If you visualize it like a bucket, if you are not managing a lot of your suppliers, then that bucket is a leaking bucket because those are typically going to be on unfavorable commercial terms. -James Meads
Intro:
Welcome to the Contract Lens Podcast brought to you by Malbek. In this podcast, we have conversations with contract management, thought leaders and practitioners about everything contracts and its ecosystem. Today's episode looks at the gaps procurement faces in contract management and how to address them. We are joined by James Meads, managing partner at James Meads Consulting. James is also the host of The Procuretech Podcast, a podcast for procurement, supply chain and finance professionals. Showcasing everything new and innovative in the Procuretech space. He is experienced in bringing together technology and procurement to achieve success. So now it's time to relax, grab a glass of wine and let's talk contracts.
Matt:
Hello everyone. My name is Matt Patel, COO and Co-founder here at Malbek. It is my pleasure to talk with James Meads today. James, how are you? If you can please introduce yourself.
James:
I will do. And thank you Matt for having me on your show. My name is James Meads. I'm a procurement professional and digital procurement enthusiast. I've been in the procurement space for about 18 years now and I am located in Sophia, Bulgaria. And I am an independent procurement consultant and also a podcast host.
Matt:
Excellent. Thank you so much James, for your time today. Looking forward to a conversation around procurement and contracts. As you know, Malbek is a CLM solution, a very modern intuitive CLM application that helps sales, procurement, legal, finance, IT services, all the departments in an organization streamline their contracting challenges. When we particularly focus on procurements, I often feel like contracts, anyone hears about a contract, they think it's legal, right? It's a legal problem or it's a legal solution. And I think procurement is challenged with contracts as much or more than legal or sales because they have a lot of supplier agreements and many of them or most of them are third-party paper. Can you shed some light on what you have seen in the procurement industry and how they deal with contracting challenges?
James:
Yeah, it's a great question. And I think there are two very distinct separate buckets that we can put this in. So on the one hand, there are your very high-spend, strategic vendor relationships where often, but not always, you as the buyer are going to maybe have the upper hand or the more leverage in terms of the amount of spend or the amount of percentage of a customer's turnover you are. And in those cases you are often using your own internal contract format simply because you have the spent and the leverage to push that through with the supplier that you are buying that particular good or service from.
James:
And those contracts, if they're on standard internal format, then usually the amount of interaction or touch points with legal are relatively minor unless a supplier is asking for a significant rewrite or red line against your standard contract terms. That typically accounts for a large portion of your spend, but it usually accounts for a small percentage of your total number or counter vendors that you are purchasing from. And therein lies the problem.
James:
Most of the contractual difficulties or challenges within procurement come in the space that we call tail spend. Which is essentially when you do the pareto analysis of 80/20, you've got 80% of your supplier account only usually represents 20% of your total spend, but that's where all of the noise is. And that's where going back to your initial question, you get a lot of contracts in the suppliers' format according to their terms that come through. And while the spent may not be significant enough for it to be a high priority for legal, if that's not viewed by a competent professional that's where things can typically go very wrong, very quickly. Particularly things like small software purchases or anything that can get you into hot water if it's not negotiated properly.
Matt:
Indeed. And some of the points I've seen in a supplier agreement is there might be no price cap, so annual renewals or pricing at the end of the term, there's no cap on it, or it may have auto renewal. And I've seen organizations often fail to send a notice to the supplier that we no longer need the service and they get locked into another term unnecessarily. And now you're spending all of that money for a solution or a service that you no longer need costing you a lot of money.
James:
Yeah. It's the perfect storm really because the lower the value of the contract and the less significant or critical a supplier is to a particular organization than typically speaking, the less competent the person is that's negotiating it from a procurement standpoint. And that's even if a procurement person looks at it, in a lot of companies any spend under a certain threshold or any spend in certain categories, especially things like marketing and IT and transportation are not managed by procurement. Because either the stakeholders have a vested interest to not let procurement in and look at what they're doing or because there just aren't the procurement resources there within an organization to bring all of the company spend under the management of the procurement function.
James:
So the less capable person is commercially or the less commercially or legally literate that person is regardless of how small the supplier is. That contract can really come back and bite you on the backside if it's not being reviewed properly. So that's where I see the biggest problem, the strategic spend, yes, there are always contractual issues in any big supplier customer, but they are usually high enough on a company agenda to give it the attention that it needs from a legal or a procurement or a sales or a risk management perspective. It's when you get down into the smaller contracts and yeah, you're absolutely right.
James:
Things like auto renewal or above inflation price increases that suppliers can just push through with impunity because they're in the contract terms that nobody's bothered to look through. They are a real problem. And that's where if you visualize it like a bucket, if you are not managing a lot of your suppliers, then that bucket is a leaking bucket, because those are typically going to be on unfavorable commercial terms.
Matt:
And this is an area where, as you said, they're buried in all the language and somebody misses the price cap or the auto and new term or security audits or whatever the provisions might be that are things that the procurement professional or legal should be reviewing AI comes into play. And there's a lot of talk about AI helping contract reviews or extracting these key terms so that you can review them quickly and in a timely manner. But I think that there's an expectation of AI that goes beyond what it can actually do today.
Matt:
So one of the things that in the entire CLM or legal tech industry, the focus is how can AI help with not only extracting some of the terms and provisions of a contract, especially third party paper. But helping the reviewers and approvers catch some of the price cap or the auto renewal or other provisions that are nice to have or don't want to have, or prefer to have. What are your thoughts on AI innovations you have seen in the market and where do you see it going as well as where do you see it lacking in the market today?
James:
I think with AI the fundamental, and you touched on it perfectly. I think the fundamental problem is that people expect AI to be the magic bullet for everything. And as you alluded to AI can only get you so far. So where I see AI in the procurement space, or even in the legal tech space, the advantage of AI is that it can do a lot of the spade work that a human would've previously had to have done. So where a human may have previously had to spend a day reading through a complex contract with a fine tooth comb to pick out the clauses that were unfavorable or that were written very much in favor of the supplier. If you tell AI what to look for, it can get you a lot of the way there.
James:
What it can't do is it doesn't have the emotional intelligence and it doesn't have the training of a knowledge worker to be able to pick out the nuances of whether a clause is acceptable or not. So it can do a lot of the ground work in terms of highlighting areas which can be of concern in a contract. But what it can't do is make the decision for you. So it can save a lot especially in organizations that are challenged from a resource or a headcount perspective. I think it offers huge advantages. But if your fundamental problem is that you don't have anyone with the commercial or legal expertise to be able to sign off on what the AI is flagging as potential issues, then you're still going to have a problem.
James:
So if you are trying to manage your contracts with no procurement people or with no in-house legal staff that have got experience of supplier contracts, it isn't going to get you very far. But if you're using AI as a means to free up procurement resource, so as they can go and work on something more strategic value added, rather than reading through and redlining contracts, then I think it's a fantastic invention. Because it can get you 80% percent of where you need to be and save a lot of resource
Matt:
Indeed. And that's the goal. AI is more of an assistant and it's meant to improve the productivity and efficiency of your procurement professionals as well as legal. I think one thing we all know is legal teams and procure teams are small and they support dozens of, or hundreds of, or even thousands of business users in the enterprise, right? So there's sales, services, IT all the departments need contracts. And they may have many members as the organization grows but the legal and procurement teams usually stay pretty, pretty constant.
Matt:
I mean, you might have a head count of five or 10, and they have to support all of the contracting volume for the entire company as they grow. And each person, if AI can help them review and expedite the cycle that's the goal of these solutions. One of the things we have noticed with our own customers at Malbek, especially when they use the solution for all of the departments on one platform including sales, legal and procurement is the legal review cycles have gone down by more than 50 to 60% because they use self-service and, and predefined clauses in their library.
Matt:
And for procurement, it has expedited third party paper review by over 30 to 40% because of AI assisted review, as well as just having that efficiency and the built-in workflows that ensure that the timely reviews happen for the right people at the right time, the downstream effect of having all of these supplier contracts in a repository, whether you use a solution or not is, going to lead to my last question. So can you shed some light on what you have seen organizations do longer term when they're dealing with a particular supplier for many, many years or months?
James:
That's a great question, Matt. And honestly, it's something that I see as changing rapidly now. When I look at open positions now in procurement, I'm seeing a lot of positions now for commercial contract management. Whereas if I would've looked on LinkedIn or on Indeed or any of these big job boards, three or four years ago, that would've barely have even come up. And I think there is now a much bigger recognition. I think COVID has played some part in this with some of the supply chain disruptions. But I think there is a much bigger at acknowledgement now that procurement journey doesn't stop when the contract gets signed and they stick it on SharePoint or in their office drawer or on their C drive or wherever it goes. Never to be looked at again until you have to cancel it.
James:
And I think that wheel is turning now. And there is an acknowledgement by procurement and by the wider business, that procurement should be responsible for contract life cycle management and managing the supplier relationship after the contract has been signed. Whereas historically, maybe that would've been handed over to stakeholders in manufacturing plants or regional head offices, depending on what it is that you're buying. And there is a whole ecosystem of procure tech that is growing around. Being able to look at things like service level reviews, spend analytics, quality concerns, supplier performance, SLAs, KPIs to enable that whole contract life cycle management as it goes on. And it is a lot easier to do that typically for materials than it is for services. I mean, I will say that.
James:
But now you're starting to see a lot more platforms coming on that can help manage more strategic professional services. Things like marketing and IT and consulting because that's becoming more and more of a company spend as we go more towards a technology driven economy rather than the previous industrial age. So to answer your question, it's a hugely growing ecosystem and constantly evolving. And I think speaking about it now, listening to this interview in two or three years time, I think it will sound very dated just because of the rapid change that we're seeing in this space.
Matt:
Absolutely. I agree. I think if we look back at this conversation, even in terms of AI and how things are moving so fast, it'll be interesting to see what's ahead of us one, two, three years from now. So I think with that, I'll wrap up my questions. This was a great conversation James, great insights. And for our listening audience, I think they would appreciate where can they find you online and get access to your content, if you want to share a few thoughts on that.
James:
Yeah. I'd love to. Thank you Matt. So the easiest place to connect with me is on LinkedIn. If you send me a connection request and just add a quick note, then I will always accept new connections, if I know where they're coming from. And I also have a podcast all about procurement tech technology which is called The Procuretech Podcast, which can be found in all good podcast directories and probably a few rubbish ones as well.
Matt:
All right. Thank you so much James and have a great day.
James:
Thank you very much. Great to be on your show.
