLM can add even more value. Predictive intelligence can automatically suggest the suitable contract language and clauses, and flag discrepancies and risk factors. AI can minimise laborious manual reviews, speed up cycles by learning decision criteria and modify documents to meet corporate legal requirements (Earl,2019).

Conclusion

Traditional contract management methods are providing clear structure in the management of documents. A well trained contract manager can optimise the potential of contracts and be of great value to an organisation. But inefficiencies in the contract management process can be dealt with through technology. A software like robotic process automation (RPA) can eliminate tedious and time-consuming tasks like approvals and notifications to shorten contract cycles and increase productivity. AI takes this automation to the next level with the learning aspect of the software. It minimises laborious manual reviews, speeds up cycles by learning decision criteria, and modifies documents to meet corporate legal requirements. Though, these technologies are not being applied that much in contract management yet, we will probably be seeing more and more technology in this sector in the near future.

Related: How Digital Technologies Will Shift Human Capital

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