Advancing Contract Intelligence Capabilities for Risk Management and Compliance

How to leverage contract intelligence to power, protect and accelerate business.

Introduction

A number of trends are currently influencing risk management in banking and financial services, necessitating shifts in policy, strategy, and operational frameworks. Organizations are becoming increasingly complex, with the need to balance digital transformation with more stringent regulatory and compliance requirements while continuing to remain customer-centric and drive profitable growth.

Efficiency in risk management and compliance can be challenging. Groups often work in silos without an enterprise view of the contract data that defines business relationships or without the ability to aggregate market, credit, liquidity, operational, and compliance risk. This can lead to confusion, inefficiency, and increased risk exposure. Having a single source of truth for all contract data is critical, including a way to search and identify what is crucial for the respective business functions and their risk appetites. Pertinent contract data should be integrated into risk and compliance systems, overall helping to improve the efficiency and effectiveness of risk management and compliance operations.

Contract data is essential for a business to operate and should be maintained as a system of record. Paired with intelligent technology that can extract and analyze contract data, significantly more value can be leveraged from contracts to impact daily operations, improve expense ratios, and enhance operational efficiency.

Contract lifecycle management (CLM) is a siloed and largely manual process in most organizations. Transformation programs often need to pay more attention to the value of moving from contract management to contract intelligence and integrating that data with other systems of record.

This eBook explores contract intelligence’s role in improving risk management and compliance. Plus, beyond risk management, how contract intelligence can improve efficiency and accelerate business outcomes for greater profitability.

The Current State of Contract Management

In banking and finance, contracts form the basis for all transactions and contain critical data that impacts daily business functions.

Contract complexity and the degree of manual processing make organizations especially cautious about changing fragile manual operations. The sheer volume of contracts, possible variations in clauses, entitlements, tables, terms and conditions, and the need to keep up to date with changing regulations makes managing contracts highly complex. There’s a strong awareness that even with several checks and balances if just one person drops the ball or turnover in a key role occurs, it can create a vulnerability that can expose the organization to risk.

When there is a lack of transparency or accessibility, contracts become a burden to risk and compliance departments rather than a valuable asset.

When changes in regulations require contracts to be updated, without a central searchable repository, there’s no way to know if all contracts have been flagged and accurately updated. Regulators don’t hold back on issuing heavy fines when compliance falls short and require evidence of due diligence performed, with validation through audit trails and reporting.

Contract Intelligence is about more than protecting financial services companies and managing their many relationships. It’s about integrating contract data into daily operations to improve financial services offered, leverage third-party relationships, improve customer experiences, and improve overall profitability.

"Many organizations in the banking, financial services, and insurance (BFSI) sector are lagging other sectors in the performance of their contracting process. They could achieve cost and revenue improvements averaging 5-7% of contract value."

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Technology to Enable Change

While digital transformation is well underway in most financial institutions, applications of artificial intelligence (AI) are still met with a level of skepticism. Many questions exist about how the technology is used, how the models are trained, how systems are integrated, and how employees will interact with AI. This is not surprising, considering risk management in most companies is still highly reliant on people and manual processes.

The problem with manual processes is that achieving consistent repeatability in all operations takes a lot of work. Especially as employees frequently turnover due to low pay, stress, and burnout. Particularly those with critical subject matter expertise in the area of risk management.

Every time risk managers leave the potential for risk exposure increases. It takes time to find and train new employees, ensure they have all the proper certifications, understand the latest regulations, and do the required due diligence. Even then, errors and omissions are usually not discovered until regulators ask questions.

Without technology as an enabler, there is no systematic way to flag obligations in contracts automatically and know that they are being adhered to or which clauses and contracts are impacted by regulatory change. If the process only relies on people and the contract information isn’t available to business managers, the opportunity for a risk event increases.

When contract templates and clause libraries aren’t centrally managed, critical updates may not be implemented, and new contracts may be drafted with outdated language.

Manual and siloed contracting processes can increase risk.

Lack of visibility creates additional risk.

Having an efficient way of keeping contracts updated is often undervalued. Part of the challenge is an inability to discover what changes must be made; requirements can be overlooked until regulators flag non-compliance or an internal audit occurs.

A reactive response to risk can impact profitability.

Organizations are often reluctant to change processes until it’s clear there may be risk or audits uncover a need to make changes. The problem with this approach is that it assumes the current risks are small enough to manage.

This often doesn’t account for risk aggregation or the compounding effects of risk that exceed the organization’s risk appetite and capital ratios. A proactive approach to risk and embracing digital transformation places financial services companies in a significantly better position to become more profitable while improving compliance and reducing risk.

Regulators want repeatable processes.

Regulators are looking for repeatability in processes that will ensure consistent compliance. Increasingly regulators are open to the use of AI as long as there is transparency in how the models behave and companies can validate and prove that nothing is overlooked.

Take onboarding a new client, for example. Banks are legally required to screen customers, individuals, and companies and conduct due diligence to ensure they’re not at risk of financing illegal activities. In some cases, this may go beyond the Know Your Customer (KYC) requirements to include Customer Due Diligence (CDD) and Enhanced Due Diligence (EDD), validating customer information against sanction lists. Depending on how a person or company onboards, they could be listed by several different variations of their name. Screening must also be performed for politically exposed people (PEP) or as subsidiaries of sanctioned companies, where it’s essential to understand the ultimate beneficial ownership (UBO).

Contracting must be firmly embedded in the onboarding process, integrating risk evaluation and screening to streamline the process while ensuring regulatory compliance. Integrating these critical processes and using AI can help to reduce risk, reduce time to onboard new clients, and improve the customer experience.

When auditors start to investigate further, it often opens Pandora’s box. Just as one issue is found and resolved, another pops up. Companies end up having to react to issues to ensure they remain compliant. While regulatory concerns are outstanding, and they are working to extinguish fires, they may be restricted from growing their asset base in essential market segments.

Digital Transformation

Improving risk management

Without embracing new automated processes and procedures, being proactive about managing risk remains challenging. Even with the right people, policies, and processes in place, how can risk managers be sure that nothing slips through the gaps? And how can they prove this to regulators?

Contract Intelligence helps digitize and centralize contract data in an operational data store, enabling quick and easy search and shifting to a more proactive approach. Applying AI technology helps manage obligations and discover insights, enabling organizations to keep pace with the constant change in financial services. Enabling workflows across the entire company, contract intelligence helps to reduce risk and meet regulatory compliance while ensuring the intent of every contract is fully realized.

Introducing the Icertis solution as part of transformation initiatives

Financial services companies have many systems designed to manage the various aspects of their operations. When considering a new software solution, companies must evaluate the impact on existing systems and their current architecture.

Will the new software solution integrate and complement the systems already in place?

During transformation initiatives, disruptions to operations must be limited. This is one of the benefits of the Icertis solution: designed as an open platform with APIs to integrate into existing infrastructure, implementing contract intelligence is simplified.

As a system of record, contract data managed in Icertis can be integrated to complement existing systems and processes, generating value without adding more complexity to operations.

Future-Proof With Intelligent Contract Management

The cost of risk management operations for banking and financial services remains high, and despite putting more policies and people in place, there hasn’t been significant progress in improving compliance or reducing risk.

If companies want to future-proof their businesses, regardless of the economic conditions, it’s imperative to continue digital transformation initiatives and become more effective and proactive at managing risk. With contract intelligence, every percentage of improvement can reduce risk, improve operational efficiency, and impact profitability.

The future of financial services.

As companies advance their digital capabilities to meet customer expectations, the focus on reducing risk and improving profitability will remain.

Finding ways to improve operational efficiency will be viewed with digitalization in mind. AI will be applied to operations as a natural progression, including contract management, to bring efficiency and scale to conduct analysis and provide intelligence.

Contract intelligence is emerging as a system of record, feeding data into other critical systems to improve operations and enhance the products and services offered. As AI continues to be adopted and accepted by regulators, it will help navigate complexities and process vast volumes of data while applying many variables to conduct analysis. Exactly the tasks that humans struggle with, AI excels at, which is why AI-powered contract intelligence is ideally suited to helping banks and financial institutions become more efficient – and ultimately more profitable.

Consider these impacts

Proactive contract risk identification

Reduce non-compliance and improve risk management by tracking adherence to standard clauses, identifying obligations, and reporting on deviations.

Improved contract cycle times

Reduce errors and improve contract turnaround times, create faster approval workflows, gain visibility to the current state of agreements, and increase the velocity of business processed.

Reduced operational costs

AI helps to identify risk; risk management staff can access this information to help them mitigate and manage risks before they escalate.

Meet regulatory obligations

Plan and respond to the evolving regulatory environment, review contracts to identify concerns and create mass amendments, and proactively manage third-party suppliers.

Conclusion

An ever-changing regulatory and risk environment combined with increasing customer expectations requires that financial services companies continue their digital transformation initiatives and include contract management in their planning. It’s a simple premise that operating in a highly competitive industry while navigating uncertain economic times requires better systems and ways of operating – requiring contract intelligence. As financial institutions grow in complexity, it will be critical to understand and aggregate risk across business lines and functional areas.

Since the financial crash of 2008, companies have been working to reduce risk by adding to their risk management teams. The reliance on manual contract management and lack of insight into contract data has hindered progress. Integrating contract intelligence into risk and compliance practices enables companies to move faster, more efficiently, and with improved accuracy.

Knowledge is power, and data is the fuel to create knowledge. With a centralized AI-powered contract intelligence system to manage and create data from all enterprise contracts, your organization can intelligently and proactively manage risk while becoming more efficient and unlocking significantly more value.