How inflation is impacting legal teams in enterprises
Enterprises have been exposed to numerous macroeconomic fluctuations, such as the Covid-19 pandemic, the Ukraine-Russia war, and ongoing inflation. This has resulted in supply chain disruptions, currency and price fluctuations, cost-cutting measures, and volatile supplier-buyer relationships. As a result, legal professionals are under pressure to shield the company from market volatility by building inflation-proof and sustainable contracts at the global level.
But this is easier said than done. As per PwC Pulse Survey 2022, macroeconomic conditions were the top reason for concern among executives. The price rise due to inflation will influence consumer spending habits impacting multiple industries such as manufacturing, retail, transportation, logistics, etc. In light of this period of economic uncertainty, contracts are a powerful strategic lever in the legal arsenal to ensure the sustainability of businesses.
Contracting blindspots that expose a business to inflation
There are a lot of bottlenecks that arise in the contract management process due to a lack of bandwidth or inadequate due diligence. They are:
Irregular contract assessment: During inflation, pricing can change at frequent intervals, even at a weekly basis. Due to manual processes, legal teams often miss out on assessing contractual levers associated with duration/term, indexing, and price increments. This takes a hit on the bottom line due to high spending.
One-size-fits-all approach: Legal teams sometimes tend to rely on a standard contract template for all vendors for a specific category. This limits the scope of negotiation for a more customized and aggressive approach. This causes a lack of alternative vendors providing competitive pricing.
Lack of diversification based on contracting terms: Legal professionals might stick to a fixed term across multiple vendors. This proves challenging while mitigating risk and offsetting trade-offs due to the lack of a healthy mix of long and short-term contracts.
How to stay inflation-ready with contract lifecycle management
No one can foresee black-swan events such as a pandemic or a market crash. And it’s always helpful to have a business continuity plan to ensure smooth operational functioning during difficult times. Here’s a checklist that legal teams can follow to tackle inflation proactively.
Diversify supplier contracts: Companies can roll out contracts of different terms to multiple suppliers, so there’s always a fallback option if primary suppliers fail to deliver. For example, suppose a furniture company diversifies the supplier for timber, then in the case of price-rise, the furniture company has the option to partner with alternative suppliers by using fixed, long-term contracts.
Adopt flexi-contracts: Flexi-contracts are contracts that have to be renewed with updated terms at regular intervals, adjusting for price spikes and material shortages. For example, companies can tie pricing with volumes, market changes, and public indexes to absorb some degree of risk to an extent.
Prioritize non-indexed contracts over indexed contracts: An indexed contract, also known as a floating or variable contract, means the price of a commodity varies according to market conditions. The index price fluctuates based on market prices for a particular day. On the other hand, a non-indexed contract has the price of the commodity fixed and does not vary according to market conditions such as inflation.
An easy way to mitigate risk is to maximize spending on existing non-indexed contracts whose prices aren’t adjusted for inflation. In the case of indexed contracts, the legal teams should negotiate using long-term spend forecasts.
How Zycus‘ AI-enabled contract lifecycle management solution helps enterprises tackle inflation
Zycus’ Merlin AI-engine helps legal teams protect their businesses from volatile market conditions by proactively identifying contract risks and taking timely corrective measures.
Identifying Force Majeure clause: Zycus AI-engine Merlin helps legal teams identify contracts that are covered under the Force Majeure clause, the extension period in the case of Force Majeure, and if termination is applicable under Force Majeure. By identifying the Force Majeure clause(s) in thousands of contracts, Merlin AI-engine can mitigate risk right at the contract level.
Suggesting right clauses for the right scenarios: With self-learning, Merlin can suggest specific clauses for specific scenarios it has observed in similar historic contracts. This leads to the creation of iron-clad contracts and their speedy execution.
Mitigating contractual risks: Merlin AI’s Insta Review protects companies from business risks by quickly identifying potentially risky clauses. It also benchmarks such clauses against industry standards and recommends ways to mitigate the risks involved.
Monitoring contract utilization: The solution can track contract utilization across suppliers. This helps monitor if there’s maximum spend on preferred non-indexed suppliers vs. pricy indexed suppliers.
A Fortune 500 company and leading provider of industrial automation and power suffered from:
- Homegrown repository unable to provide standardization
- Lack of visibility into key contract terms
- SOX compliance risk in approval process
- Time consuming process of creating new contracts
Zycus iContract solution helped them provide the following:
- Consultative creation of 40+ templates and 10+ workflows /li>
- Mandatory approval from Legal for clause-level changes
- Standardization of contract metadata to ensure visibility into existing contracts
- Better visibility to all stakeholders
This led to a reduction in contract creation cycle time and mitigation of SOX compliance risk during approval risk.
To know more about how Zycus AI-enabled solution helps mitigate risks associated with inflation, sign up for a demo.