During the years I spent leading the business innovation unit for the Large Corporate segment of a Nordic bank, I often reflected on the concept of a Universal Contracting Platform given the role that a bank could play in it. Contract Management is a tricky and often painful issue for basically all corporations and the main problems along its lifecycle are common, from contract drafting, negotiation, signing, execution, monitoring, enforcing and storing.
Instead of each enterprise grappling with these issues independently, let’s envision a singular core platform integrating all the aspects of contract management and accessible to all commercial entities. This is the essence of the Universal Contracting Platform that I am presenting here.
In this context, a contract is defined as an agreement between parties creating mutual obligations that are enforceable by law.
The time is ripe
While the challenges of contract management trace back to the dawn of organised societies, I feel that the present moment is opportune for a radically new proposition. In particular, technological advancements are propelling contract management into the digital era, rendering it many fold more efficient, cheaper, secure and convenient.
Key technologies driving this transformation include 5G for real time data transfer and hence real time monitoring of the enforcement of contracts, cloud computing for high data processing power as well as vast data storage, and AI for enhancing efficiency and productivity. GenAI can for instance read old contracts and produce new ones based on preset rules, allowing for easy contract renewal based on new conditions. In addition, Industrial Internet of Things (IIoT) devices can provide an incredible range of data that in turn can be used as parameters in a contract. APIs allow system to system communication and therefore automation of the contracting process, and blockchain is (slowly) becoming a good base for smart contracts.
Digital contracts, as opposed to traditional paper-based documentation, enable the use of the above technologies and the digitalisation of the contract management cycle. This includes digital authentication, electronic signatures, cloud-based storage, workflow automation, digital security and audit trails. Contract management software also offer features such as contract drafting, negotiation, version control and analytics.
The complete digitalisation of the contract management cycle dramatically enhances convenience, security and cost-effectiveness, lowering the barriers for new contract engagements.
The inevitable surge in contract utilisation
According to the transaction cost theory, the boundaries of an organisation are defined by the level of friction inside its boundaries versus the friction in dealing with the outside world. As long as the latter is higher, the organisation will remain intact or even expand into new areas. But if the level of convenience and cost-effectiveness of transacting with parties outside the organisation becomes lower for certain functions, with at least the same level of quality, it has an incentive to outsource those functions through contractual agreements.
Conversely, customers opt for bundled offerings as long as they remain cost-effective and convenient. Else they have an incentive to purchase the different parts separately from various suppliers, i.e. the offering is unbundled. In turn, the surge in unbundling leads to a proliferation of contracts between economic entities.
It should be noted though that unbundling increases another form of transaction cost, not at the contract but at the search level. When buyers have too many options, the “cost of search” increases. As a result, re-bundlers are often needed to repackage the different parts together. But in terms of the number of contracts needed, the result is the same since the re-bundler needs to enter into contracts with all the part providers before offering the package to the end customer.
Current CLM solutions and their limitations
Current CLM (Contract Lifecycle Management) software provide substantial advancements for companies implementing them, in terms of increased efficiency, lower costs, reduced risk and a better overall management of their contract portfolio. Their features can include a centralised and secured repository for storing all contract related documents, as well as automated workflows for the approval processes, notifications, and task assignments. Some provide a contract collaboration tool for facilitating the drafting and negotiation phase, and they may include contract analytics as well as risk and compliance management. The more advanced ones propose an integration capability with other business systems such as CRM (Customer Relationship Management) or ERP (Enterprise Resource Planning) to facilitate data exchange.
However, since their focus is confined to addressing internal challenges, they fall short in establishing market standards or promoting the use of generic tools. Moreover, as external market pressures drive the unbundling of a company’s offerings, existing CLM solutions may prove inadequate when companies partially lose control over contract management.
Going further with a common workspace
A common contract management workspace, or platform, could solve the limitations of CLM software and bring an array of additional benefits.
When an agreement is established between two or more parties, it is built upon the contract format and process of only one of those parties. For instance, the seller can use a top-notch CLM software, but that will be of limited help to the buyer. In this respect, a contracting platform offers a solution which benefits both, especially when it is connected through APIs into their respective systems.
Generally, building a common infrastructure brings economies of scale and hence access to a top-notch contract management experience even to the companies that cannot invest into their own CLM software. A Universal Contracting Platform would “democratise” contract management.
A platform would also enhance real-time collaboration as a common workspace being de facto an extension of both parties’ systems and processes. This would improve communication, reduce negotiation delays and solve the version control issue.
Customisation and flexibility are also issues that can be better achieved at scale, for instance with adaptable templates tailored to specific needs. In particular, a platform would be a good base to standardise certain contract elements, in fact as many as possible, like small lego blocks that could be put together in all types of shape. This in turn would help reduce legal risk and ensure that contracts are clear and enforceable.
And when you think about the platformisation of the economy at large, with platforms and marketplaces increasingly re-offering products and services, also in B2B, a new form of contracting is needed: in order to ensure that the buying experience is homogeneous across the offerings of the different providers, the contracting will have to follow similar formats and processes.
The contract platform revolution unfolding
The momentum towards a contracting platform is evident, marked by the introduction of common infrastructures like digital identity and digital signatures.
In fact, initiatives to establish a contracting platform have already been undertaken, exemplified by ventures such as we.trade, a digital-native platform founded by twelve European banks. The aim of this partnership was to cover most companies in Europe, both sellers and buyers, in order to make their trade easier, faster, cheaper and more secure, in particular by hosting and executing their commercial contracts. Its main achievement was likely the writing of a comprehensive rulebook governing how to enter into contracts on the platform, i.e. a common standard to which every single party being active on it would adhere to. We.trade was however probably introduced ahead of its time since corporate customers adoption was too slow and it lost the support of its shareholders.
Despite its failure and the fact that it was built by trade finance specialists to solve primarily issues related to cross-border trade, the solutions it developed could be revisited in order to be applied to digital contracting between economic entities. In particular, its use of the blockchain technology was not painless but was validated for issues like enforcing transactions, providing operational resiliency and solving the concerns related to data access, ownership and protection.
Other attempts should also be studied to get inspiration in solving the many challenges of building a singular core platform.
Navigating challenges: The quest for a Universal Contracting Platform
Embarking on the journey to build a truly universal contracting platform is a huge endeavour. It will need to conform to the legal requirements and regulations that vary across jurisdictions, as well as cater to the unique contractual needs by each industry. For instance, a construction contract vastly differs from a software licensing agreement. In addition, businesses often require customised contracts tailored to specific needs, making it imperative to strike the right balance between a high degree of flexibility and the necessary standardisation.
Interoperability with other business systems and software, like CRM or ERP, is another requirement to reach a seamless workflow, and establishing common technology standards for contract data, formats and communication protocols is crucial to reach this interoperability. User adoption and training should not be under-estimated, with a user-friendly interface being key for widespread adoption. And last but not least, security and compliance will need to be prioritised, especially with data compliance regulations.
With the above list in mind, it looks imperative to limit the scope of the project for its first iteration and identify the entities best placed to act as catalysts.
The Nordics as the initial playground, with Nordic banks as catalysts
A large part of the commercial activity of Nordic companies actually takes place within the Nordics and the Nordic countries share a quite similar culture, legal setting and level of technological development. Hence, focusing initially on the Nordics looks like a good proposition.
Nordic banks could take a major role in such an initiative given the services they currently deliver around the core contractual process of their customers, such as KYC, authorisation, counter-party risk management, financing and payment. Banks have a large existing customer base in all customer segments, their identification system is used widely in the Nordics for all kinds of transactions, and they ensure a high level of data secrecy. Furthermore, they are not only a trusted counter-party but they could also bring trust to the platform.
I doubt that banks will take the initiative but they could instead be a strategic partner to whomever is foolish enough to attempt this feat. If you are one, please connect!
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