Can Contract Analysis Help Risk Managers Find Hidden Revenue?
When we think about risk management in an enterprise, we tend to think primarily about controlling and mitigating risks. But what if we looked at risk identification as a tactic for finding more revenue?
A clear view of an organization’s contracts can lead to increased savings by rationalizing suppliers, negotiating better deals and taking advantage of incentives. Using contract analysis, a company can improve how it manages the procurement lifecycle by creating a 360-degree view into supplier information, risk and performance.
The Appliance of Science
Contract analytics, which is made possible by developments in the fields of machine learning-based decision-science and artificial intelligence, has become central to efficient contract servicing and risk management. Employing AI allows large matrix organizations to maximize revenue and mitigate risks associated with contractual documents, systems, and processes.
It is mission-critical for enterprises and large matrix organizations to better understand the risks and opportunities associated with their contracts. Frequently, this is driven by regulatory requirements for data buried in contracts, such as qualified financial contracts and ISDAs (from the International Swaps and Derivatives Association), which needs to be aggregated for submission to meet a compliance mandate.
The latest legal-tech platforms perform automated discovery of contracts across entire organizations and bring them into a centralized repository for extracting all the valuable terms, provisions, and clauses buried in the text. This allows organizations to discover hidden revenue streams, improve business efficiency and build intelligence around the data already available to them.
A Heat Map of Risk
Imagine a heat map of your organization that points out where different liabilities exist and indicates the risk level of each of these liabilities. This is analogous to the application of advanced analytics to contracts within the enterprise, where the identification of nonstandard language or clauses, and how far they deviate from the standard, are a primary objective.
If you are struggling to assess the levels of risk associated with your day-to-day business, AI contract analysis tools could be important.
This requires far more than a static database with reporting capabilities; it demands accurate, dynamic, real-time intelligence that can only be derived from AI-driven methodologies. Contract analytics and discovery systems can uncover hidden opportunities to rationalize suppliers, negotiate better deals and take advantage of incentives.
What Role Will Procurement Professionals Play?
Considering that International Association for Contract & Commercial Management (IACCM) figures indicate that businesses typically waste between 4 percent and 9 percent of total spend, the result of applying contract analysis to the procurement and supply management process is sobering.
Procurement professionals are under tremendous pressure not only to acquire products and services for the best price but to ensure that the entire procurement strategy is in line with wider business objectives.
That scrutiny means that the procurement function is often the external face of an organization, acting as an early-detection system for spotting anything that might represent a financial, legal, or reputational risk. Effective procurement can have a major impact on the revenue and profitability of any business.
A company with an annual spend of $1 billion, based on the lower end of IACCM’s estimates, is losing $40 million. Should the procurement team successfully identify half of that loss, and if just 50 percent of that figure is recoverable, it translates into a potential savings of $10 million.
Every organization has their own appetite for risk. Assessing a company’s risk profile is the first step toward applying right-fit contract analytics that give a view of contracts at scale and provide a “heat map” of potential risk exposure. Without this assessment, it is hard to take a holistic view of the entire contract corpus, and with it, a comprehensive understanding of, for example, service-level agreements and uptimes, nonstandard conditions and terms, and whether or not liabilities are covered by insurance.
Regardless of the size of your current business, if you are struggling to assess the levels of risk associated with your day-to-day business, AI contract analysis tools could be an important tool.