How A Pandemic Will Shape Buyer-Supplier Contracts Into The Future

Although the global pandemic was widely an unanticipated event, it was not an unprecedented one.

For organizations that had covered all of their bases along the supply chain, there may have been plans in place to proactively address changing risks and shifting business models that provided invaluable security and resilience at an extremely volatile time.

Yet for many organizations, the pandemic thrust operations into unfamiliar territory, with profound implications on supply chains and buyer-supplier relationships. With many vendors suddenly unable to fulfil their contractual requirements, organizations faced the challenge of sifting through documents for related clauses that might offer some guidance as to what to do next.

Often, it’s a process that involves manually reading out contractual agreements — a painstakingly manual task, according to Beth Fritts, general manager of Legal Compliance and Analytics Solutions for Conduent Incorporated. She, along with Conduent Director of Contract Analytics and Management Services Rajesh Bagga, spoke with PYMNTS about the opportunity for automated technologies and business data integration to augment and enhance the buyer-supplier contract management process, and help organizations become better prepared for a future disruption.

Procurement’s Manual Pain Points

As a vital component of the buyer-supplier relationship, contracts are critical sources of information for procurement teams and the enterprise at large. Yet they’re also complex legal documents that change frequently based on an array of factors, from shifting compliance requirements to adjusted price arrangements.

As such, said Fritts, relying on manual management of these documents can have a suboptimal impact on the procurement function.

“People in the procurement and legal space rely heavily on manual review to do a lot of the work they do — to understand risk within a contract database,” she said. “For large companies, that can be an incredibly expensive way of understanding a core group of documents and cause quite a bit of breakage in the review process.”

With supplier contracts in particular, some of the biggest risks include financial leakage thanks to missed opportunities for cost savings or failure to quickly identify overspend. For instance, firms may not be operating at a capacity to capture a volume discount outlined in a particular contractual term. Manual version control may see professionals unable to efficiently identify the most up-to-date pricing agreements, too.

“This is around ensuring that you can understand the types of operational parameters laid out in a contract,” added Fritts, “and understand how your company is performing against those in buyer-supplier relationships.”

Extraordinary Circumstances

This pain point of manual contract review and management can be a challenge at any moment. But in times of extraordinary circumstances — for instance, in the midst of a pandemic — the inability to quickly understand which agreements are in place, and whether obligations must be upheld, can be detrimental to a company.

As Bagga explained, ahead of the pandemic, use of force majeure clauses — provisions allowing for one party in a contractual agreement to withdraw from the arrangement as a result of an extraordinary event — was not universal.

“It was all over the board,” he said. “Some contracts mentioned ‘pandemic’ or ‘epidemic’ specifically; many did not.'”

He predicted that, much like what occurred about 15 years ago with the addition of terrorism into boilerplate force majeure clauses, organizations from here on out are likely to include the term “pandemic” or “epidemic” within their contractual arrangements.

Yet even when force majeure clauses are in place, manual review of a contract can add a hefty burden of complex work to professionals to understand what the next steps are once the clause is invoked. In the procurement department, this has profound implications for organizations’ supply chains — and plenty of uncertainty.

Fritts offered the example of notice requirements. If a supplier is unable to meet a specific SLA (service level agreement) as laid out within a contract, there might be language with regard to how much notice that vendor must provide its partner.

Driving Intelligence Through Automation

By automating contract review, organizations can be far more efficient and speedy at identifying such terms and acting upon them. Fritts also highlighted the ability of intelligent technologies like artificial intelligence (AI) to help procurement, legal and other teams to prioritize which actions to take — for instance, notifying partners of the inability to meet SLAs based on which contracts require the most advanced notice.

Through automation, professionals can spend more time on value-added services for the enterprise, as opposed to reviewing troves of documents.

But optimizing buyer-supplier contract management isn’t only about automating the process of searching for certain clauses and keeping versions up to date. As both Fritts and Bagga highlighted, it’s also about incorporating business data from other areas of the enterprise to augment visibility and insights for the enterprise.

Such was the goal of Conduent’s newest contract analytics solution announced last month. According to Fritts, elevating contract management is about wielding the power of automation and business intelligence, while embracing a human element to buyer-supplier relationships.

“There is quite a bit of manual work in the traditional model that could be fairly well automated in the newer world,” she said. “A lot of it comes down to understanding specific risks that exist within an organization’s operating model. The interpretation of that risk can be aided by data — but risk is still assessed by humans.”