Why Digital Transformation Requires Connected Contracting

A 2018 analysis in the Harvard Business Review of numerous failed digital transformation efforts noted that a primary cause was failing to undertake a systemic and companywide approach. Given that contract obligations and related business operations touch on nearly every aspect of a company, enterprise digital transformation efforts will fail to achieve their full potential without thoroughly incorporating contracts.

This article explains how the Clause API supports digital transformation by adding connected contracting functionality to contract management and business systems. Drawing from our experience with enterprise leaders, it describes why connected contracting is essential for any enterprise seeking to successfully create a digital-first company.

Connected contracting means connecting legal agreements post-execution to external sources of data and business systems to digitize, integrate, and automate the performance of their legally binding obligations. By connecting to real-world data including from IoT sensors and market prices, connected contracting functionality can significantly enhance the functionality of existing contract management and business systems.

Contracts and Digital Transformation

Contract obligations and related business operations touch on nearly every aspect of a company. Successful digital transformation accordingly requires treating contracts along three, interrelated dimensions:

• Digitization: contracts and related documents such as invoices, and data about contract pre- and post-signature, must be created and stored in digital form and be accessible by databases and analytics software. Currently, a wide variety of software exists to create and store contracts and pre-execution data, as well as to provide analytics about payments, basic milestone compliance, and renewal dates. Enterprise resource planning (ERP) and IoT systems also contain large amounts of enterprise data directly related to contracts, such as amounts spent on suppliers and metrics about the specifications of goods or services.
• Integration: contract data, the rules contained in contract clauses, and the real-time status of obligation performance (or lack thereof) must be integrated into and between enterprise systems such as contract lifecycle management, ERP, and others. Currently, contract management software has the ability to connect pre-execution contract data and workflows to other systems, such as integrating contract buyer data with customer relationship management software.
• Automation: the performance of contract obligations and related legal and business operations must be undertaken on an autonomous or semi-autonomous basis. Currently, contract management software automates much of the pre-execution contract lifecycle, such as data population and approval routing. In addition, specialized enterprise software automates certain aspects of contract performance, such as recurring billing for payments, automated invoice generation, and automated alerts for upcoming deadlines or if a payment or other deliverable has not been made. Existing software also automates contract digitization and integration in some ways, such as using AI to extract contract data from text and automatically syncing approved invoices to an ERP or accounting system.

The Shortcomings of Digital Transformation

Despite existing contract digitization, integration, and automation, digital transformation is being undermined by the failure to fully incorporate contracts post-execution.

In addition to continued reliance on paper, many aspects of contracting are still not digitized due to post-execution performance not being captured digitally, and analytics thereby being limited. For example, purchasers of services too often do not adequately track service levels or manually reconcile deliverables against payments and credits. We recently learned from the IT leaders of a global technology services provider that only about 15% of their IT service levels were being tracked by systems, and that the majority of those processes involved manual upkeep of Excel spreadsheets.

Digital transformation is also being undermined because data about contracts and their performance after they are signed is not being integrated with applicable contract payments, penalties, notices, warranties, and other obligations. Value leakage is the result.

Finally, digital transformation is undermined because the performance of contract obligations is insufficiently automated. Manual processes are still relied upon for contract operations involving penalties, credits, pricing and accounting adjustments, and notices about breach, performance failures, and other changes in contract status.

Even where data about post-execution contract obligations is capable of being integrated among enterprise software systems, end-to-end integration is not automated. For example, syncing data about whether goods are delivered on time often requires data from a transportation management system to be manually reconciled with a contract management system and a payment system.

The Clause API for Connected Contracting

Connected contracting addresses the shortcomings of digital transformation in incorporating contracts post-signature. Clause supports digital transformation in the following fundamental ways:

• Digitizing contract performance by capturing terms and legal obligations in data and code, and by capturing and storing data about the performance of obligations in real time that other systems do not capture or integrate.
• Integrating contacts after they are executed by enabling legal agreements to connect with IoT, ERP, and a wide variety of business and technical systems that are relevant to their terms and conditions.
• Automating compliance with contract terms by triggering the performance of legally binding obligations in response to external sources of data and updates in other systems. By doing so, Clause automates systems integration by pulling updates from and pushing updates to other systems.

The Clause API for connected contracting helps digital transformation to succeed by enabling users to add connected contracting functionality directly their existing digital systems and workflows. API functionality enables users to add connected contracting functionality without using a new application or disrupting existing workflows.

Connected contracting functionality that is available via the Clause API includes:

• Adding a Smart Clause. Adding a Smart Clause® to contracts lays the foundation for enhancing digital transformation with connected contracting functionality. A Smart Clause template is a contract clause that has the ability to be triggered by external data and systems to integrate and automate the performance of obligations. Once created, a Smart Clause can be edited and reused in a wide variety of contracts, use cases, and systems.
• Connecting a Smart Clause to External Systems. Users can customize Smart Clauses to trigger legally binding contract obligations in response to data that exists within their existing systems or new sources entirely, such as data from sensors or other IoT devices. Doing so can serve as a new bridge between data in existing systems, such as payment data in an ERP and spending limits in a contract management system. Smart clause customization also vastly expands the types of processes that users can create without tying them to contract obligations.
• Triggering a Smart Clause with External Data. When a Smart Clause is triggered by external data from the real world, it enforces contract compliance in real time, such as requiring prices to be lowered in response to a change in a supplier’s costs or a volume discount. Existing contract lifecycle obligation management can be vastly improved by integrating real-time contract triggers to existing systems.
• Obtaining a Contract Audit Trail. Users can view, receive, or export an audit trail about the performance of a contract after it is signed. Unlike standard contract management audit trails, the Clause API creates a record of how well parties are complying with their contract obligations to provide widespread business visibility, vastly improved analytics, and a reduction in disputes.

Conclusion

By adding post-execution contract digitization, integration, and automation to existing systems, the Clause API helps digital transformation efforts succeed by fully incorporating contracts. Connected contracting is essential for any enterprise seeking to achieve their full potential. Visit the Clause API to get started, or visit our website or read our product documentation for more information, and contact sales@clause.io for assistance.