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Contract Intelligence and the Financial Services Lifecycle of Risk Management

By Jeremy Skaling

The great business philosopher Peter Drucker, who helped to define the foundation of modern-day business, is famously quoted as saying, "you can't manage what you can't measure." Or perhaps it was the famous statistician and quality-control expert W. Edwards Deming who first made this statement. While there are debates online about who said it, there's no debating that it is difficult to manage without insights and business intelligence.

This certainly holds true in the realm of risk management, particularly in financial services where regulation abounds. Measuring and managing the risks associated with third-party agreements, financial transactions, and regulatory obligations is critical for financial institutions to stay out of the headlines and avoid fines that can greatly impact their shareholders.

Managing risk requires teams of skilled resources to know the laws and to continuously review relationships and financial transactions. Providing these teams with the insights needed is where technology can play a critical role. These teams specifically need technology that can shine a light on areas of concern, quickly traverse thousands of potential threats, and bring to attention the risks and obligations that must be managed — technology such as contract intelligence.

The AI-powered Icertis Contract Intelligence (ICI) platform is quickly becoming a system of record for banks and financial services companies. Integrated with other critical systems, ICI is helping to efficiently onboard customers and vendors, optimize contract performance, help to manage contract risk and compliance, and improve revenue recognition in a fast-changing regulatory environment.

The Lifecycle of Risk Management

The financial services business model is predicated on managing risk while growing profitably for shareholders. The lifecycle of risk management is a helpful framework for understanding and managing risk within an organization. This framework provides an ongoing cycle of activity that risk managers can use to evaluate risk and manage compliance. As a framework, the lifecycle focuses on identification, measurement and assessment, mitigation, control and monitoring, and reporting. At each stage of this framework, it is important to measure what must be managed.

As a foundation for banks and financial services companies, contracts govern how their business operates. Contracts define the offerings provided, articulate the role of their many vendors and service providers, and define the terms of their financial transactions. As such, contracts are a critical component to measuring and managing at each stage of the risk management lifecycle, and contract intelligence provides a definite advantage.

Identification. Identifying and managing risk begins early in a relationship while selecting a vendor and beginning the contract negotiation. While working with a third-party provider or developing a new transaction with a counterparty, relying on standard terms and creating agreements that align with your expectations starts at the beginning.

The AI-powered ICI platform can help to optimize contract negotiation, reduce risk, and negotiate better outcomes. Identification must also take into account existing agreements. Digitizing agreements and moving them into a central repository will allow for all contract elements to be quickly searched and managed.

ICI, with AI trained to identify contract attributes, can rapidly digitize large bodies of legacy agreements and structure contract data and metadata within the ICI platform. This generates insights and helps identify areas that need review and ongoing management.

Measurement and Assessment. Once risks have been identified, it's important to measure and assess the potential impact and importance of mitigation. Not all risk is created equal, and some level of risk tolerance must be accepted by any organization—and contract risk is no different. Which terms and clauses will need to be further negotiated and which can be accepted and managed going forward will depend on each organization's policies.

Once agreements have been centralized and digitized, Icertis can help to assess and manage clause deviations and understand which clauses are impacted by new regulations. If clauses requiring updates are found, automated workflows enable teams to execute mass amendments against those contracts and send them to counterparties for approval, keeping the organization agile no matter what happens in the regulatory environment.

The ICI platform also includes a quantitative and qualitative risk-scoring model. The AI is trained on millions of contracts to automatically discover contract risks or poor post-execution contract performance owing to the non-fulfillment of obligations.

Mitigation. With risks identified and assessed, risk managers can then begin enacting processes and procedures to help mitigate these risks. Reacting to market events and mitigating risks is critical for financial institutions—whether it's a simple credit event or a complex geopolitical event. Being able to mitigate risks that emerge is vital to protecting the interests of a financial institution.

Quickly reviewing all contracts will allow for mitigation to be enacted, which may take the form of renegotiating or enforcing new policies outlined in an agreement. The ICI platform will help organizations identify and work through mitigation efforts.

Control and Monitoring. Ongoing control and monitoring of relationships and obligations set forth in agreements are critical to any risk and compliance process. Financial institutions must have tools and processes in place to monitor obligations, commitments, SLAs, and entitlements. It's important to ensure the expected performance from a relationship or transaction is realized. It's also critical that security and data governance is managed to protect the institution.

Reporting. The ICI platform offers highly configurable role-based dashboards and analytics that help to proactively identify risk and compliance issues. These provide an effective way of tracking key metrics such as risk trends, clause deviations, and cycle times and also improve visibility while helping to provide an audit trail for regulators. Additionally, with the AI-powered ICI Obligation Management app, obligations are identified and can be monitored to help institutions gain the full value of relationships and financial transactions.

A Real-Life Example: The OCC and Third-Party Risk Management (TPRM)

As an independent bureau of the U.S. Department of the Treasury, The Office of the Comptroller of the Currency (OCC) ensures that national banks and federal savings associations operate in a safe and sound manner, provide fair access to financial services, treat customers fairly, and comply with applicable laws and regulations. It is clear from the OCC that banks must properly govern third-party relationships to ensure activity is performed in a safe and sound manner and in compliance with laws. All activities performed by third-party vendors are ultimately the responsibility of the bank. Failure to maintain adequate processes and controls and to adhere to regulations results in enforcement actions taken by the OCC.

The process of managing third-party relationships begins early in due diligence and continues through contract creation, ongoing monitoring, reviews, contingency planning, and ultimately the termination and offboarding of relationships. Throughout this process, contracts define and govern relationships. Managing agreements, reviewing SLAs, and reacting as laws and regulations change is vital to remaining compliant and protecting banks and their consumers.

OCC compliance is a very real-life example of where risk and contract intersect. The cost to comply with new regulations is growing each year and is a significant portion of labor and technology costs for financial services companies. Managing all vendor relationships to ensure compliance is streamlined and optimized when the contracts that define those relationships are digitized and structured. The ICI platform helps banks to manage these third-party relationships. Whether it is negotiating and ensuring all applicable laws are being followed or through obligation management to track and view ongoing SLAs, the AI-powered ICI platform provides the technology advantage banks need.

Achieving Contract Intelligence to Manage Risk

The complexity of managing the risk lifecycle is one-factor driving banks to explore the value that contract lifecycle management (CLM) can offer. As outlined in a recent World Commerce & Contracting (WorldCC) report, a top area of focus for commercial and contract management teams among banks, financial services, and insurance companies is increasing strategic relevance and demonstrating value. Risk management is an excellent example of demonstrating value. The report also describes commerce and contract management as a newer discipline and shows that organizations are prioritizing the adoption of contract management tools and software along with contract analytics.

As a new category of software, contract intelligence leverages AI and other advanced software to digitize the contract management process, structure contract data, then connect that data to other systems of record. With the ICI platform, financial institutions can enjoy more intelligent contract creation, more intelligent contract automation, and more intelligent contract management insights—all with less overhead.

Moving Forward with Digital Transformation

Whether it was Drucker or Deming, who offered the famous quote on managing what you can measure, the business has evolved to a point where measurements and analytics are available on all aspects of operations. Thankfully, technology advancements and the rise of artificial intelligence are providing the necessary efficiency and scale to enable decisions based on these measurements and reduce risk.

Contracts are the first line of defense for risk mitigation within a financial institution. Digitally transforming contracts and managing them across all channels and aspects of a financial institution will help to proactively mitigate and manage risk. Better visibility into—and control of—contract data and information, wherever it resides, enables better business relationships and provides opportunities for all parties to remain compliant with regulations and react as markets and the geopolitical landscape evolves.

To learn more about Icertis Contract Intelligence for Banks, Financial Services, and Insurance providers and how it can benefit your organization, contact us today.