Contracts are the bedrock of modern civilization in many ways. From simple vendor-client relationships to nuclear agreements between countries, everything is bound by legal contracts.
However, despite the fact that contracts are so essential to doing business everywhere in the world, the contract management system simply hasn’t evolved beyond a point.
This is set to change with futuristic technologies bringing a fundamental shift in the contract management process.
In this article, we talk about the next big thing in contract management software and how it will drive business efficiency.
The problem with contract management today
Given the technology-led strides that have been in other business domains, from product and marketing to finance and accounting, contract management simply hasn’t kept pace.
For instance, most contracts are designed for the future and cannot be executed at the time of the transaction.
This makes contracts particularly vulnerable to negative outcomes if the business environment changes which is often the case.
With the advent of contract management software, things have improved to an extent. However, the main purpose of contract management software so far has been to streamline administrative tasks and provide a unified view of the contract management process.
Contract management software has not yet succeeded in bringing a fundamental shift in how contracts are structured and executed.
The future of the Contract Management System
With the advent of new technologies like AI(Artificial Intelligence) and Blockchain, things are about to change. These technologies together have the potential to fundamentally alter how businesses build and execute contracts.
They will bring about a fundamental shift in the entire contract management process. Here’s an overview of the next big thing in contract management software and why it’s so important.
AI to monitor business environments around contracts
One of the biggest applications of AI and blockchain technology is the creation of contracts that are executed at the edge. Traditionally, many contracts are made today but executed at a later point in time; years later in some cases.
In other words, if the business environment changes in the intervening time, the contract may end up working against one or more of the parties involved.
With AI and blockchain technology, contracts can now be executed as close to the time of the transaction as possible.
This ensures that the contract is only executed when there is complete clarity around the business environment and all contracting parties have up-to-date information.
Example of an AI-powered contract
Let’s take the example of a major steel manufacturing company to discuss how this works.
This company will have thousands of suppliers across many different countries. With traditional contracts, the company would have to predict business conditions over the next few years and sign a contract with the supplier based on these predictions.
If its predictions go wrong, it can end up losing out in a big way. For instance, if currency rates fluctuate in an adverse manner, the steel manufacturer will end up with huge losses.
If they include a clause to deal with currency fluctuation, manually monitoring thousands of such contracts will be impossible.
With AI, however, the contract management process can be simplified greatly. Companies can use clauses in their contracts that have the formula to calculate exchange rates.
This allows the contract to monitor currency rates in real time. Whenever circumstances become adverse, contract managers are automatically alerted and they can take an action proactively.
As a result, AI has completely eliminated these kinds of costs that are contingent on the business environment.
Blockchain and self-executing smart contracts
At present, there are more than 6260 blockchain-enabled apps that can create smart contracts.
So what really constitutes a smart contract?
Smart contracts not only enable businesses to execute contracts nearer to the edge but actually go one step further and execute the contract themselves.
Blockchain technology uses a distributed ledger to create decentralized contracts that are autonomous, self-executing, and self-verifying.
With blockchain enabled self-executing contracts, the contract doesn’t just flag an action but actually takes the action too.
Example of a Blockchain based Smart Contract
Let us use the same example of the global steel manufacturer.
In the previous case, the currency fluctuation clause was monitored in real-time by the contract management software, and flags were raised so that contract managers could take action. With a smart contract, the contract takes the action itself.
In other words, when the supplier and manufacturer enter into a smart contract, there will be agreed-upon conditions regarding which parts of the contract can be changed autonomously and whose transactions will be automatically triggered when certain conditions take place.
The best part about blockchain-based contracts is that they are indestructible and trustworthy.
In other words, once the conditions have been agreed upon and the clauses have been amended, neither of the parties can go back and manipulate the contract in any way.
This is why the contracts can actually be made self-executing without either party worrying that they will be cheated in any way.
Real-world smart contract platforms
Here’s an overview of some of the most popular AI and blockchain-based smart contract platforms.
Ethereum is a decentralized blockchain platform. Apart from its own cryptocurrency (also known as Etherum), the platform also runs smart contracts.
Currently, Ethereum smart contracts can record information about membership privileges, application rights, and domain registration. It can also manage contracts between multiple parties including insurance contracts, business partnerships, and rental agreements.
Ethereum is by far the most popular smart contracts platform in the world today.
EOS is rapidly becoming one of the world’s most popular smart contract platforms. This is mainly because it can process millions of transactions in a second and because it requires almost no fees.
Corda is a smart contracts platform that is used to create financial agreements. Corda’s smart contract technology enables businesses to undertake direct transactions, with value.
dTrax is Deloitte’s AI-enabled contract management system. It enables in-house contract managers to become proactive, strategic decision makers instead of investing most of their time in mundane, time-consuming tasks.
Icertis is a contract management software that uses AI to analyze documents and provide detailed risk reports, smart notifications, and automatic obligation tracking. The AI-powered algorithm allows companies to understand a bunch of agreements and their inter-dependencies within seconds.
Exari import and disaggregate contracts into constituent parts following which they use an AI-powered contract data model that enables deeper analytics of a company’s contract portfolio.
Contracting at the edge
Contracting at the edge is a realistic possibility in the next few years. In other words, contracts will actually be executed at the exact moment when the transaction conditions become true which will result in lesser risk, lower compliance requirements, and much more efficiency.
Today, AI is able to monitor limited conditions like currency fluctuation. However, with advances in technology, smart contract software will be able to monitor more complex business conditions as well. Contracting at the edge will fundamentally change the nature of contracts and how they get executed.
The first wave of innovation in contract management software brought much greater visibility and ease of management. This definitely made the job of contract managers a lot easier and enabled companies to manage hundreds of contracts simultaneously.
However, the fundamental nature of contracts and contract execution remained unchanged. which is now set to change.
Tomorrow’s contract lifecycle management platforms will use technologies like Blockchain and AI to change how contracts are executed.
Businesses that leverage contract management software can drive amazing efficiencies and gain a major competitive advantage.
Since the widespread adoption of this technology is still some time away, this is the perfect time to experiment with contract management software and get ahead of the competition.
What according to you is the next big thing in contract management software?