Three Contract Concerns to Focus on Beyond Supply Chain Risk

Recently, my colleague Bernadette Bulacan noted how valuable enterprise contract management software is for companies that want to gain visibility into their supply chain amid the COVID-19 pandemic.

It makes ample sense why most of the business focus around COVID-19 has been on supply chains: with the outbreak starting in Wuhan, China, a major commercial center for suppliers, it was the global supply chain that took the first hit.

But just as COVID-19 has now become a pandemic with far-reaching geographic effects, it's impact on global commerce has become farther-reaching as well. Companies must begin to think holistically about how the outbreak will impact business, and that begins with how it will impact the commercial terms codified in contracts.

Here are three contract risks companies should keep an eye on amid the urgency to respond to specific COVID-19 contract concerns:

1. Regulatory Non-compliance: Amid discussions around supply chain risk, a lot of focus has been paid to force majeure clauses that account for disruptions caused by events outside the control of the contracting parties. But while these clauses account for how the two parties may react to COVID-19, they do not relieve companies from ongoing statutory or regulatory compliance outlined in these agreements. For example, a contract may stipulate that a company must file monthly declarations about the makeup of its labor force or contractors (e.g., DBE compliance). This stipulation will remain in place regardless of whether other deliverables are delayed because of COVID-19.
2. Missed Obligations: While the COVID-19 outbreak may impact the ability of a company to deliver on some obligations, it is unlikely that it will preclude it from fulfilling all of them. Yet there is a serious risk that obligations will get missed due to the attention being paid to addressing the crisis at hand. If so, the impact of the pandemic will be compounded as companies deal with the financial and reputational damage that comes from a failure to fulfill their commitments. Companies must monitor obligations in all agreements, whether those obligations are directly impacted by COVID-19 or not.
3. Disconnects Between the Sell-side and the Buy-side: With the growing market uncertainty tied to the pandemic, it's not only the buy-side of the business that will be disrupted. Companies may see sell-side orders slow down as buyers wait for the turbulence to subside. However, if the sell-side and buy-side of the business are disconnected, it will be difficult for these order changes to flow across the business. In such a case, a company risks incurring costs for purchasing goods that it ultimately does not need.

None of the above risks are unavoidable and don't necessarily require a technological solution. That said, contract management software can help. By digitizing contracts and managing them on a central, cloud-based platform, companies can leverage AI to extract clauses from the contract and tag them based on attributes (e.g. "compliance clause," "obligation," "delivery requirement") for better visibility and management.

When a clause is extracted, it can flow across the enterprise, from the point of origin to the department that must fulfill it.

A clause related to government regulation arising from a sales deal automatically flows to the compliance department; obligations in a service contract flow to the delivery team; specs from a sales contract—or the cancellation thereof—flow to sourcing.

Business rules can assign these clauses to owners, and push notifications and other alerts can ensure proactive management and fulfillment.

When it is an all-hands-on-deck scenario in battling the crisis unleashed by a pandemic, technology can free up a business’ most important asset, its people, from having to worry about manually tracking contract terms. This allows them to focus on creating value for customers without missing critical contractual milestones.

Now is not the time for companies to lose sight of contracts and the obligations, compliance requirements, and financial implications therein. Contracts form the commercial foundation of an enterprise, and therefore will be foundational to any strategy for setting a sustainable course in the times ahead.