According to researchers at the British Library, the written word dates back to the fourth millennium B.C.E., when contracts between buyers and sellers became too complex to recall simply by memory. That contracts gave rise to writing itself speaks to how central these documents are to commerce: they define the value, the risks and the opportunities of a commercial relationship, and just as it was in 4000 B.C.E., the terms of these agreements can be quite complicated and hard to remember!
In today’s sourcing environment, every dollar, good and service into an enterprise is governed by a contract. Indeed, contracts are the only concrete output of the sourcing process, in which all proceeds for each party are rooted.
In recognition of contracts’ centrality, many sourcing organizations are investigating how they can digitize the contracting process. A recent study sponsored by Icertis found that 68% of Chief Procurement Officers surveyed said they planned to invest in contract management software in the coming 12-18 months; Gartner has reported that interest around Contract Lifecycle Management (CLM) is robust: “Customers’ interest in CLM is stronger than ever and is a leading topic raised by users of Gartner’s client inquiry service.”
In an attempt to meet this demand, many sourcing suite providers have folded contract management capabilities into their service offerings. For sourcing organizations hoping to move fast in their digital transformation, these suites may be the intuitive choice for a CLM solution. After all, they are provided by companies that focus on sourcing.
But such organizations should beware.
Leading analyst firms report the contract management capabilities found in S2S (source-to-settle) suites are often too rudimentary to move the needle on sourcing outcomes desired by CPOs in regards to speed, cost and risk mitigation.
As Gartner reports in its whitepaper, “Don’t Assume You Need an S2S Suite to Digitalize Sourcing and Procurement”: “Focus has been on breadth of functionality over depth of functionality. All suites on the market today have their stronger and weaker modules, and it’s often obvious where the vendor’s origin lies. There are, for example, few suite vendors that started in supplier management or contract life cycle management and, in these areas, functionality is often very limited.” [Read the full Gartner report, along with Icertis’ commentary, here.]
The outcomes of poor contract management capabilities are many. In general, Gartner projects that suite solutions will see widespread failures because they are not up for the task: “By 2022, more than 50% of S2S suite deployments will have failed to meet business expectations due to lack of functionality and rushed implementations.”
Using Contracts to Transform Your Sourcing Process
So what’s the alternative?
Major companies with complex supply chains, including Daimler and Airbus, are addressing the above challenges with a new paradigm: Contract-centric sourcing. Contract-centric sourcing leverages the power of the AI-infused Icertis Contract Management (ICM) platform to introduce contracts at the very beginning of the sourcing process and makes contract compliance a third pillar by which vendors are evaluated, next to technical and commercial capabilities.
A buying scenario under a contract-centric approach goes as follows: As part of the RFx, the buyer presents prospective vendors with all the contract language they would like the vendor to agree to, along with the typical specs for what product or service they need. This allows buyers to weigh contract redlines during the selection. What’s more, the AI capabilities also help the buyer and legal assess the impact of redlines on their entitlements or simulate vendor obligations in the negotiation process. With this approach, the contract becomes the natural output of the sourcing process.
Contract-centric sourcing is an approach enabled by technology. Where contracts have long been confined to paper and filed away, these valuable documents can now be digitized for real-time analysis and collaboration. Online collaboration portals allow vendors and buyers to work together across the globe on redlines and approvals; with Artificial Intelligence (AI) trained on contract language, buyers can quickly evaluate how submitted redlines will impact the commercial outcomes of the deal.
Daimler’s outcomes have been striking. Using ICM to manage relationships with 500,000 suppliers, the automaker has seen contract turnaround time has gone from five weeks to one week and improved compliance.
“From sourcing to contracting, we have gained speed, and it has made us safer,” says Ulrich Ochmann, product owner, contracting, NPS, Daimler. “We have our risks transparent, we have our process transparent, and our buyers like the software. It’s easy to use. The software guides the buyer through the process so the user always knows what to do next.”
What to Look for in a Contract Management Platform
So how should a company approach buying contract management software? Gartner provides this guidance:
“As with all technology, the value you get from your investment is directly correlated to the adoption of the solutions. In order to drive adoption, you should focus on finding solutions that fit your buying organization’s needs as closely as possible. This means that, in many areas, it makes sense to consider alternative specialist solutions to replace or — in some cases complement — the suite offerings. This is particularly true if you have industry-specific or differentiating needs.”
Icertis is focused on delivering the vision of contract-centric sourcing to clients. Features of the ICM platform include:
Deep supplier functionality: While we are focused on the shortcomings of suite players here, it should be underscored that among stand-alone CLM providers, supplier contract functionality varies. Icertis offers sourcing-specific solutions in concert with the flexibility to handle any type of contract in the enterprise.
APIs: The advantage suite solutions can claim is that all their systems work seamlessly together (an oversold point in cases where suites have been compiled through the rapid acquisition of niche players.) Connectivity is vital, especially so for stand-alone providers. Icertis’ robust APIs have provided it a strong track record of integrating with ERP, P2P, and other buy-side systems.
As those first scribes knew six millennia ago, contracts are the foundation of commerce. Just as they developed new technology (writing) to take their contracts farther, sourcing organizations today must think hard about what technology can allow them to do.
Contract-centric sourcing is a tech-enabled paradigm that we at Icertis believe will become a dominant model in sourcing, and underscore the competitive advantage offered by a best-of-breed CLM provider.
To learn more, read our whitepaper featuring Gartner Research: “Achieving Speed and Agility With Contract-centric Sourcing.”