Emerging technologies impacting contract management in the Financial sector

A meeting of financial supply management executives, faculty, and IACCM thought leaders took place on January 26, 2018 in New York.  A number of different topics were discussed during this session, and the agenda was kept fairly open in discussing how emerging technologies would impact the supply management and contracting space.

Clearly, there is a myriad of automations emerging, including block chain, process automation, AI, and digitization, and an entire new wave of technologies coming at us.  Tim Cummins noted that “we see the next wave as the potential to transform trading relationships and networks.  We have been through the era of ERP, have moved towards a high level of standardization, and have driven tremendous improvements in data, to a point where standardization led to the disaggregation of activities from the enterprise to a diverse supply base.  In financial services, an extreme amount of due diligence has been given to internal controls, but as these organizations have outsourced more and more, they do not have the same level of insight into quality and performance of diverse suppliers and customers is beyond the capability of existing technology.  So organizations are now having to throw a high level of human resources at the consequences of outsourcing to manage these outsourced resources.

There are several consequences of this trend.

  1. We have complexity, but every customer and supplier behaves differently, and different norms exist on the way we want to work.  I have a specific way for invoicing, that is unique and different.  We this creates massive a complexity and risk in the system, because we refuse to standardize aspects of our relationship that have no economic value for being different.
  2. A second dimension is the technology itself, and the way that emerging technologies have the promise to provide us with a better way of operating across organizational boundaries. We have suggested that the potential efficiencies of technologies is equivalent to improvements and savings generated through ERP systems, but this does not address the external piece.  We need to enter into the era of Relationship Resource Planning to manage our outsourced contractual relationships.  And how does automation emerge in this environment, and how could we be using these technologies to ensure that we are benefiting from outsourcing and not driving additional costs into our external relationships?

In the ensuing discussions, the role of these emerging technologies was discussed at length, by several individuals present.  Here is a snippet of some of the conversations that took place.

Dynamic Discounting

New technologies will have a big impact in the future landscape of financial flows in the supply chain.  At a major global bank, for instance, procurement is employing a dynamic discounting tool, that provide opportunities for cost saving as well as early payment discounts for supplier that require access to working capital.  For example, typical payment terms may be 10 days with a 2% discount, or 0 discount in 30 days.  But what if the supplier needs cash immediately?  What would they be willing to pay to get the payment within 2 days?  Some organizations are even borrowing against their payables to get letters of credit, and pay higher interest rates on commercial paper.  The bank is piloting a tool that enables the manager to set an internal hurdle rate, and put current payables out on an auction, that allows suppliers to bid and request early payment on their payables.  This can yield significant cost savings for the bank, and help suppliers with their cash flow positions.

Block Chain

Pilots in the financial sector is also underway using smart contracts to enforce SLA management of their server contracts within their outsourced data center.  In one case, IBM manages 400 prepositioned servers for a bank, which is in their data center.  Each sub-server has an IoT sensor, and is pre-positioned for the bank, and is tied to a condition in the contract for those storage services.  When the server is provisioned, the IoT trigger automatically triggers a purchase order and invoice for that server, and once provisioned, there is a Service Level Agreement (SLA) that goes into effect, stating that the server must operate at an uptime of 98.6% (example).  But if there is a faulty chipset, and the server fails to hit the SLA, two things happen.  First, the server sends a signal into the block chain it generates a service credit.  Second, the block chain immediately creates a settlement for the credit, using an internally generated cryypto-currency, with a defined value.

The potential future scenarios for applications of block chain are enormous for the financial services sector.  One of the biggest expenses for banks is professional services, and one of the biggest challenges associated with professional services is how to monitor services delivered in a Master Services Agreement.  From a contract management perspective, the challenge is how to ensure that the verification of services performed occurs against the contracted requirements and statement of work.  For instance, if using an “Agile” software development perspective, you could build a two-week deliverable checkpoint into the process, that would allow the customer to send a signal back into the block chain showing that the code had been completed, has been tested, and verified.  This would in turn be used to drive the payment cycle.  This is one of many potential future applications that would transform procurement, and potentially eliminate the need for software such as Ariba, etc. that requires processing of PO’s, invoices, requisitions, etc.   The entire sector would be disrupted.  This is indeed an exciting potential development.