Corporate Finance » How CFOs can futureproof their contracts amid economic uncertainty

How CFOs can futureproof their contracts amid economic uncertainty

Rajat Bahri, CFO of Icertis, discusses how intelligent Contract Lifecycle Management (CLM) can help large enterprises build economic resilience amid inflationary pressures

In today’s ever-evolving economic landscape, CFOs face unprecedented challenges as inflation exerts mounting pressure on their organization’s bottom-line performance. A recent study cited inflation as a top concern for 58% of CFOs, up from 33% last year. Meanwhile, over half of CFOs expect similar volatility as inflationary headwinds persist.

In parallel, 72% of CFOs cite increasing their own participation in business decision-making as instrumental in managing volatility. As businesses head into 2024, and CFOs focus on risk mitigation, how will they successfully build economic resilience to drive future growth?

The secret ingredient: price-adjustment clauses

The era of CFOs prioritizing growth at the expense of profitability is behind us. Financial leaders are finding new ways to harness AI and technology to increase revenue and improve the health of their company’s balance sheet.

In a world where economic, financial, and commercial conditions can fluctuate dramatically post-contract execution, large enterprises risk exposure to various economic factors outside their control. For example, the inflation rate and the correlated price of many commodities fluctuate each year. In the context of the COVID-19 pandemic, the steep market rebound led to a surge in inflation that raised the costs of many goods and services. Incorporating price-adjustment clauses into long-term commercial contracts to address such dynamic variations can help protect business interests.

The UK’s recent double-digit inflation, the highest since 1981, also underscores the need for such clauses. Fortunately, AI-powered contract lifecycle management (CLM) provides CFOs with visibility into contract commitments pre- and post-execution, safeguarding the bottom line without manual intervention.

Since contracts govern every dollar in and out of the enterprise, inflation clauses could be the secret ingredient to help CFOs minimize revenue leakage amid turbulent inflation. These clauses, coupled with leveraging AI to ensure the obligations in the contract are fully realised, enable companies to build resilience against unfavourable and unpredictable market conditions.

Data is the new gold

Whether a business is buying or selling commodities, the impacts of inflation can still be felt by both parties entering a contract. This means buyers often experience the erosion of their purchasing power, while sellers have the potential to increase revenues and profits by matching or exceeding inflation with price adjustments. In response to increased inflation, forward-thinking CFOs must leverage contract data to navigate these dynamics and make informed business decisions.

The data from contracts offers one of the largest untapped opportunities to help address inflation and create value. However, the power of contract data is only as good as the integrations that connect it to core systems and processes – that’s where contract intelligence is born. AI-powered contract intelligence enables vital outcomes around revenue, savings, compliance, and risk, and can be especially beneficial for enterprises managing thousands, if not millions, of commercial agreements. By structuring and connecting the vast amount of contract data across the enterprise and applying AI, businesses gain enterprise-wide visibility and a single source of truth for all commercial relationships so CFOs can build trust in their relationships while managing costs, gaining unique insights, and adapting contract terms to changing economic conditions.

Conclusion

Contract creation, negotiation, and reviews are manual, cumbersome, and expensive. In fact, World Commerce & Contracting estimated that poor contract management could cost companies 9 percent of their bottom line, and the cost of mismanagement is likely even higher in today’s economy.

Inflation presents a serious and ongoing risk to margins and makes planning and investment decisions harder at a macro level. But contracts – and the commitments and obligations they contain – can be used to help CFOs protect and future-proof their business in a fluctuating market.

Investing in AI-driven CLM enables CFOs to respond to inflationary impacts and address price adjustments and negotiations in contracts during the full lifespan of a business relationship. This technology delivers strategic advantages and valuable business insights on-demand, in addition to offering end-to-end visibility into business data, contract performance, financial risk, and compliance standards.

 

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