The B2B Contract Finds Its Strategic Role In Procure-To-Pay

Within complex supply chains, a single company is typically both a buyer and a supplier, part of a broader web of strategic B2B relationships. With any new or changing relationship, contracts have to be written up and re-negotiated, a tedious process that can be costly, and yet ultimately, ineffective.

That’s because when manual strategies are relied upon to negotiate and draw up B2B contractual agreements, the commitments each side make aren’t necessarily always enforced during the procure-to-pay process. Even worse, businesses can struggle to even find those contracts in an effort to understand whether they’re being adhered to or not.

As a result, automation technology is looking to transform the role of the buyer-supplier contract, and according to Vivek Bharti, general manager of Product Management at Icertis, the industry is helping to shift the contract to the center of the procurement ecosystem.

“There are usual transaction systems for suppliers, for customers, for employees and for financial transactions. These are the four traditional systems of record,” Bharti told PYMNTS in a recent interview. “We believe contracts are becoming a fifth system of record.”

A Single Source Of Truth

The buyer-supplier contract is increasingly viewed as the “ultimate source of truth” for both sides of a B2B relationship and, therefore, is shifting its strategic role much earlier in the source-to-pay process.

This shift encouraged Icertis to recently announce the integration of its contract lifecycle management (CLM) technology within the source-to-pay platform of SAP Ariba, enabling the contract management process to begin earlier in the procurement work cycle.

Bharti also emphasized the role of integrating contract management more seamlessly within the B2B relationship management arena across both buy-side and sell-side commitments.

“If I sign a contract with a customer, and now I’m going to spend money to fulfill my obligations with that customer, how am I going to spend money for buy-side contracts?” he explained. “The moment I can link my customer side to my buy-side, I’ll have much better control over my business.”

Enforcing Commitments

That control is not only about ensuring budgeting and spend is balanced on both buy- and sell-side commitments. According to Bharti, contract management within the procurement lifecycle is also about ensuring agreements that are made are actually fulfilled.

He pointed to recent McKinsey research, which found that 80 percent of procurement functions are not entirely aware of current contract structures in place. As Bharti explained, lack of awareness into contractual agreements that are already in place means leaked spend — for instance, if invoice costs are not what was agreed upon in a contract.

He also highlighted the struggle for large, international conglomerates often managing thousands of contracts. As a result of manual processes, often times these businesses cannot even find the right contracts they’re searching for to see whether they’re being adhered to, a pain point that can be especially detrimental in today’s climate.

Even when the markets are more stable, procurement teams aren’t able to access the information necessary to compare whether orders, payments and supplier performance match up to contracts.

“When you talk of large global corporations with different business units, different departments in different countries, procurement folks don’t have visibility unless they’re managing contracts digitally,” he said.

Automating Performance

Digitization and automation of contract lifecycle management means a much more efficient way for procurement teams and other professionals to find the contracts they have in place to assess how agreed-upon commitments stack up against actual performance of a B2B relationship.

But technology has moved beyond simply enabling greater management of existing contracts in place. Indeed, Bharti said that autonomous contracting is an emerging area in this field that can enable companies to establish their negotiating objectives and wield automation technology to optimize the negotiating process.

And after contracts are established, blockchain is another technology likely to introduce new efficiencies in the ways that organizations manage their agreements and assess both supplier performance, and their own adherence to commitments. This will become even more imperative as more organizations introduce pilots and initiatives within their supply chains around sustainability and ethical sourcing.

“Businesses are feeling increasingly responsible but find it very difficult to comply without a bigger community of suppliers in the supply chain participating,” said Bharti. “Blockchain is going to enable what was not being done until now.”