CLM, ignited by COVID-19, is pushed into the spotlight - what's behind the trend?

Good news is on the way! Surprising? Maybe, but true.

Standing alongside IACCM and its members, we at Icertis have also been outspoken about contract digitalization as being an essential part of best practice business continuity planning for several years. However, with the recent IACCM research¹ revealing that almost 80 percent of organizations are suffering moderate to severe impacts to their contracts and trading relationships as a direct result of the COVID-19 pandemic, Contract Lifecycle Management (CLM) technology is being pushed further into the spotlight.

Some might wonder why this trend is happening. For starters, CLM has seen a transformation in the past decade. Ten years ago, organizations managed static paper contracts. Today automation provides legal, customer-facing and procurement teams with the ability to digitize, access, and manage contracts automatically at every stage. This has accelerated commerce, protected against risk and optimized their business.

But we still face risk and need to be aware. After all, we know contracts govern every dollar in and out of a company, so it is imperative that contract managers are able to surface the risk hidden in these documents. Not understanding where an organization may be vulnerable to supply chain disruption, missed customer commitments or broken partnership agreements could leave companies vulnerable to revenue loss or delayed recognition, increased costs, fines, late deliveries and greater risk.

And now, with the virus threatening and already significantly disrupting enterprises across all industries, minimizing exposure to any of these risks has become a business imperative.

Force majeure relating to COVID-19 is here and we must move beyond it, now!

One term on the lips of many supply chain professionals over the past weeks has been ‘force-majeure.’ Before this crisis kicked in and began to impact deliverables out of China, contract professionals and contract negotiations were typically focused on price, delivery of service, termination and data privacy. Force majeure was arguably overlooked in favor of more contentious issues that would directly impact the day-to-day bottom line of a company.

According to Icertis’ own research of contracts held on our platform, four out of five force majeure clauses didn’t even mention the term ‘pandemic’ or other health-related crisis. But, as borders closed and trade came to a standstill, understanding force majeure terms and their implications became a critical discussion between contracting parties. IACCM survey data² supports this with an overwhelming 80 percent of respondents now seeing the review of force majeure clauses as being an important business priority.

In this world of trade uncertainty, organizations of all sizes and across all industries have been forced to review terms and conditions, like force majeure or other risks within existing or future contracts. In the automotive sector, for example, IACCM research¹ reveals that 79.3 percent are already doing this, compared to only 50 percent in the transport and logistics space.

In response to this pandemic, I expect every standard force majeure clause will be reviewed across all industries. Revisions will ideally include expanded definitions of force majeure events to include pandemics, along with an agreement on which government agencies and non-government organizations (NGOs) the contract parties will turn to for such declaration.

The big picture here is larger than force majeure. Contract parties should not expect that force majeure will be the only clause reimagined and reframed because of this crisis. Frank Marty, Global Head of Contract Lifecycle Risk Management (CLRM) at Cognizant observed in a recent webinar³, “force majeure should be a clause of last resort. I also expect contracting parties to come together to add and revise business continuity provisions and add frameworks that anticipate events like this pandemic. I don’t believe that this will be a contentious negotiation, and that interests will be aligned and reflected in new contract templates.”

It’s here that CLM can play a role in surfacing impacted contract clauses that require review and renegotiation so revisions can be made. Further, CLM can help ensure that templates with outdated language can be sunset and the enterprise be prohibited from using such contracts.

 Centralizing contract data - preventing supply chain risks beyond force majeure

The crisis so far has highlighted the fragility of many supply chains. The World Economic Forum estimates that the US and Europe saw a combined initial drop in domestic and international trade transactions of 26% in early April, and a further 17% dip at the end of the month.⁴ Protecting fragile supply chains, no matter where an organization sits within them is therefore becoming a priority for entire business units - from procurement to logistics to legal.

Missed obligations between contracting parties can pose another risk, so organizations must be confident in the performance of their suppliers or in their ability to quickly identify other options if suppliers cannot meet expectations. Without security and confidence in the supply chain, organizations remain open to one of the greatest risks to businesses - the failure to deliver on commitments to customers.

To be resilient in a crisis, organizations must centralize contracts into a unified data pool - from the supply side to customer facing agreements -- to gain full visibility of exposure to a crisis and critically prioritize resources. Here again, the IACCM has been instructive, a recent report encouraging organizations to “move towards a common buy-side / sell-side contract management system, or at least towards a common platform that would enable integration of data across systems.” ³ Fully embracing end-to-end CLM provides full visibility across all agreements at any one time - whether or not those agreements are impacted by the crisis.

Cognizant is an example of a company embracing CLM to make themselves more resilient in a crisis. Frank Marty, Global Head, Contract Lifecycle Risk Management (CLRM) at Cognizant observed that when the Covid-19 crisis hit, he was confident he knew where all his customer contracts were, that they could be easily accessed and searched for critical data. As the crisis developed, Frank and his team have been able to dynamically search contracts for key-words and phrases - particularly where force majeure clauses are concerned.²

CLM made it easy for his team to identify what force majeure clauses looked like across different geographies, and to ask questions like “Does the term pandemic show up in our contracts?” then surfacing as much of that information as possible to empower leaders to make the most informed decisions. Cognizant, like other organizations that have embraced digital transformation, are far more resilient than organizations with static documents on a shared drive or paper agreements across siloed departments.

Artificial Intelligence (AI) and machine learning provide insights to risks

With greater digitalization comes opportunities - particularly in contract management. By creating or storing contracts digitally, organizations will be able to create pools of data on contracting relationships that -- when analyzed by artificial intelligence/machine learning (AI/ML) -- can provide insights on risks and opportunities during times of uncertainty.

With AI, clauses in a digitized contract repository can be quickly surfaced in a way that would be impossible through a manual review. The nature of AI means those critical business queries do not need to be pre-defined by a vendor within a system - but can address complex questions specific to a business need (or requirement) or an executive request. Organizations using AI functionalities and applications within their CLM can ask specific questions such as “which of our contracts contain force majeure clauses and do they contain language relevant to pandemics or quarantines?”

Further, with large numbers of employees likely to transition away from offices in the future as we embrace this new normal, accessing filing cabinets filled with paper contracts to respond to these inquiries will become impossible for many. AI can help quickly digitize these legacy contracts at scale, accurately extracting their attributes and clauses directly into a contract management platform, thereby reducing risk and improving performance.

Looking to the future, I expect in the coming years we’ll see more enterprises embrace AI within their CLM systems. Companies that have embraced digital transformation -- from digitizing their contracting processes to incorporating AI into those workflows -- have responded more quickly and confidently to COVID-19.

As well, employees of companies with a centralized repository in the Cloud will, in the future, be more accustomed to working from home, leaving the business confident that business critical contracting will neither be slowed, nor hindered. And with greater access to data, they could more quickly respond to the challenges they face on a daily basis.

So, yes! Good news is on the way - perhaps here already!

END NOTES

1. IACCM report titled, Business Impact of Coronavirus: Global Action & Reaction
2. Icertis webinar titled IACCM and Cognizant: Managing Contract in Times of Uncertainty
3. IACCM report titled, Managing Contracts under Covid-19: What have we learnt?
4. Article titled, Here’s how global supply chains will change after COVID-19.

ABOUT THE AUTHOR

Bernadette serves as Vice President, Lead Global Evangelist, at Icertis, the recognized leader for enterprise contract management. She is charged with sharing contract management best practices and innovations with corporate counsel and contracting professionals.

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