In 2022, companies worldwide experienced inflation resulting from the fallout of the pandemic, supply chain issues, strong consumer demand, and the conflict between Russia and Ukraine, among others. While showing signs of reducing from its 40-year highs, inflation continues to impact companies across the globe.
With rising costs, companies can quickly see their margins evaporate if they cannot offset inflation through other means.
A recent report co-authored by Boston Consulting Group (BCG) and Icertis underscores inflation’s impact.
“A comparison of earnings before interest and tax (EBIT) for leading global IT companies reveals a margin drag of up to 300 bps from March 2021 to March 2022, which indicates that nearly 20-25% of the drop can be attributed to wave inflation,” the report finds.
While the report focuses on the services industry, its lessons are applicable across all sectors whose revenue is tied to long-term contracts. The solution to the problem may be in contracts via clauses that allow companies to increase prices based on rampant inflation. Yet finding and exercising those clauses is easier said than done for many companies.
Contract intelligence is key to avoiding margin erosion
Contracts are an essential part of every company’s day-to-day activities. They make up the crucial underlying commitments that drive operations. Unsurprisingly, poor contract management is often associated with massive value erosion.
The BCG-Icertis report, citing the Harvard Business Review, suggests that inefficient contracting leads firms to lose anywhere between 5 to 40 per cent of deal value. This is possible because contract clauses span nearly all business areas, including procurement, sales, finance, HR, legal, and service domains. Proper authoring and implementation of contract clauses are crucial for margin realization.
In today’s economic conditions, a powerful contract intelligence solution that gives companies real-time insights into their contracts. It can provide immense value across the contract authoring and execution stages. Apart from driving business agility and organizational compliance, an effective contract intelligence solution can lead to margin improvement by addressing four critical areas of concern:
1. Revenue assurance
- Missing or ambiguously defined contract clauses lead directly to inadequate management of obligations, negatively affecting margins. Efficient contract management can help create standardized contract templates to prevent further revenue leakage. It can also monitor contractual obligations and clauses to identify and recoup revenue from clients. Such contracts can include inflation-adjustment parameters such as COLA, payment schedules, and rate cards, directly affecting the economics of any transaction.
2. Delivery excellence
- Visibility and effective management of delivery obligations, such as tracking milestones, tool deployments, or assigning full-time equivalent (FTE) staff, are crucial for cost optimization and avoiding penalties. Deviation from any contractual obligations can result in significant costs. An effective contract intelligence solution tracks delivery obligations through proactive prompts and notifications. It allows managers to monitor service level agreement (SLA) commitments via interactive dashboards, ensuring cost optimization and penalty reduction.
3. Risk management
- Clauses around liability super cap, penalties, and privacy regulations are key considerations for any enterprise. The proactive prompts on regulatory details provided by contract intelligence software can help avoid penalties. With new privacy regulations adding to GDPR, CCPA, etc., complete visibility into contracts can help mitigate hidden contract risks.
4. Operational effectiveness
- In the age of ever-increasing efficiency, fast processing and turn-around time for contract authoring is of prime importance. Manually managed contracts are inefficient, scattered across the business, exposed to human error, and have low visibility. All these factors create a risk for value leakage. However, contract intelligence solutions can help remedy these drawbacks through dedicated capabilities like a centralised, searchable contract repository, collaboration apps, workflow builders, and AI-based digitization that streamline contract management processes, free up human capital, and ensure obligations by all parties are adhered to.
Conclusion
Companies must focus on the fundamentals in times of economic turmoil, and nothing is more fundamental to a business than its contracts.
Contract intelligence can potentially retain and improve significant margins for companies struggling due to inflationary pressures on existing contracts. An effective contract intelligence solution enables vastly improved visibility into contract terms by providing a centralized digital repository of contracts that can now be tracked for outstanding obligations and commitments that need managing. AI-enabled solutions, backed by cloud storage, hold the key to arresting margin erosion and providing an efficient and transparent contract intelligence solution.
For more details on how Contracts Can Help Companies Weather Inflation, download your copy of “Drive Margin Improvements with Effective Contract Management”
With unmatched technology and category-defining innovation, Icertis pushes the boundaries of what’s possible with contract lifecycle management (CLM). The AI-powered, analyst-validated Icertis Contract Intelligence (ICI) platform turns contracts from static documents into strategic advantage by structuring and connecting the critical contract information that defines how an organization runs. Today, the world’s most iconic brands and disruptive innovators trust Icertis to fully realize the intent of their combined 10 million+ contracts worth more than $1 trillion, in 40+ languages and 90+ countries.
