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Live Contracts: How Next-Gen CLM Solutions Will Make Contracts More Than Merely ‘Smart’

01/21/2019 By

Enterprise contract management has become one of the hottest areas for digital investment, and rightly so. Because contracts form the foundational system of record for all commercial relationships, it stands to reason that, as business becomes increasingly digital, the foundation must also become digital to keep up.

Yet as companies move from storing contracts in filing cabinets to dedicated contract management software, another question arises: What next?

The advent of artificial intelligence-based technology offerings has promised procurement organizations an era of automated, “smart” contracts that execute predetermined actions when specified conditions are met. Such functionality is attractive, to be sure, but the scope of the smart contract concept is also inherently limiting.

To attain the true benefits that digital transformation is bringing to contract management, procurement organizations must go beyond simply making their contracts smart. Instead, they should strive for a more powerful paradigm: “live” contracts that convert their documents into living, adaptable tools for transaction acceleration, risk management and value creation.

‘Live’ Contracts Defined

 The live contract reframes the concept of a contract from a static document to one that can interact with other software, users and even contracts — taking new actions that are independent of users based on predefined parameters or rules.

Whereas digitizing contracts merely brings a physical document into a virtual environment, facilitating information retrieval and traceability, live contracts go a step further.

They pull these virtual assets apart so contract components, like clauses, can be converted from unstructured to structured data. Businesses can then build databases that house these components, and these databases can be tapped to design workflow rules that govern how various contract components interact with other enterprise systems, like e-sourcing.

This is a fundamentally different approach from a smart contract.

With a smart contract, systems are set up to support a limited number of automated tasks. Smart contracts enable simple execution of conditional logic. For example, if the price of oil drops beyond a threshold, then the organization executes a specific supply contract. While useful, smart contracts complete only actions limited to the framework of one specific contract.

With a live contract, however, the document is also capable of interacting with the broader enterprise and beyond. Consider how digitizing obligations related to, say, information security can allow businesses to cascade resulting requirements into different systems. The contract may stipulate that any employee working on a piece of business can’t have a laptop with USB drives on it, because the customer wants to protect valuable IP from being easily stolen. A service delivery organization could inherit that security requirement from a CRM system, where the contract was originally received, and have that transferred into a purchasing system, which will set up appropriate controls for laptop selection and ordering. If the business is using subcontractors in the project, that clause can be passed down to sourcing and supplier management systems so that the security requirements are reflected in those contracts too. And then there are tracking components to report back to the client and give confidence that all provisions in the contract are being adhered to.

A smart contract takes the digital document one step further, enabling a helpful set of automated actions. But a live contract goes far beyond that, tying business obligations to all related enterprise processes and reporting needed to successfully execute agreements.

Benefits: The Case for Live Contracts

While the appeal of a live contracts approach may seem clear due to its comprehensiveness, at an operational level, the benefits come down to three areas: speed advantages, risk reductions and optimization of commercial relationships.

First, a live contract is also a faster contract, significantly accelerating the pace of business. As we discussed in our earlier article on bringing contracts to the center of the sourcing process, integrating contracts into the full sourcing lifecycle makes the whole process faster — from forming a category strategy to cutting out the back-and-forth during bidding and streamlining delivery of the final award. This approach requires the contract to be living rather than just smart, as the document must be able to exchange information with the sourcing system to support this strategy.

The same thinking applies to risk management.

A smart contract can execute an agreement based on certain risk events (e.g., a supply chain disruption due to a natural disaster) but little beyond that. A live contract, however, can go beyond simple mitigation tactics. It can unearth potential issues before they happen and determine how obligations need to be pushed into other systems so that the contract can be fulfilled. The information security scenario above is one example of this.

Finally, live contracts can help businesses improve the overall quality of their commercial relationships. Consider, for example, how contracts interacting with a financial system like your ERP can be used to optimize working capital in collaboration with suppliers. A live contract system can pull in the results of various financial scenarios, using AI to evaluate the impact of having a net-30 versus a net-60 clause in terms of payment terms and offering different options to bidders in the contracting process. This not only helps procurement contribute to the business’ overall financial performance but also supports stronger supplier relationships, building financial strength into the agreement in addition to supply assurance.

Bringing the Concept to Life

As taking a digital approach to contract management is increasingly becoming the new normal for businesses, procurement organizations will need to grapple with the implications of this shift. Changing the foundation of how commercial relationships are managed will create challenges, to be sure, but it will also create opportunities.

Ultimately, understanding and embracing the live contracts paradigm will allow procurement to seize the digital contract moment with new methods to accelerate transactions, proactively manage risk and create value for the business and its partners.

How can organizations do just that? Stay tuned for a follow-on article in this series, in which we interview one CLM provider that is enabling the live contracts concept with its customers today.