Using AI to cure contract “Incumbency Disease”
What are your supplier relationships like these days? If you have long-term relationships with vendors, that may seem like a win-win. But are you really getting the best deal for all the things you ask them to do? Are they giving you their best resources when they know they are your “go to” vendor for the products or services they are providing? If you are not asking yourself these questions, you might be succumbing to incumbency disease.
What is Incumbency disease, and why is it bad?
Incumbency disease is a term I started using when I saw what happened when the procurement/vendor relationship flips to autopilot. Instead of engaging in a rigorous competitive bid process, businesses just go with what is convenient, whether the vendor continues to provide the best pricing and service or not.
This is not a small challenge. I’ve been in procurement for a long time, and I would say that only about 10 to 15% of contracts are competitive bids.
Incumbency disease is bad for business. Below is a question you should be asking to avoid incumbency disease and keep the procurement contract process competitive.
Are You Getting the Best Price and the Best Resource?
With an incumbent, the good news is that you have an established relationship with a supplier that you don’t have to work hard to manage. The bad news is that this relationship can blind you to the fact that your goals will never be completely aligned. The supplier wants a good deal – more money in their pockets without giving too much away in the process. You want competitive pricing and a high standard of service. But if you just stick with what is familiar, how do you know you are getting the best deal possible?
Here’s how I see this play out. You establish a relationship with Big Supplier, and they are providing a host of services to you. It’s a big contract and they can provide a wide suite of services. Jane from your company comes to procurement and needs Project Z done as soon as possible. She says, “We’ll bid it out, right?” But you know you can’t get the project turned around in Jane’s timeframe if you bid it out, so you give the work to Big Supplier. Are their price increases out of line with the market? You have no way of knowing, because you haven’t been getting competitive bids.
Another element of incumbency disease is that, if a supplier just expects the business, often they will not put their star players on the task. They’ve got to put the A team on projects that must not fail. If they know your contract is safe while they go after new work, the A team will not be servicing your contract.
The Cure for Incumbency Disease
Traditionally, the RFP and contract negotiation process takes so long that going with what you know is much, much easier, to the tune of about 85 to 90% of your procurement contracts in my experience. But what if it was simple and fast to manage the RFP and negotiating process with multiple supplier candidates?
That is exactly why we built ContractAI.
What we’ve done is flipped traditional procurement on its head. Instead of a tedious process of procurement and legal going through contracts and the inevitable redlines with hours of tedious work, you can bring negotiation of terms right up front instead of at the tail end of the process.
Bringing in challengers to the incumbent is no problem, because ContractAI allows you to measure the bids against each other in real time.
If you bring a challenger in, then Big Supplier can’t use the people they have sitting on the bench. They have to bring their “A-game” if they want to win the contract, in contrast to the challenger, who is hungry for the business of a large enterprise. How does all this work? Using an AI and data-driven approach, ContractAI shows suppliers your most favorable terms, based on analysis of all prior contracts, along with two other term options they could choose. All bidding suppliers can review contracts in real time, providing your company and the suppliers with risk ratings based on the vendor’s clause selection. Now they know where they stand in terms of risk level, and you can quickly award a contract to the best fit, not just the familiar choice.
As businesses become more complex and competition gets more fierce, the ability for businesses to make decisions quickly is table-stakes for success. A procurement process that cedes power to the incumbent does not serve your company well. I understand the tendency to default to what is familiar may be the path of least resistance. But with new software solutions, like ContractAI, that create a quick and simple process to discover your best vendor option, incumbency disease can become a relic of the past.