Observations from the IACCM Americas conference
A recent Liberty Mutual commercial highlights a woman talking about a typical car insurance contract being 22 pages long, and that most people don’t read it except lawyers because no one really understands it; to the average person it reads “blah blah blah blah blah”.
Hitting a nerve even in the world of commercial contracts, it is evident that contract management today needs to get beyond the traditional legalese of typical contracts designed by lawyers for lawyers, by transforming them into practical and collaborative business tools.
Forward contracts: Innovation from IACCM
Noted at the IACCM Americas conference in San Diego this week, it’s creativity and innovation in contracting and commercial management that lies at the heart of the future. The continued transformation of contract management drives social benefits and interdependencies with “contract digitization,” which requires a new level of precision.
As Tim Cummins, CEO of IACCM, said during the opening of the IACCM conference:
There are winners and losers in the analog world of contracts…and where the world of contracting has remained behind [is] often still insisting on wet signatures in a digital world.”
As was discussed at the conference with several academics, traditional contracting tends to be based on power brokering. Contracts are written about the unknown and unknowable, and as a result, are seen as an insurance policy. They’re more focused on innovative clauses like force majeure, that inserts a high degree of intrinsic uncertainty by imposing terms to manage the risk rather than ensuring openness and clarity.
Moreover, the importance of contract transformation is self-evident and can not be understated, as expressed by the recent Noble Prize winners for Economic Science calling out that modern economies are held together by an innumerable number of contracts. The theoretical tools postulated by professors Hart and Holmström demonstrate the potential pitfalls in bad contract design and management.
Improving contract and contractual relationships today thus starts by tackling the risks themselves, focusing more on mutual outcomes and results. This moves contracts from the purely legal interpretation of the contract to the commercial and social aspects that govern these relationships.
Thinking beyond the repository
To accomplish the continuing transformation of contract management through automation means organizations must go through the next phase of CLM (Contract Lifecycle Management) adoption. For instance, contract automation over the past decade has been largely focused on efficiency rather measurable business benefits, but CLM technology adoption rates have been low. According to IACCM research, despite 60 percent of organizations having CLM, fewer than one-third are actually using it.
Today, organizations and software providers such as Determine need to collaborate to enable moving beyond having CLM simply be an e-Storage and repository in the first generation of contract management implementation. This entails actively increasing the adoption of reviewing and approving contracts through workflow, self-service delivery and broadening the usage of e-Signatures. It also means improving the ability to demonstrate accelerated comparison of contracts, shared performance of contracts, and improving insights on rights and obligations. And perhaps, in the not too distant future, go so far as machine-based negotiation.
Accelerating CLM with AI and Blockchain
Digitization means improving CLM through the use of artificial intelligence, such as using complex algorithms to “sift through and learn” about commercial relationships built-in to contracts to better understand customers, suppliers and other third parties. Or the use of blockchain, which the Economist describes as a programming language that allows users to write more sophisticated smart contracts. These smart contracts could, for instance, create invoices that trigger payments when a shipment arrives, similar to share certificates that automatically send their owners dividends when profits reach a certain level.
Contracts beyond the written word
Digitization is also about the convergence of written, spoken and visual elements. At this year’s IACCM conference, the emphasis of one discussion was how to make contracts more accessible through the use of non-verbal cues. This brought to the fore some unorthodox ways of looking at contracts beyond the traditional body of terms and conditions, through the usage of better-designed contracts with improved visualization, text and images. For instance, the designation of icons to represent key elements of terms and clauses or the linkages of definitions through the use of Wikipedia-like insertions that help non-attorney/lawyers of contracts ensure they understand the T&Cs based on the legal definitions upon which they are drafted.
Accessibility: Contracts as infographics
Furthermore, the notion of the contract has gone so far as to also incorporate “illustrated forms” of contracts for those not familiar with contract language. Pictorial diagrams can ensure all parties, regardless of their familiarity with the language, can understand the obligations that are being asked of them.
As an example, one presentation demonstrated an experiment in the usage of pictorial labor contracts for fruit harvesters who come from many different tribes / language groups in South Africa and do not speak a common language. Perhaps this is very early in the next evolution and may not be accepted by the legal or contract community, but it’s definitely a new way of thinking.
Contracts without borders
Finally, digitization links contracts to global supply networks, tapping into supplier performance and relationship management. The creation of cloud platforms has already enabled the digitization of contracts to go beyond the four walls of the organization and improve the ability to collaborate and share contracts. But this evolution is very much still in play, and in its early stages for how contracts will ultimately be accessed and shared between organizations.
Given the observations at the IACCM conference, it is interesting to see to what level organizations have achieved this transformation. Do any of these ideas resonate with your organization?
Learn how to leverage your contracts
Watch our on-demand webinar with Protiviti and IACCM – Improving Business Outcomes by Managing the Link Between Suppliers and Contract Management. You’ll learn how to make contracts an integral part of your working relationships with suppliers to get everyone on the same page and driving business results.