Artificial Intelligence in Contracting and Procurement: Harnessing the Power of Innovation

05/13/2024

AI's influence on contracting and procurement is both evolutionary and revolutionary. Despite its origins dating back to 1956, when rudimentary AI programs were introduced, many of us have unknowingly interacted with AI for years.

So why the excitement now? Well, the ‘revolutionary’ part is the accessibility of AI via laptops and mobile devices, a significant shift influencing daily life, including contracting and procurement.

For 25 years, World Commerce & Contracting (WorldCC) has examined technology's effects on these fields, aiming to streamline complex processes. However, technological applications have often fallen short of expectations. They have helped us standardise, provided us with catalogues, and driven the development of templates—but have they made our lives easier? Perhaps the best we can say is that the procurement and contract management technologies that have evolved over the last thirty years offer efficiency and introduce new complexities.

Is AI merely another incremental advancement? No. It represents a profound change, promising enhanced value and capabilities previously unimaginable.

Let’s start with the obvious. Efficient contracting and procurement are crucial in global business. As companies seek to maintain competitiveness, AI is gradually taking a prominent role, promising to be a transformative force despite its slow integration. This delay is attributed partly to human limitations in envisioning change and our inherent resistance. Yet, bottled up, we have a new assistant offering a very different set of capabilities. Let’s start exploring them!


Regional variations of the integration of AI into contracting processes


The Dawn of AI in Contracting

Initially, AI in contracting was largely theoretical, promising streamlined operations through automated contract creation and intelligent selection from clause libraries. This vision is becoming a reality, with almost 10% of large companies using intelligent playbooks and clause libraries, escaping the constraints of the contract template.

AI platforms automate tasks such as contract risk reviews, summaries, redlining, and portfolio analytics faster and more accurately than humans. Post-award AI offers obligation extraction, performance monitoring, automated alerts, and proactive risk forecasting across multiple agreements. These tasks were aspirational but rarely achievable until now.

Procurement Processes Reimagined

In procurement, AI revolutionises through data analysis. By leveraging machine learning, organisations can predict market trends, assess supplier risk, and optimise their supply chains. For example, a manufacturing company uses AI to analyse historical data on raw material costs, seasonal availability, and supplier reliability, combined with current geopolitical factors and social media, predicting price and demand fluctuations.

AI’s ability to analyse vast data is unmatched, depending on our ability to ask intelligent questions in a form that generates a meaningful response! It will also, tap into extensive data banks to identify cost-saving opportunities and pre-empt disruptions.

Risk Mitigation and Compliance

AI's capacity to analyse complex contract structures and legal language enhances risk comprehension and aids contract utilisation in business operations. Tools equipped with natural language processing can scan and interpret contract terms, ensuring compliance with laws and corporate policies and mitigating legal and financial risk beyond human capabilities.

Additionally, AI facilitates better structure and simpler wording, improving communication of rights and obligations to users. According to WorldCC research, almost 30% of an organisation’s workforce engages in the contracting lifecycle. AI eliminates errors, omissions, and confusion from inaccessible and incomprehensible contracts of the past, transitioning to a simpler and more intelligent approach.

Customisation and Personalisation

As businesses prioritise customer-centric models, AI enables personalisation in contracts and governance standards by tailoring terms and procedures to specific business relationships. It considers past interactions and preferences, such as recognising previous negotiations or identifying a need for industry-specific regulatory language.

AI streamlines negotiations and fosters empathy for robust collaboration between businesses and their clients or suppliers. AI also identifies when projects require structured governance, such as areas of joint working, formal problem-solving techniques, and a defined communication and reporting protocol, which is crucial for positive outcomes.

Strategic Sourcing and Supplier Relationship Management

AI's advanced analytics in procurement enhance strategic sourcing, enabling better decision-making. For instance, AI evaluates supplier performance over time, cultivating strategic relationships and directing negotiations (both pre- and post-award) on ‘things that matter.’

These insights are invaluable for managing contract value, often leading to improved terms and cost reduction. WorldCC research indicates an average value erosion of around 8%, much of which occurs in our higher-value, more complex contracts and relationships. AI empowers procurement to support value throughout the contract lifecycle.

Humans or Machines: The Future of Negotiation

Early uses of AI included forms of ‘optioneering’, where customers or suppliers interact with a machine to select term options. These will increase, and steadily, we may see machines negotiating with machines. Is that a good thing? WorldCC’s early experiments suggest this is advantageous. AI requires a framework like a human to understand rules, boundaries, and options.

These parameters can expedite agreements with greater economic benefit for all parties involved. In our experiments, teams equipped with AI, like ChatGPT, significantly outperformed those without it. They reached an agreement around 30% faster and achieved better outcomes. Hence, AI is poised to play a significant role in the future of negotiation, both in planning and execution.

Practitioners expectations of the benefits of AI and comparative ranking by ChatGPT


Mass Customisation and Self-Service

AI's ability to manage vast and intricate variables at scale facilitates mass customisation. An instance of this is the creation of self-service portals powered by AI. These portals empower end-users to draft and manage contracts or make procurement decisions within set guidelines, dramatically reducing the cycle time and empowering users.

Consequently, procurement and contract management personnel can escape many more mundane and repetitive tasks, which currently consume roughly 25% of their time, as per WorldCC benchmarks. This time can then be redirected towards high-value, strategic endeavours, like proactive risk management and tackling sources of value erosion!


The benefits of implementing AI in the contracting process


The Evolution into Strategic Function

AI in contracting and procurement signifies more than just automation; it's about strategic transformation. It is about realising the longstanding aspiration for procurement and contract management to be recognised as strategic functions, moving away from being labelled as mere ‘administration’ or ‘compliance’. AI will generate business value, provide insights guiding high-level strategy, and enhance our function’s agility and responsiveness to market shifts.

Ethical Considerations and Future Outlook

Of course, there are concerns. No innovation is without risk, and AI is no different. Our research highlights significant concerns over data security and privacy, and AI’s accuracy. Undeniably, these concerns must be addressed, often stemming from human errors rather than machine faults. Controls on data usage and handling and thorough reviews of AI-generated output are imperative. Similar concerns emerged with the introduction of calculators and email, prompting us to work differently.

Also, learning to discern considerations based on the type of AI we are using and its integration with other technologies, like blockchain, may enhance security and trust in business transactions.

Barriers to implementation


Final Remarks: Entering the New World of AI

So, evolution or revolution? The choice is yours. Hopefully, you are among the 76% of WorldCC members who are excited by AI, particularly Generative or GenAI. After reading this, excitement may extend from purely personal use to its business applications.

Integrating AI into contracting and procurement eradicates manual, labour-intensive processes, reducing operational overload and mental health challenges. Instead, we can develop sophisticated, strategic operations that enhance profitability and position us as visionary leaders driving business success. With AI as our trusty assistant, who knows what new possibilities will emerge, enabling further innovation in our business function?


This is an exclusive blog by Tim Cummins, Founder and President of World CC, drawing from the latest WorldCC AI in Contracting research - https://info.worldcc.com/ai-in-contracting

About WorldCC

World Commerce & Contracting, formerly the International Association for Contract & Commercial Management, is a not-for-profit association dedicated to helping its global members achieve high-performing and trusted trading relationships. With 75,000 members from over 20,000 across 180 countries worldwide, the association welcomes everyone interested in better contracting: business leaders, practitioners, experts, and newcomers. It is independent, provocative, and disciplined, existing for its members, the contracting community, and society at large.



Return to Blog