How Companies Use AI for Contract Negotiations

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For foodies traveling the Baltics, you’ll find Lithuania has some of the best food hands down – kugelis, kapusta, and bundookie buns should be on your to-do list. In second place would be Latvia. Look no further than buffet food chain Lido for some seriously good Baltic fare. Then there’s the black sheep of the bunch, Estonia. Whoever thought putting peaches on pizza was a good idea should be taken out behind the kitchen and shot. This culinary faux pas could be because Estonians spend all their time honing their tech skills instead of messing around in the kitchen.

Another Estonian Startup Making Headlines

Prior to The Rona, our MBAs were scouting tech startups across the globe from Saudi Arabia to Russia. One country we visited last year was Estonia where we met with Skeleton Technologies (ultracapacitors) and Veriff (global identity verification). Recently, both companies raised sizable funding rounds – Veriff raised $65 million a few weeks ago and Skeleton $61 million last month. We also looked at 9 Artificial Intelligence Startups in Estonia, and one company not on that list was Pactum, an AI startup that’s been garnering some attention lately with their AI algorithms that negotiate contracts.

About Pactum AI

Click for company website

Estonia is often said to be one of the most digitally advanced countries in the world, and her e-residency program attracts tech talent from across the globe. The Founding Managing Director of that program, Kaspar Korjus, is renowned in Estonia for his technical prowess. He was one of three people that founded Pactum AI in 2019 to help companies “unlock value from thousands of suppliers by automatically negotiating contracts on a massive scale.” This foreign fintech firm has quietly snuck into the Silicon Valley Vatican and now sports a Mountain View address along with $15.2 million in funding and the best reference customer you could ask for – dividend growth champion Walmart (WMT) – the largest corporation by revenue globally, and one of Pactum’s most supportive customers.

Pactum’s most recent round of funding was an $11 million Series A which closed just days ago, putting them on the radar of investors and potential customers as they look to offer contract negotiation services to companies with $1 billion of revenues or more. The process starts with two weeks of discovery, after which the algorithms take over and start negotiating tail spend contracts. For most companies, around 80% of their commercial agreements are high volume and low value – tail spend. Pactum can unlock a significant amount of hidden value in tail-spend contracts, reducing spend by 2% to 11% per $100m of tail spend. As for pricing, they only charge for successful deals that add value, essentially guaranteeing an ROI for every project they’re working on. They also offer a “gain share” pricing model which takes 25% of the gain a renegotiation generates. We love AI companies that are so confident in their product they simply take a cut of all the money they’re saving their client’s.

Credit: Pactum AI

In terms of the “how,” Pactum uses a chatbot interface to connect with suppliers and negotiate terms by first probing what the other party’s needs are. Some say negotiation only starts when one party says no, and one wonders how many people will say no to Walmart. It’s easy to negotiate a contract when you’re the 500-lb gorilla in the room, and Pactum recognizes this by pointing out that most people treat negotiation as a zero-sum game – one in which someone must lose. The company disagrees, pointing to the notion of Pareto efficiency whereby “an individual or preference criterion cannot be made better off without making at least one individual or preference criterion worse off.” For finance people, this is the efficient frontier of negotiations which is often never reached because of human psychology.

Here’s the thing about negotiating. It may be an incredibly important skill, but most of us are remarkably bad at it.

Pactum’s Chief Product Officer, Kaspar Korjus

Using AI to Negotiate Contracts

A few years back, we published a piece on Using Artificial Intelligence for Legal Contracts which looked at a handful of startups that were largely working on contract search engines. More recently, we looked at 6 LegalTech Startups Disrupting the Legal Industry, one of which was Icertis. Their cloud-based enterprise contract management solution streamlines everything with a healthy dose of AI. It seems like what Pactum is doing isn’t just differentiated by their focus on tail spend contracts, it’s also their desire to perfect the negotiation process itself.

According to KPMG, 80% of contracts negotiated by humans never reach the most optimal deal for both parties (in other words, they don’t achieve pareto efficiency). Even the best human negotiators will leave money on the table because of psychological pitfalls like risk aversion – feeling the impact of a loss twice as much as enjoying the feeling of a win. Over 60 different negotiating mistakes result from the flawed human psyche. It’s a problem not easily fixed.

It’s hard to teach people how to be successful negotiators. If your Big Five personality profile shows strong tendency towards agreeableness, it’s even harder. In business school, they make you do these prisoner dilemma exercises which accomplish little more than pointing out who the biggest assholes are. That’s perhaps the most exciting thing about the Pactum solution. It has no ego, and it will only get better at negotiating over time. Not only that, people appreciate it more as time goes on – even the person sitting opposite the table. Below you can see three iterations of Pactum using 100 contracts a pop:

Vendors increasingly prefer negotiating with an AI chatbot – Credit: Pactum

Maybe someday we’ll have AI chatbots on both sides of the negotiation, something that will truly allow every company to achieve pareto efficiency. One company that might have the scale and reach to make that happen right now is DocuSign.

Pactum AI and DocuSign

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Our uncanny ability to foresee the future of technology isn’t just because we wasted invested six-figures going to business school, it’s also because of our powerful proprietary research tools, one of which is LMGTFY. We used this powerful tool to investigate “using AI to negotiate contracts” and found a big name dabbling in this space. DocuSign (DOCU) is a $45 billion publicly-traded company that is an investor in Pactum, and also potentially a competitor. A blog post by Docusign talks about how “AI is being used to revolutionize the contract negotiation process,” and their product, DocuSign Analyzer, is said to be capable of this. Pactum is also listed as one of their partners, so maybe they’re providing this functionality to DocuSign? Not sure, but a quick look at the DocuSign investor deck shows a very interesting stock with some exposure to legaltech, something that’s now been given to our overworked research team to write about in the coming weeks.

There are likely to be any number of companies out there claiming to use AI to negotiate contracts, but probably not in the way Pactum is. The actual negotiation process is being conducted between a human and a machine while achieving up to 96% automation.

Credit: Pactum

That process is producing loads of big data that will make the AI algorithms even more likely to achieve pareto efficiency. We’re not sure how they’re getting to decision makers (this is tough even for humans), but that’s just part of what makes the whole platform so remarkable. If it’s good enough for Walmart to happily grace the front page of Pactum’s website as a reference customer, then that means this little Estonian big Mountain View startup is going places.

Conclusion

Pactum estimates that all the Fortune Global 500 companies combined have 12 million supplier contracts that are unmanaged, amounting to around $100 million to $500 million per enterprise. Contract negotiation is an ongoing process, so there’s a software-as-a-service model shaping up here which will command a market premium. What Pactum does seems like a perfect fit to what DocuSign does, something we’ll be talking about in a coming article.

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