CORONAVIRUS RESPONSE: Contract Analytics — Finding and Managing Contractual Risk and Reward in a Pandemic [PRO]

In the Spend Matters Coronavirus Response series, we are exploring the COVID-19 related business scenarios where the pandemic is affecting supply chains and commercial relationships — and how various countermeasures, solutions and providers are helping to respond. Much of the pandemic coverage started upstream in China where the outbreak originated. Last month, an ISM report that was conducted in late February cited that 62% of firms saw delays in orders from China (and a majority of firms also cited delays in simply getting supply chain information out of China). We did a deep dive into supply risk as the first topic of our now seven-topic series covering the pandemic response in areas such as:

  1. Supply risk management solutions that include supply chain risk, CSR risk, supplier financial risk, etc. (Read this category’s PRO analysis and solution recommendations here.)
  2. Sourcing and commodity management, including advanced sourcing, direct sourcing, automated supplier discovery, and commodity management to help dynamically plan and source. (See this category’s recommended solutions for direct sourcing here.)
  3. Advanced procurement analytics to enable direct procurement and/or to perform “spend planning” when demand drops out or spikes. (Its profile for this series is here.)
  4. Procure to Pay (P2P) that emphasizes working capital, dynamic discounting, payment control and related finance priorities to help inject cash into the P2P process — especially for many cash-starved suppliers. (This category is discussed in-depth here.)
  5. Fraud, P2P and vendor management safeguards when new suppliers need to be set up quickly, and also when lowlife fraudsters try to use the pandemic as a way to steal money and IP. (Its profile for this series is here.)
  6. Providers with deep contract analytics that can analyze a contract portfolio for affected contracts from suppliers (and customers) for not just force majeure clauses, but other related clauses that tie to the multiple risks popping up at once in the pandemic.
  7. Contingent Workforce and Services solutions that are able to, at a minimum, help rapidly ramp up on-demand workers to deal with massive resource shortfalls. We are looking at four categories of solutions: for sourcing remote/online work; solutions for sourcing and managing mobile-first contract workers anywhere you need them; solutions to “direct source” and manage contract workers; and solutions for data management and analytics.

This installment of the series covers contract analytics, No. 6 above, and deals with the topic of contracts (and commercial relationships more broadly). Staying on the China theme for now, the pandemic’s impact on Chinese supply chains led to roughly 6,000 force majeure certificates being issued by the PRC via its trade body to Chinese suppliers (a nearly 5x increase since early February). A force majeure clause provides relief from contractual obligations due to external events that are unpredictable/unforeseeable, unpreventable and of no fault of your commercial counterpart — and these certificates are somewhat of a “get out of jail for free” card for contracts.

The supply risk management firm Riskmethods cited that it has seen a 44% increase in firms that declared force majeure and a corresponding 38% increase in production stoppages or reductions in operating hours. It’s the latter metric that should be unpacked a bit. Force majeure is just a single clause, but it’s an interesting one because, similar to a business continuity clause, it represents how trading partners can help model and manage the effects of external risk/complexity on the commercial relationship. For example, Kira Systems, a contract analytics provider, recently conducted a study of two years’ worth of such Chinese supply agreements and found that within their sample of 130:

  • Only 74% even had force majeure clauses!
  • Of those contracts, 89% had contract language specifying the impacts/effects on the commercial relationship.
  • Within those, 42% specified contract termination effects, but 55% specified contract suspension (e.g., suspending performance obligations through some period of time) and 39% discussion/consultation to remedy the situation.

The whole point of this discussion on force majeure is to illustrate that contracts shouldn’t just be boilerplate text documents that include generic clauses that sadly try to properly transfer commercial risk to counterparties, but yet, end up creating downstream confusion and ill will because they don’t actually provide the needed risk mitigation and recovery when the crap really hits the fan like the coronavirus pandemic. The best contracts work in concert with robust risk management processes, policies and playbooks so that when various external conditions change, the underlying contracts can translate those changes to the affected parties and actually give them the decision-support / options to help jointly mitigate them (a business continuity clause is just one example here).

And herein lies the foundational problem: If you do not have an electronic contract repository that is filled with “intelligent” contracts that model the richness/complexity of the value exchange between the parties in commercial relationships in a risky world, you’ll be driving blind and putting yourself at risk. It’s like playing football without a playbook and not knowing what plays to call and how to actually successfully run the plays — NOT a recipe for success! We’ll return to this concept of playbooks later when we discuss Seal Software. Seal delivers many of its world-class contract analytics through a playbook approach where specific playbooks (i.e., the sequence of granular analytics to run that answer specific questions and support specific business use cases) and “rule books” (i.e., rule libraries and knowledge bases that are built on top of a rich contract data/metadata model) are served up as “Insight Packs” that can then be tailored by the client and augmented with Seal experts.

The foundational problem of poor commercial intelligence from an online contract repository takes many forms. IACCM benchmarks estimate that between roughly a quarter and a third of firms struggle to 1) find contracts they’re looking for, 2) find specific information with particular clauses, and 3) assess/report risk in their contract portfolios. So, when you consider the impact of COVID-19 on your customers, suppliers and employees, you can see how pervasive the pandemic’s impact is on contracts related not just to force majeure (and related clauses for termination, governing law, jurisdiction, arbitration, etc.), but also provisions related to delivery performance/service levels, liquidated damages, payment terms, limitation of liability and others.

We’ll dive more into the above clauses later when we get into specific use cases, but for now, CLM providers or niche contract analytics providers should be able to analyze contracts and related broader commercial information (which we call commercial value management, CVM) that in turn allow firms to:

  • Interrogate the contract portfolio proactively based on advanced search down to the clause level and even to the provisional language that includes specific obligations and risks (that hopefully have already been specifically modeled and extracted into granular metadata fields).
  • Perform where-used analysis and “related contracts” pegging to find impacts and enable changes (some of them being mass changes).
  • Identify what contracts have specific clauses in place (or not), including where either you or your counterparties can claim force majeure, but also the related information that determines the related clauses for notifications, required information for proof of harm, proof of mitigation (which might be specified in a business continuity clause), and types of available remedies/resolutions (contract suspension, cancellation, amendment, etc.).
  • Relate contracts to other critical data about counterparties (suppliers, customer, etc.) and value chains to help prioritize where to focus based on certain clauses. For example, customers might be actively trying to cancel/renegotiate their contracts that in turn may link to specific suppliers that you’ll need to pass on the pain. Some CLM systems allow this type of supplier-customer contract linkage.
  • Get ahead of contracts that will do you harm in terms of performance obligations and renewals (and related steps), but also use the pandemic as a good way to re-prioritize sourcing/negotiations efforts and also third-party/supplier risk management activities (e.g., liability issues for essential contractors that still are needed on site in operations)
  • Respond to specific adverse contract events that are occurring in real time (e.g., attempted contract cancellations) while also trying to support new deals and support transformation activities.
  • Support transformation activities during the downturn so that you can address highlighted weaknesses in your contract portfolio (e.g., weak/generic force majeure clauses that don’t specify pandemics or other related clause information).

We’ll dive more into the above clauses later when we get into specific use cases, but for now, such analytics help organizations answer the following questions related to some high-level use cases:

  • How can my contracts guide me in my need to radically cut costs, and more importantly, preserve cash?
  • How can I work with suppliers (or any supply chain partners) to accelerate existing cash-to-cash cycles and reduce working capital levels?
  • How can I support supply chain risk analytics to better support rapid decisions and risk mitigations?
  • Are “wet ink” paper contracts still being used, and isn’t it silly to continue using them given that COVID-19 can be spread through human-based contact or via intermediate surfaces (like a signing pen)? The chances might be infinitesimal, but there’s no better time to finally be moving to a fully virtual contract lifecycle and to get all paper contracts digitized into a proper contract repository. And where are contracting bottlenecks for customer contracts, supplier contracts, contingent workforce contracts and others holding up the value chain when every second counts and every precious resource counts even more than usual.
  • How standardized are our contract terms that are being lit up during the current pandemic, and can we use the crisis to help improve this standardization? Also, how richly are the contracts being modeled so that they can be directly interrogated for such decision support questions? And can these contract risk factors be the perfect way to align and operationalize other risk management processes and systems across the business? Hint: The answer is yes! And as a shameless plug, Spend Matters compares CLM solutions in our SolutionMap benchmarking process/database based not just on process-specific functionality, but also on the richness of the contract information models and underlying technical platform elements.

We’ll drill down into the high-level questions and examples in a moment, but for now, it should be clear that having a modern CLM system (and a commercial knowledge management database built within that system) with robust contract information modeling and associated contract analytics is a critical business competency to manage commercial value (i.e., the “CVM” concept again). But you don’t have to be on the leading edge of AI-based contract analytics to get many benefits from a CLM application, although having a CLM solution with some of these capabilities is a key advantage. These include providers such as DocuSign (with its pending acquisition of Seal Software), Conga Solutions, Agiloft, SirionLabs, Coupa (via its acquisition of Exari), and Apttus.

Some providers have built out specific COVID-19 capabilities.

For example, Seal Software brings its capabilities to bear with existing clients. SirionLabs has built a COVID-19 specific dashboard that has some straightforward analytics, shown below. SirionLabs also specializes in supporting “agile contracts” for large-scale services contracts like BPO deals so that if demand for services spikes or drops precipitously, the contracts can be updated dynamically to accommodate those shifts.

(Click to enlarge image)

CLM market leader Icertis shared some examples of clients using its solutions in interesting ways to address the crisis:

  • One well-known US-based multinational consumer electronics retailer has had its in store performance hit hard by the pandemic and has used the Icertis ICM application to digitize and radically speed up its supplier rebates process with electronics manufacturers — thus helping improve cash flow.
  • Another client is a food supplier/distributor that has been hit hard in its restaurant segment and has used the ICM solution for guided contracting in a mobile app that helps configure the sales contract based on various customer attributes, including payment terms calibrated to the financial status of the customer.
  • A life sciences firm had one of its coronavirus-affected regions move legacy contracts onto the ICM application so that workers didn’t have to physically go find contracts in the office buildings!
  • This move to a virtual CLM environment was cited by Granite Construction, a $3 billion firm headquartered in California, where a procurement staffer mentioned that “many back-office departments, including legal, had to transition to working from home. Since all of our contracts and contracting processes were cloud-based … there has been little to no change for our business.” “Contracting had always been important, but now it’s more critical than ever. When the outbreak hit, we knew risk indemnities and force majeure clauses were already in our templates and our contracts; we didn’t have to think about it.”

These examples illustrate that contract management has a place in the coronavirus response, even if the use cases are very straightforward and don’t require advanced capabilities such as AI-based analytics.

It’s also important to realize that these commercial/contract issues are impacting an ecosystem of solutions / services providers beyond CLM tech providers. For example, NPI Financial is a market leading IT-intelligence provider and they offered up some insights on what they’re seeing around this topic in the IT/digital markets:

“Some buyers in hard-hit industries are defining plans to ask vendors for special concessions. This requires a strong business case and buyer-side compassion. What (if anything) can a buyer offer the vendor in return for concessions? E.g. Longer commitment, faster payment in the future, ability to use their name publicly in an approved case study or ad, etc. One thing we’ve seen across several of our clients is that buyers are approaching this with compassion — one enterprise told its IT sourcing team to “behave ethically and don’t be outrageous” as they push for cost reductions across their IT supplier base. They know some vendors are also hurting and want to be sure they’re financially sound and strong when we come out on the other side of this crisis.”

It’s encouraging to see buyers taking a holistic and humanistic approach that also lets them be a “customer of choice” when critical vendors/suppliers are hard-hit and to use the buyers’ market leverage responsibly to create value with a win-win approach that should pay off down the road with a thankful supplier.

Within the rest of this Spend Matters Coronavirus Response installment, we’ll dive a little deeper into some use cases and supporting tools.

Some providers are offering coronavirus-specific programs and “freemium” commercial offers, and we’ll note those whenever we update this piece. We’ll also start the series with providers that we already have deep knowledge on, but we’ve been seeking information from other providers too.

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