Why Contract Intelligence Is Growing in Demand (and Why You Cannot Separate It from Lifecycle Management)

Given the recent hype in the contract intelligence market, with recent projections of a multi‑billion dollar market and the separation of contract intelligence vs contract lifecycle management into two distinct tracks (which is complete rubbish IMHO), plus the increase in fraud sophistication and the growing importance of compliance, it is not surprising contract intelligence is in vogue. Why? Because contracts underpin all business operations on money spent and income.

Before we talk more about contract intelligence, it is important to understand the history of contracts and how they are managed.

Contracts underpin the business

Contracts underpin 60% of a company’s spend, the other 40% being employee costs (under HR contracts) and ad hoc spend not under contract. 90% of income is contracted.

If we look at both buy and sell contracts and how they differ, we can see that buy contracts coming from suppliers are very varied, as they come from each different vendor, whereas sell contracts are very similar, as they come from us as the supplier using the same contract template, tweaked for each client.

What both sets of contracts have in common are:

• Legal clauses
• Commodities we supply
• Price of those commodities, including consumption, tier discounts or other variable parameters that define the contracted price
• SLAs, KPIs or performance criteria
• Obligations that need to be monitored and delivered against

These documents detail how we trade, so by their nature they are complex. The mistake we made was trying to separate the content into disparate systems.

Nobody handles contracts effectively

I’ve worked for some large companies and I’ve sold to many larger ones, and not one of them handled contracts effectively. I met with a very large hotel group, concerned at late payments due to managed hotels disputing that obligations were completed. The time taken to identify evidence had extended payment by another 40 to 50 days. This large company had no strategy on managing contract commitments.

Over time we have seen the data in these valuable documents dispersed into the ERP or CRM, with pricing sent to finance, performance sent to the ERP and the clauses left in the repository. All in all, even with the advent of ERP contract modules (which were simply reactive, not proactive, document management of contracts), managing contracts was just too hard to do and too disparate.

I have tried to understand why businesses see contracts as just too much hassle and not enough value add. I think it’s because the importance and need for contract intelligence are spread too far and wide into the organisation, hence hard to articulate, leaving companies to learn to deal with the inefficiency of poor contract intelligence.

I think this is the real key to why we always shoved contracts in a folder and left them until something went wrong, treating contracts again as reactive and not proactive.

Let me explain the problem a bit further. A supplier contract that is in runtime can touch procurement, legal, operations, managers, performance teams, the warehouse, finance and support desks. I recall one decent sized company where the help desk teams had no idea if a support contract was still valid when providing support, and neither did its client.

In runtime, the lack of contract intelligence and its inefficiency is broken down into small bits across a company, so a COO, for instance, does not want to put in the effort to provide contract intelligence as they have no visibility of the ROI or pain points, because they are too diverse. Hence no reason to onboard contracts fully at the source. To be fair, the issue around clause analysis was also hard, and modern AI has helped this valued technique massively.

Even yesterday, I spoke to one COO who thought the upfront effort was not worth the outcome of contract intelligence, but she did agree to take a deeper look when we show what can be achieved by proper contract onboarding.

Why we launched contract intelligence

We launched contract intelligence to try to overcome these barriers, with a goal to:

• Centralise the intelligence at the contract level: keep the basic document management, clauses, commodities, performance and costs at the contract level rather than disperse them into other apps, increasing both cost and complexity
• Make available easy access to persona‑based functionality that both adds value to each persona and in the process captures further contract intelligence, enhancing the information set available
• Align contractual spend to actual spend
• Deliver spend intelligence

Yes, we still need to do some upfront work, but the value to each persona is immediate, and the level of control we have paves the way for modern fraud detection, stronger compliance and superior spend intelligence at a level never seen before.

Once set up, the benefits of contract intelligence to a company are many, including benefits across fraud detection, employee efficiency, better supplier and client trust and engagement, plus the ability to extend to more mature business practices, being more in control of business risk.

So what’s coming?

Well, we know that:

• Fraud is increasing and is much more sophisticated; to tackle this we need access to strong intelligence
• Compliance is on the up. Fines are being delivered for non‑compliance. Paying a vendor that is blacklisted or non‑compliant can attract fines, loss of business or legal challenge
• There is an increased push for 4‑way invoice matching to control spend
• AI automation needs better insight into contract details, costs, performance and obligations if it is to be useful
• Worldwide competition now requires absolute control of margins

Contract intelligence vs contract lifecycle management

There are many more drivers pushing the need for better contract intelligence, but it still has that stigma of being too much work. To avoid this, the contract intelligence players are distancing themselves from classic contract lifecycle management, trying to sell a dream of data analysis only. Let’s look at this play in more detail and explain why it’s complete rubbish.

• Contract intelligence: using AI to analyse data to provide the intelligence for decisions
• Contract lifecycle management: the lifecycle management of contracts that, if done correctly, captures the essential knowledge required to manage risk, costs and compliance

Quite clearly both are essential. If we do not complete the latter, then the former will be weaker and of less value, although I concede it’s better than nothing.

Below we set out a stack to achieve the level of contract intelligence that is essential for a modern business. But first, let’s take an example.

An example: 4-way matching

Due to increased and more sophisticated fraud attacks, it seems 4‑way matching is on the up: matching an invoice to the PO, the delivery and the underlying contract.

Both Facebook and Google were scammed out of over $120 million by a fraudster impersonating a genuine supplier; once one fake invoice was paid, others were simply paid out. It was caught eventually, but not before the money was taken. 4‑way matching would significantly reduce this. But let’s not forget, fraudsters are not stupid and keep evolving.

So if we are starting to add contracts to 4‑way matching, what is the question we will ask AP clerks to check?

1. Do we have a contract in place that this invoice relates to? Pretty simple to do, but easy to get around with a fraud play.
2. Does this invoice have a contract behind it, and have we paid on it before? If so, how much? A bit more complex.
3. Does this invoice have a contract? Show me the last payments made, and do the invoice amounts agree with the contract payment terms and pricing? Even better.
4. Or utopia: “Can you check this invoice for me?” “I have checked the invoice and it has a valid contract with proper approval in place. The supplier is completely up to date on its compliance. The line items on the invoice have been checked and all are within the contract commodities and pricing agreed. If you need more confirmation, the contract business owner is Derek and he can be contacted here.”

So to answer any type of validation question we need contract intelligence, and for contract intelligence we need contract lifecycle management. To get contract lifecycle management, we need to put in a bit of effort to set the correct foundations.

Essentials for contract intelligence

This architecture leads to spend intelligence, as below.