Procurement lessons from the pandemic which shows the need for AI-powered contracting software

A year after COVID-19 sent shock waves through the world’s supply chains, creating the most significant global disruptions in history. The pandemic served as an unfortunate wake-up call for companies that black swan events can and will happen, and they require swift and immediate response.

While many contracting processes and technology gaps surfaced within organizations, there are important lessons around supply chain transparency, supplier risk and contract operations that underscore the need for AI-powered contracting software.

We don’t have the supply-chain visibility we think we do

Prior to the pandemic, surveys consistently showed that procurement leaders felt confident about the level of visibility they had into supply chains. However, just six months into the pandemic, the number of leaders who felt they had sufficient visibility dropped dramatically. This is because before the pandemic, the essence of supply chain transparency was not fully understood.

Companies thought it was sufficient to understand who their Tier-1 suppliers were; in truth, effective supply chain management requires visibility down multiple tiers to understand how different disruptions will affect them.

Historically, suppliers have been reluctant to share details of their own sourcing strategies for fear the buyer will circumvent them. However, AI-powered software uses blockchain technology to enable all participants of a supply chain to upload their supplier contracts to a restricted consortium that can extract information like location and compliance documentation, without divulging sensitive information.

A year ago, this may have sounded like futuristic technology for procurement leaders. However, the pandemic has proven the need to move fast on advanced digital solutions to enhance supply chain visibility and optimize costs.

It’s not enough to manage risk

Another business assumption tested by the pandemic is that risk is inevitable, and it is procurement’s job to manage it. For example, managing the consequences of a supplier failure. This approach only makes sense on the assumption that global, catastrophic disruptions are impossible. However, COVID-19 has taught us that global disruptions are inevitable, and companies must go beyond risk management and work towards risk prevention.

Companies should look to the very beginning of a supplier relationship—the process of selecting a supplier and getting them under contract—as a key moment to preventing risk. This should involve understanding the supplier’s inward supply chain for lower tiers to understand the ultimate sources of supply.

With today’s software, companies can link public information sources such as D&B to their contract management system. This means potentially risky suppliers get flagged early in the process before any agreements are signed.

Advanced contract management software can actually monitor contract negotiations in real time and provide risk scoring based on language modifications to the contract. This powerful AI technology gives procurement leaders the intelligence they need to stop risk before it enters the system.

Contract intelligence software is now enabling procurement teams to unify all this information into an ‘Integrated Supplier Risk Assessment’. This assessment can serve as a single source of information on the risk potential of every relationship, enabling procurement leaders to build a much more resilient supply base.

Contract deviations can be an early sign of risk but only if detected

While risk is inevitable in business, the question is how best to identify problems in the supply chain so companies can address them. The early detection of supply chain failures is critical to quickly respond, develop contingency plans, and stay on top of a crisis.

One of the most effective ways to detect risk early is by monitoring contract compliance. If a supplier begins to deviate from their contractual commitments, it can indicate that there are problems in need of immediate attention.

However, these contract deviations are rather difficult to detect if the associated contracts are not connected to operational. Hence, it is an emerging best practice to connect contract data to the systems where transactions occur. By doing so, terms can be enforced, and deviations can be addressed before bigger problems emerge.

Ultimately, advanced procurement departments are adopting processes and AI-powered software in which their entire supply chain is visible, supplier risk is closely monitored and optimized, and supplier failures are detected early and addressed immediately. The combination of AI-powered software and robust processes make companies more resilient and ready to respond to both black swan events and mundane challenges that have long caused leakage and risk for procurement organizations. The pandemic has clearly demonstrated the need for companies to adopt intelligent contract lifecycle management software to help procurement operations improve speed, compliance, and performance in their operations, all of which will help eventually have a positive impact on company revenue.

This article has been written by Vivek Bharti, General Manager, Product Management at Icertis.