AI Improves Coverage in Procurement Contracts
The future of purchasing leverages AI for risk and reward
2020 has been a trial by fire for procurement teams everywhere. Procurement contract workflows have been stressed to the point of breaking, and flaws of all sizes have been exposed. For some organizations, these process leaks have the potential to entirely shut down buying processes. It’s time to update procurement contracts to operate in today’s world.
If we’ve learned anything about procurement this past year, it’s the need to remake agreements to be more buyer-friendly. There is a diverse range of procurement tools to help you do that, you just need to develop a plan and assemble the right ones to (a) identify the gaps of the past and (b) fix contracts before you sign them.
The best approach combines lessons from the past and present with a vision for the future. Procurement teams are addressing these issues by asking a few important questions:
- What is broken and needs to be fixed?
- How must agreements change to meet new needs?
- What does a modern purchasing contract process look like?
- How do we get there?
Fixing broken procurement contracts
The first part of correcting buy side contracts is digging into the ghost of procurement past. How effectively did your contracts hold up as internal and external processes shifted to remote operations? It’s likely that you ran into unexpected scenarios that weren’t covered by language in existing agreements. It's also possible that your business continuity and disaster recovery plans did not sufficiently address reality.
Vendor contracts are particularly problematic when unexpected events happen. In business continuity and disaster recovery (BCDR) scenarios, external teams have to deal with their own organizational shifts and may lose their ability to deliver the services they’ve promised. Internal needs might also change dramatically, which could mean overage fees or additional charges due to unpredicted usage. Procurement teams must liaise between internal and external parties when facing new challenges.
Consider an enterprise business in Canada that normally has a small percentage of remote workers utilizing a VPN service to stay connected. As that organization shifted to remote work, all employees logged in to the VPN service. Unfortunately, a large part of that service’s customer base logged in as well, causing a network crash that lasted for several hours. That scenario could have been avoided if the procurement team had contracted additional vendors to help load balance during an instance of high demand. With additional vendor engagement and more robust force majeure language, the company would have been in better shape to handle increased usage.
For procurement teams that have survived the chaos of 2020, the lesson is clear: it is imperative to partner with the legal team and agree on contract language to handle unexpected events. Even though most contracts will not likely have to act on that language, it’s important to get it right. Moreover, it’s something that is easily fixed with the right technology.
After assessing procurement contract workflows, a lot of teams have adopted the use of electronic signature technology to help solve problems caused by disjointed agreement workflows. Research shows that almost all organizations saw an increased need for electronic signature and an incredible 43% of businesses saw at least a 75% increase in documents that need to be signed via electronic signature.
Intelligent corrections to modern contract problems
For a lot of procurement teams, the biggest need right now is to dig into existing agreements and uncover BCDR provisions in contracts that are already finalized. It’s also important to have solid BCDR terms in agreements that are still undergoing negotiation. This is best addressed by working together with legal and IT counterparts.
Look for tools and processes that help identify and understand exactly what is required for the company and its vendors during times of crisis. An important lesson of 2020 is to expect the unexpected, so those teams need to expand the scope of contract provisions and craft language that ensures optimal outcomes.
It’s especially important to focus on vendors that provide technology or data processing solutions. Procurement teams need to consider all of the possible ways that usage needs regarding technology could fluctuate and craft contract language to account for those scenarios. It’s important to review holes that 2020 may have exposed in the contracting process and look for ways to maximize coverage going forward. A company that maintains the ability to operate nimbly during a crisis is going to minimize potential damage caused by those challenges.
Rather than manually searching through existing agreements to uncover responsibilities during a crisis, AI can do the heavy lifting. Aggregate documents from a range of file types and sources to create a comprehensive shared library of agreements. From there, use AI to search those documents and find blind spots, risks and opportunities across a range of common concepts. It’s a powerful way to ensure that procurement teams are putting their organizations to a position to succeed.
The future of contract analysis
To set up for future success, procurement teams are looking for ways to incorporate AI analysis into the regular agreement process. That means finding a tool to review language for risk areas. Depending on several factors (size, industry, geography, etc.), the appetite for risk may differ from organization to organization, so this will need to be customized to fit each business.
AI should be configured to catch contract issues during negotiation. That means that the legal team won’t need to waste valuable time reviewing procurement contracts and procurement professionals can analyze contract language to get a clear picture of the terms (including opportunity and risk) before they sign. It’s the easiest way to ensure that bad terms don’t end up in an agreement during negotiation.
With modern contracting tools, procurement teams now have the ability to come to the negotiating table with process-driven and substantive contract data that will help them enhance negotiations. They will be able to make well-informed, data-driven decisions during contract drafting and negotiation in real time. Over time, they will become even more effective at using it to their advantage.
Procurement teams can also get accurate analysis of the content of inbound contracts. It’s a powerful way to use AI to search through agreements for a range of legal concepts and pinpoint specific sections that pose risks – and even suggest new language to reduce or remove that risk in the drafting and negotiation process in Word. Imagine a point in the near future where risk analysis technology becomes as ubiquitous and essential as spell check is today.
As contracts come up for renewal after all the upheaval of 2020, procurement teams have the opportunity to enter negotiations with a focus on BCDR provisions that could be a key point of comparison across vendors. To accurately understand these terms, procurement professionals need a tool that will help them identify BCDR risks and the power of contract analytics to get the best terms possible at the negotiating table.