Smart contracts are knocking on your door – it’s time to answer!

Smart contracts are knocking on your door – it’s time to answer!
Contract management and smart contracts will have more in common than we might think.

It’s happening now. Manual contracting processes are disappearing and being replaced rapidly by growing technological innovation and automation – like artificial intelligence and smart contracts. Adapting effectively means we need to get smart — know what role we play as contract managers. And know the risks before committing resources.

In this interview by the International Association for Contract and Commercial Management, Piotr Powązka defines smart contracts, summarizes how they work, then unpacks three specific questions everyone’s asking these days surrounding the role of contract managers (CMs) within the complex space of smart contracts.

Tell us about smart contracts -- what are they?

“Smart contracts are self executing – they carry out the terms of the agreement, literally. All of its terms are written into lines of code distributed across a blockchain network. Their pre-written language (computer code) replicates on a storage platform (e.g. a blockchain). Run by computers they can produce transactions such as payments (using bitcoin). Their programs perform a task “if this happens, then do that. Very recent example is AXA’s insurance product called fizzy which offers a compensation in case of flight delays automatically if such event occurs.
Smart contracts eliminate redundant manual tasks and the need for time-consuming transactions involving another party’s authorizations or legal involvement. All smart contract transactions can be traced, are transparent, and irreversible.”

How do they work

“The simplest example is a vending machine. When you push the button selection for, say a lime soda, a written code (smart contract) dispenses your selection. By pushing your selection button, you’ve literally “signed off on the contract”, activating the coded instruction that tells the machine to give you the soda you selected and paid for.

Smart contracts are already handling mundane tasks like stock replenishment in groceries, restaurants, and hotels and this is not new.

Blockchain (storage) is reshaping today and tomorrow with examples of CommonAccord 1 initiatives or Billon 2 start up, a Polish company reinventing money transfers. To that add service needed – service delivered or any other ecommerce and you end up with an application doing standardized contracting provisions with an ease of receiving payment for the service without contract management’s involvement.”

What is the role of the contract manager?

“Smart contracts will allow contract managers to focus better on deal structuring, risk management and will truly enable contract professionals to manage contracts rather than spend time on administration. CMs will also begin nurturing internal relationships, providing guidance and expertise from various fields to other colleagues engaged in contracting activities

In that space, the CM becomes more advisory to key management stakeholders on trends, changing best practices, and strategic value creation to the organization. This will ensure contracts achieve positive economic and compliance balance in those nonstandard and non-fully automated transactions.”

As the CM role changes, so will other functions in organizations. How will smart contracts and new contract management approach influence organizations in future?

“While the CM function itself certainly will change, we need to remember that despite many tools and systems already in place for CMs, an issue for many large organizations is being able to adopt and integrate them. It is not only about IT challenges to link the current infrastructure and integrate systems but it’s also about design principles of existing systems and processes in companies.

I can imagine a situation where contract management will look after sale, procurement and other partnership agreements under the same divisional umbrella although with the right segregation of duties analyzing and managing the performance.

The role of contract management may further merge and gather other functions especially since today’s companies work in a matrix organizational structure — a consequence of contract management holistic approach.

Existing roles supporting contract management will likely reshape how they operate and what they deliver to contract management. Smart contracts will reduce the need for constant involvement of risk and control, finance or legal departments and contract management. Consequently, these departments may become better deal enablers since automation will partially take care of controls, risk and compliance.

Smart contracts will self-manage to some extent because they will be data driven. For example, updates to the contract in response to a physical event can pay on time or order goods or services. Therefore, the operational side may need to revamp existing processes to align standards for a typical deal and future ongoing support, because CLM software will also evolve since it is now used more to manually manage a contract.

Smart contracts will shift the contracting industry as we move away even from a digitally signed PDF contract to a digitally signed code forming a contract.

Sales will execute standardized contracts in a simplified form without directly involving contract management, legal or project management. These professionals will look after specific work now conducted by contract professionals. This will speed up delivery and implementation.

Imagine a situation when updates and periodic review of a contract from a compliance perspective may be updated by automated triggers, for example, from a government or third-party legal repository which will move contracts into their proper places. According to a recent IACCM report 3 on Transforming Contracts and Commercial Management with the use of automation, there is still a lot to do to achieve such a level of autonomy in contracts as organizations move from goods to service delivery while they still struggle with adopting new solutions. The good news is that multiple parties collaborate with one another on a global level to speed up the process.”

What are the risks of using smart contracts?

Disruption. Automation and smart contracts will eventually lead to changes in roles humans play. But it seems that with smart contracts, not necessarily all aspects will be automated, especially considering the ongoing need for true intelligence, commercial or legal expertise. In that sense I doubt smart contracts will replace soon the way we prepare contracts for really large deals such M&A or similar due to their complexity.

For example, think about smart contracts ordering a drug for a patient. How can the computer make such a decision? If it’s wrong, how can we prevent it from happening in future? Who will take the responsibility for a mistake? Massive work will be needed on existing processes, regulatory, ethical and legal aspects (e.g. enforceability, signing, etc.).

Human interactions may degrade smart contracting further. We see it already on social networks. Add to this smart contracts placing orders. We are seeing more app-based relationships developing over time.

Cybersecurity is another concern with smart contracting, especially when it comes to protecting personal and other data. A law like the General Data Protection Regulation (GDPR) must be taken seriously. GDPR sets guidelines for collecting and processing personal information of people within the European Union (EU). Such systems must definitely be tested for fraud prevention to avoid shipping goods or providing services where they should not be provided. Examples include export controls, payment misuse and others. Ownership and privacy of data is also important in terms of risks of how data is used and by whom.

Artificial intelligence (AI) investment is very tempting now but as pointed out by McKinsey&Company 4 “[…] there is only tepid demand for artificial intelligence applications for businesses, partly due to the relatively slow pace of digital and analytics transformation of the economy.”. Thus AI does not discourage big tech and private equity companies from investing an estimated $18 billion to $27 billion in 2016 by large corporations as internal investment and their external investment — from VCs, PE firms, M&A, grants, and seed funding — rose from around $8 billion to $12 billion [see Exhibit 1 p 10] 5. I just hope it will not lead to a dot-com bubble (excessive speculation between about 1997 to 2001) at some stage.

Machine learning limitations caused by data bias and quality of it used and coded in smart contracts is another challenge. Machines powered by AI can today perform many tasks like…

  • complex patterns analysis,
  • synthesizing information, and
  • drawing conclusions and forecasting.

Such capabilities have dramatically expanded and so has the use of it in smart contracts. At the same time, there are limits on machine learning and coding as systems are trained on specific data sets. And that can impose a risk of bias. It is worth remembering then that humans must train machines on comprehensive data sets.

Organizations lack of readiness for adopting smart contracts is yet another risk. Even now with well-known approaches to process improvement programs such as Lean/Six Sigma, companies’ internal processes are ineffective and they require streamlining. It was surprising to note during one of conferences I attended, how many firms do not have good document repositories or e-invoicing solutions, not to mention more elaborated solutions or workflows. This will need to change as well in order to progress.”

Smart contracts can serve as connections between automated systems and human systems 6. They can provide broad explanation and clarity in terms of contract layers, layout, graphic representations, commentary and many more depending on the needs. The vision of smart contracting combines conventional contracts drafting processes, standardized web/code development and business process automation under the same umbrella. The aim is to transform contracts into codified text and images while still ensuring aligned terminology, enforceability which will allow the use of standardized provisions and contract templates. This in turn will change the way we do business today.

END NOTES:

1. CommonAccord

2. Billon Group.

3. IACCM report “Automation – Transforming Contracts and Commercial Management”

4. McKinsey&Company “Artificial intelligence the next digital frontiers? June 2017”.

5. as above McKinsey report Exhibit 1 p 10)

6. ‘Wise contracts: smart contracts that work for people and machines”, James Hazard / Helena Haapio

This article originally appeared in Contracting Excellence magazine on 19 Nov 2017 view edition

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