AI Contract Negotiations Come to Big Business

January 28, 2021

The subtle art of negotiating might be ready for a digital revolution.

And the arrival of artificial intelligence in contract talks could lead to a major reworking of supply chains — helping companies move beyond price to optimize for a host of other attributes, from sustainability to diversity to delivery schedules.

Leading the charge is Martin Rand, cofounder and chief executive officer of Pactum AI, a Mountain View, Calif.-based firm that, at least for now, has the world of AI negotiations to itself and is working with some of the world’s largest companies, including Walmart Inc.

The two-year-old Pactum is starting by helping big businesses get their arms around the thousands of contracts they have with smaller vendors. Even the biggest players don’t have the manpower to renegotiate every contract, leaving a huge chunk of business renewing on autopilot or adjusted with only the blunt tool of price cuts.

It’s a situation that Rand said can leave the companies and their vendors muddling through, working on terms that aren’t optimal for either side, but can’t be easily reset en masse.

“Our target is to be expanding the pie, creating value for the vendors as well,” Rand said.

And while big companies are known for pushing suppliers for better prices to help support their own bottom line, Pactum is focused on a much broader set of variables — 30 items in all, including price, payment terms, liability and marketing.

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“It’s not a bidding system, it’s a negotiation system,” Rand said. “In a marketplace you can buy something for money, essentially in a bidding system. In a negotiation, you essentially negotiate all 30 things. In a negotiation, more value can be created.

“Every large enterprise can today send out an email and say they want a 4 percent discount, there is no point in replicating that with AI,” he said.

Pactum instead hooks up to the systems and departments responsible for controlling the aspects of a contract and goes to the vendor to renegotiate through a chat platform that the vendor uses to type in responses to the AI.

“The system has an endless amount of time to find out what the vendor needs and then do useful trades,” Rand said. “The system knows exactly how much 20 days of additional payment terms is worth in terms of a co-marketing contribution.”

It’s an approach that can also give the vendors options by serving up “multiple equivalent simultaneous offers,” letting them choose what would be most useful for them, be it longer payment terms, a different shipping cadence or something else.

“With such choices, they get value,” Rand said. “They see offers are built in a way that our customer [the big company] doesn’t lose out either and the outcome is that the pie is expanded.”

Pactum charges a six-figure sum and guarantees the company will see three times that in benefit.

“What the companies [that have used the AI approach] saw was that, in just a few months, we’re able to create 4 percent of new value on average in these deals,” Rand said.

And the system is learning. “Every negotiation is making every other negotiation better,” Rand said. “We’ve created a new industry of automated negotiation.”

Pactum started with consumer products and other areas, including seconds of television advertising, but is moving toward apparel, getting smarter along the way.

Rand, who has worked at Skype and The Climate Corporation, negotiated contracts across Europe and studied advanced negotiations at Harvard and Stanford universities, knows the intricacies of the corporate face-off and has shaped AI accordingly.

“The first 180 seconds of a negotiation have a high correlation with the outcome of a negotiation,” he noted.

Knowing that — and many other nuances of the craft — Pactum AI is able to change its approach on the fly and find new ways companies sitting across the virtual table can get a little more out of the deal.

The computer’s ability to manage so many moving parts could also help the industry tackle bigger problems, breaking bottlenecks that could enable more action in areas of collective importance, like climate change or finding ways to boost minority-owned businesses.