By Pactum · · Updated · 8 min read
TL;DR
If you only have 30 seconds, here’s a recap:
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Many supplier negotiations suit machines better than people. Negotiation is an optimization task between two parties. Machines are not affected by human emotions and can weigh every trade off, no matter how small.
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AI can negotiate thousands of contracts at the same time. Each contract can take a human team weeks to months. AI can handle thousands of contracts in the time it usually takes to renegotiate one.
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Machines do best on high volume, data heavy and frequently repeated deals. These include low value, high volume contracts, deals that depend on complex data such as commodity prices, spot pricing deals such as freight, and multistakeholder negotiations.
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Humans still do best on strategic negotiations. People can anticipate cultural differences, read the other party and use back channels to save a deal. Machines cannot negotiate things that are not officially on the table.
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Preparing for AI negotiations needs leadership, good data and a search for neglected value. Companies should appoint a leader for innovation and give teams freedom to experiment. They should make sure data is not siloed, and look for contracts that are renegotiated too rarely.
Understanding what types of deals machines are better at negotiating is key to unlocking value in commercial contracts.
We’re not far from the day when AI will negotiate commercial deals in most large organizations.
Why? Because every large corporation has thousands of neglected vendor deals that are set up to be automatically renewed when they expire, without anyone ensuring they maximize value. Research by KPMG shows that 17%–40% of value in deals is lost due to inefficient contracting. A value increase of even 400 basis points in supplier deals represents at least tens of millions of dollars for a typical Fortune 500 enterprise—and AI can help unlock that value.
The key is knowing which kinds of deals should be negotiated by humans and which by machines.
The Hidden Advantages of Machine Negotiations
Negotiation is at its core an optimization task between two parties. Many deals are actually perfect negotiation tasks for machines, which aren’t affected by human emotions.
The obvious advantages of machine negotiations include:
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Each negotiation can influence all the others. When thousands of negotiations are all masterminded by a single AI, there’s an increased opportunity for coordination and optimization. For example, an e-commerce platform that wants to renegotiate holiday sales terms with vendors might offer a co-marketing campaign that includes prime-time TV advertising. The value of each ad second will go up as more suppliers agree to jump on board, maximizing the value of every second of the promotion.
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A machine can negotiate thousands of contracts at the same time. There simply aren’t enough hours in the day for human merchandising and procurement teams to negotiate and renegotiate the tens of thousands of vendor contracts enterprises need to stay on top of, as each contract can take weeks to months to complete. AI can handle thousands of these simultaneously in the same amount of time that it usually takes to renegotiate just a single contract. Automation makes the entire process for enterprises not just faster, but exponentially faster.
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An AI system can continuously learn. Every machine negotiation can make every other one better, creating a virtuous cycle. Such knowledge sharing and training would be close to impossible without AI.
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Machines can consider every trade-off, no matter how small. A single contract may have 30 factors that need to be individually negotiated, each with a different value and priority for both parties. For a human, this combinatorial explosion would be overwhelming, leading the parties to focus on just the top three items in most cases. A machine, however, is built to find optimal combinations and, so, will identify and derive more value from each negotiation.
The Best Kinds of Deals to Negotiate Using AI
Given the above advantages, there are certain types of contracts that machines are much better at negotiating than human teams are. These include:
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Low-value, high-volume contracts. Machines can renegotiate tail-spend deals much more efficiently and cost-effectively than humans can. Enterprises have thousands of low-dollar contracts that would take humans months to renegotiate, with the labor cost outweighing any additional benefit the company might gain from the process.
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Deals that depend on complex data. Machines are better equipped to manage negotiations of contracts that depend on factors such as fluctuating commodity prices, consumer demand or competitive price analysis.
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Spot-pricing deals. Human teams don’t have the time or capacity to effectively handle freight terms and other deals that need to be renegotiated daily or weekly.
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Multistakeholder negotiations. Trade union and class-action conflicts tend to be highly charged negotiations involving multiple parties with competing priorities. By removing the emotional component, enterprises can often achieve better outcomes more quickly.
The Best Kinds of Deals for Humans to Negotiate
Biological intelligence has distinct benefits over the artificial sort and some kinds of deals are still best negotiated by humans. These include strategic negotiations, which benefit from human sensitivity. For example, people can anticipate cultural differences, get a gut feeling about the other party and back-channel information to save a deal that is at risk of going south. Machines cannot negotiate things that are not officially on the table—only people can think outside the box.
The key to any successful negotiation is focusing on strategy. Parties have to know what they want and where it will get them. They need to know, for example, who their contact might influence in the organization to improve future deals and what synergies there may be between a product line offered currently and a future one that a supplier is looking to sell. That kind of strategic thinking is something that machines have not yet mastered.
How to Best Prepare an Organization for AI Negotiations
For a corporation to maximize an early-mover advantage in adopting AI for negotiations, it must be willing to think like a startup and foster innovation. Companies that can appoint a big-picture thinker who can also execute well to lead innovation and then assign teams to specific projects—while giving them the freedom to experiment—will be ahead of the game.
Enterprises should also be mindful of the structure and quality of their data. “The world’s most valuable resource is no longer oil, but data,” as The Economist put it a few years ago. Ensuring that data is not siloed in specific systems or parts of an organization and investing in the business intelligence tools needed to compete are critical.
Finally, corporations should find the neglected value in their organizations. That may lie in a long tail of thousands of unmanaged suppliers or contracts that are renegotiated too infrequently, perhaps only once every several years. Business events such as changing commodity prices or fluctuating consumer demand might also hold hidden value that companies can tap through AI.
Understanding what types of deals machines are better at negotiating is key to unlocking additional value from existing contracts. This value is already there, just waiting to be revealed and leveraged once AI systems are deployed.
