Did you know that an average Fortune 1000 corporation has over 40,000 active contracts across various levels of complexity? A significant number of these are procurement contracts, and they could run into millions of pages. So how do companies keep track of all these contracts? Today, procurement contract management is dependent on manual effort, affecting efficiency and productivity.
Why should organizations automate their current contract management processes:
- Manual collaboration across multiple departments takes a disproportionate amount of time and causes delays
- Repetitive tasks cost time and affect the productivity of procurement teams
- Error-prone manual interventions could lead to compliance issues and opportunity costs
- Growth is stunted as manual systems are not scalable
Gaps in current procurement processes
A procurement contract goes through 5 main stages (See Fig.), each requiring extensive review effort. The existing manual processes cannot address four critical gaps in the procurement contract’s lifecycle.
Fig: Lifecycle of a Procurement Contract
- Inherent cost inefficiency: Creating and renewing contracts requires significant effort from expensive legal talent to draft and negotiate the terms. A study found that a low-risk contract could cost a business an average of $6,900. These costs are not one-time; they recur on contract renewal as the same effort goes in again.
- Compliance oversight leading to losses: Current procurement processes result in a cumulative loss of time and resources over the period of the contract. That leaves a substantial margin for error. Undetected and unimplemented clauses could lead to overpayment, lapses in compliance, or even fines.
- Bandwidth strain on expensive resources from unpredictable needs: Changes in the business from events like mergers & acquisitions could warrant a large-scale re-working of a company’s contracts. However, manually reviewing and renegotiating millions of pages of vendor agreements is costly and inefficient.
- Risks from complex business needs: For some industries, e.g., pharmaceuticals, product requirements could be very stringent and heavily regulated. A less-than-perfect understanding of the procurement needs could have disastrous consequences.
AI-powered solutions to strengthen your procurement function
Using an AI-powered contract management solution can help businesses optimize procurement efficiency, improve processes and regulatory compliance posture, and redirect valuable resources towards strategic business initiatives. Gartner predicts that by 2024, the manual effort for contract review will reduce by 50% from adopting AI-based contract analytics solutions.
Let’s delve into how these solutions can benefit procurement:
- Cost savings: Over 60% of the in-house legal work is repeatable and fact-based. AI-led automation of document analysis, processing, and comprehension eases the burden of large teams and reduces reliance on people. An AI-driven analysis is faster, more accurate, and can help identify clauses to prevent leakages and leverage concessions — for example, using unclaimed credit limits.
- Process agility: In the event of unpredictable or significant change, like an M&A activity, an AI-driven contract management system can speedily and accurately enable contractual changes. A robust contract management system can complete all processes — ingestion, extraction, scoring, and digitization — in less than 60 seconds, expediting the procurement phase. Manual intervention is needed only for exceptions or risky clauses identified based on predefined thresholds.
- Enhanced and deeper visibility: AI-driven spend classification and analytics can offer insights for renegotiating contracts. Global third-party data can provide context to organizational data. Vendor-specific dashboards provide a look into each vendor’s strengths and vulnerabilities for better partner identification and renegotiation much beyond tier-one suppliers.
- Risk identification and management: Agility of AI-powered contract management solutions can improve compliance by flagging exceptions in time. It can swiftly and accurately score suppliers’ risk profiles, check for compliance, and redline contracts easing the team’s load.
At EdgeVerve, we have implemented XtractEdge Contract Analysis to help our clients reap the benefits of AI. For instance, a Japanese conglomerate’s procurement team was manually creating, reviewing, and conducting a risk analysis of the contracts, resulting in a loss of productivity. With XtractEdge Contract Analysis, our client automated contracts review and contract management process, achieving over 90% of cost savings and 9x improvement in employee productivity.
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Conclusion
Making the most out of AI in your procurement function
For procurement teams globally, a robust AI solution is like a shot in the arm. It offers the understanding needed to make decisions and drive strategic initiatives without ever having to read a contract. Yet, AI is no magic pill. Instead, it’s a sustainable long-term solution, which needs data and training to develop the necessary intelligence. To effectively integrate an AI-powered contract management system into your enterprise, access to real-time data is essential, enabling continuous learning.
Read more about how AI-powered contract management solution (CMS) can help businesses optimize procurement efficiency, enhance visibility, and improve regulatory compliance.
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