Managing third-party contracts in a large enterprise is daunting. First, there is the sheer volume of contracts and the lack of uniformity of drafting them. Then there is the typically dispersed responsibility for contract management across the enterprise, and the inherent complexity of the contracted business services themselves. Few companies have the staff required to identify and track the critical vendor obligations covered by what can be tens of thousands of active contracts. The result is that potential business value goes unachieved simply because the human and basic electronic processes for managing their contracts cannot perform at scale.
Artificial intelligence (AI) solutions on the market today can help organize these contracts better. For instance, an AI application can assess contracts across an enterprise and categorize them based on renewal date, services covered, SLAs and other firm-specific criteria. But these simple categorizations offer minimal value to a contract management team trying to corral thousands of contracts. Such simple categorization does little to bridge the divide between a hard drive full of executed PDF contracts and vendor management software that lacks full context of the contracted services.
AI’s greater promise is when it is used to convert contract-specific obligations and terms into a detailed workflow that makes clear to contract managers what and when actions must be taken. The result is a daily “to do” list that helps contract managers maintain commitments and measure and improve contract management operational efficiency. This shift to contract workflows, or ContractOps, brings better contract compliance for all parties and, ultimately, greater value to the enterprise.
Enterprise contract managers should keep the following in mind when plotting a course toward better ContractOps.
- Plan for ContractOps as scale. Don’t use AI only as a sophisticated query tool to parse a large set of unstructured contracts on demand. Set goals to convert obligations to concrete workflows that direct your team’s efforts through the daily tasks of auditing invoices, meeting renewal dates and confirming SLAs.
- Prioritize. For enterprises managing large numbers of contracts – say, more than 1,000 – prioritize based on contract value, risk levels inherent in the services and potential impact of those risks. Not all your contracts are of equal importance to your enterprise. While AI may efficiently parse them all, the greatest value to your organization comes from efficiently completing the resulting contract workflows, and that will require human attention. Focus that attention on the greatest value.
- Focus on best practices. Leverage technologies that will turn your AI observations into cleaner, more efficient contracting in the future. AI will naturally discover anomalies in how terms are defined, how service levels are described and other variances among your many contracts. The best AI solutions will find the trends and inform your new efforts to form best practices.
- Be careful about BYO-AI. AI algorithms are readily available to any IT organization, but they need to be trained with data from beyond your own hard drive of PDF contracts. Otherwise, you will simply be training your AI model on how YOU construct contracts – not on how they SHOULD be constructed.Choose a commercial AI solution that is trained on industry-wide best of class contracts.
- Train your contract managers on the role of AI in your ContractOps strategy. AI is one tool in the tool chest. The best AI solutions use multiple machine learning models to characterize contract phrases against the training model. These characterizations should prioritize contract phrases with confidence levels that allow a contract manager to quickly proofread low-confidence characterizations in a digitized workflow. The best models will accurately characterize approximately 90 percent of the clauses, leaving just 10 percent for the contract manager to quickly confirm as part of the workflow.
ISG helps companies reimagine how they govern, prioritize, organize and deliver on the full promise of their supplier portfolio with secure, on-demand access to ISG GovernX®. GovernX reinvents the way you manage your suppliers by providing a customized single pane of glass into spend, performance and risk across your organization. It will change the way you manage your contracts – and your business.
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About the author
Kevin Blackwell leads ISG’s product technology platform strategy, which brings the wealth of ISG experience and intellectual property to customers through industry-leading technology solutions. Kevin has 30 years of experience in software application and infrastructure development spanning hundreds of customer implementations in big data analytics, middleware, retail analytics and innovation management.