Managing contracts is mission critical

You know why?

Mission Critical

Managing contracts is mission critical for your economy: you know why?

Let's remember that contracts, often still in paper form, are the critical assets from which rights and obligations, forming the basis of business, derive.

Competing with Tesla by selling horse-drawn carriages is nothing more than a caricature of those resisting digital transformation. Individuals and businesses, in general, forfeit numerous business advantages by delaying their digitization efforts.

Managing contracts and agreements is the transformation niche where quantitative leaps tend to be most significant. It's the most lagging area in the digital transformation of economies. 

If we think about it for a moment, even in the largest and most innovative companies, contracts are still primarily signed on paper and reside inert and dusty in warehouses, structured and indexed with essentially 19th-century technology: the era when horse-drawn carriages were admired as a symbol of technology.

There are only a few exceptions in business leadership that recognized the mission-critical nature of the contracts upon which their operations are based. They have been pioneers in integrating contract obligation management with their business operations and the systems they rely on: CRM, ERP, collections, etc.

Let's remember that contracts, often still in paper form, are the critical assets from which rights and obligations, forming the basis of business, derive. They provide the matrix of certainty for relationships between individuals, without which our economies could not advance. The more formal a sector is and the more integrated the companies within it are with the surrounding economy, the larger their contractual assets become.

In line with Nobel Laureate in Economics Oliver Hart's assertion that contracts are the connecting tissue of the economy, Harald Stieber of the European Commission suggested creating macroeconomic indicators based on the number of active contracts. This is something that, while it might have been projected with electronic invoices, which many people feared a few years ago, is clearly only achievable in a digital world.

This is precisely why, during the darkest weeks of the pandemic and even today as we discuss levels of social distancing, economic dynamism is still at play. If economic recovery and growth are linked to increased economic transactions, and this is measured by the number of active contracts, then contract digitization takes on mission-critical status.

The good news is that financial institutions have always known what a critical infrastructure is. That's why many of them had already digitized customer onboarding, daily transactions, policy issuance, and more. But there are still lags, and precisely the contractual processes of other segments of the financial cluster are not yet fully digitalized. The largest businesses within the cluster, which include productive loans, collateral, mortgages, or simple notarization, remain in the Napoleonic era. In the case of households, their contribution to the economy is still limited to income from work and not from transactions involving their movable and immovable assets, which are stuck in analog processes that prevent them from being pillars of economic growth.

What would the financial cluster and the economy be like with households fully capable of buying, selling, mortgaging, collateralizing, or leveraging at very low cost and without the frictions and delays currently required for such transactions to be perfected? Imagine how our economy would be if household assets, along with business assets, increased their transactional activity.

Today, we know that institutions that had invested in digitization were able to orderly confront the COVID-19 crisis. However, they had to overcome numerous challenges, from identity verification to secure authentication, electronic signature for transfers or policies, and providing a seamless user experience. Their efforts were rewarded with unprecedented success; in some jurisdictions, certain banks doubled or even tripled the number of people with banking access. Achieving such a feat would have been impossible with horse-drawn carriages.

With their sectoral leadership, from which many other sectors should learn, the financial cluster is now organized to capitalize on these conditions, shifting from debates about "if" and "when" to "how" to leverage them.

JP Morgan, Blackstone, Fidelity, they are all looking at web3 and asset tokenization as a way to accelerate the business cycle, increase security, and provide better services to their younger users.

Moving Away from the Carriage

Before COVID, cultural inertia and the status quo still justified some assets being transacted in paper or transaction settlement times taking several days.

With the advent of web3 platforms for digital commerce, that is no longer an acceptable state of affairs. An encrypted electronic signature, provided through a digital identity represented in a cryptographic wallet, allows the electronic signature of a transaction to equate to its legal and financial execution: money movement and secure title registration occur simultaneously on a blockchain. This is a level of equivalence between signatures and transactions that was unthinkable in previous stages of the internet, not to mention the paper era.

Getting on a Tesla

Respected thinkers in this field argue that in the near future, contracts will be automatically integrated with the various accounts affecting the balance, producing immediate and verifiable actions on a secure and private ledger. There have never been as many cryptographers working on this as there have been since 2020.

Gradually, contracts are being generated more directly from a CRM at the point of sale, signed in seconds without the parties having physical contact. Once in effect, they trigger and report actions on a wide range of matters: customer service and satisfaction, team performance, dispatches and receipts, electronic invoicing, accounting, and payments, to name just a few examples. Gone are the days when the International Association for Contract and Commercial Management (IACCM) reported that, on average, 9% of business profitability was lost due to inefficiencies in managing contractual obligations resulting from this historical disconnect. It is as astonishing as it is to imagine what a company can do with 100% of its contracts connected to its other systems.

This is not a matter of changing horseshoes on horses' hooves; it's not a matter of installing GPS on the carriages that drive our country and region's economy.

Emerging economies, in particular, have tremendous potential due to the demographic dividend they are experiencing; it is this youth that has the greatest potential to leverage these technologies, even demanding it. Countless industries that are still in their infancy in these regions will grow thanks to the growing digitization still possible on digital platforms. These are unprecedented growth rates, as modern industries are not like the primary or secondary sectors of our economies, which took centuries to granulate their reach. Modern industries grow thanks to digital platforms that have already achieved national, regional, or global reach in just a few years.

Now, combining the global crisis we are trying to overcome with the growth possibilities of our economies is obviously a monumental challenge. Of all the issues at stake, these lines are only enough to emphasize that the recovery and growth we long for in the coming years will be different for those still operating on 19th-century technology and those who are already using technology from our era. The technology that is now defined as Internet 3.0 is undoubtedly the catapult for our arrival in the Fourth Industrial Revolution.