A group of economists no longer satisfied with gross domestic product to best measure the health of modern economies seeks help through an unlikely source: the humble contract.
Contracts are the connective tissue in modern economies, said British-American economist Oliver Hart when he accepted the 2016 Nobel Prize in Economics. This got some innovative economists thinking: Could contract volume improve a country’s insights into its economic health?
“If you had an accurate picture of the volume of contracts in a country, you would have a better understanding of a whole range of economic activities, which would lead to better policy making,” says Harald Stieber, Senior Economist at the European Commission.
Mr. Stieber has found new uses for contracts in the past. A few years ago, he pioneered making financial contracts machine readable for easier reporting. He was also involved in early work on using blockchain technology to track smart contracts.
GDP is a bad measure – but we fixate on it
He convinced the Commission to look at the contract size as a complement to GDP. A study on the subject was completed earlier this year by Trakti, a British-Italian legal technology provider looking at the use of blockchain to improve the negotiation, signing and storage of contracts.
“The [analysis] have proven that studying the changing characteristics of contract networks can help governments optimize policies, ”says Stieber.
The limits of GDP
Diane Coyle, Bennett Professor of Public Order at Cambridge University, argued in her 2015 book GDP: A Brief But Loving Story that they fail the services industry and the digital activities that make up so many 21st century economies can measure.
“GDP is a bad measure of many things in business, but that’s what we focus on,” says Doyne Farmer, a professor at Oxford University. “There are often big mistakes and it can take about a year to get the numbers down. And it does not give us a measure of a country’s wealth or wealth, just the flow of certain forms of economic activity. “
“The pandemic has made us all more aware of the networking of companies and the global economy,” says Sally Guyer © Getty Images
Prof. Farmer tries to map an ecology of contracts using methods from biology. He hopes to gain a better understanding of manufacturing operations and networks for individual companies.
“If you were able to follow the flow of all the contracts in an economy, you’d think it would be a very good indicator of a country’s health,” he says. “Every transaction is under a contract – even if I buy a candy bar at my local store, I make an agreement with the store owner that is an implicit contract.”
In addition to formal contractual relationships, both business-to-business and business-to-consumer, these implicit contracts would be important for any contract volume measurement attempting to provide an accurate view of economic activity.
“Billions of these transactions take place every day and are an important part of economic activity,” says Prof. Farmer. “These must be taken into account with every new measure.”
A practical measure?
Mr. Stieber and Luigi Telesca, founders of Trakti, agree that for a useful contract volume it is crucial to understand every corner of the economy – and they understand that they have to convince companies to get involved.
“The fundamentals have to be robust so that companies of all sizes can easily and easily provide information on contracts and transactions,” says Stieber, who compares each potential system with the tax return process.
The two see the contract volume as a complement to GDP rather than an alternative measure. The system they envision would deliver economic health information much faster – maybe even in real time.
“We are not questioning GDP, but rather its explanatory power,” says Stieber. “We want to build a complementary view of GDP that will help us answer policy questions in a variety of areas, including competition, taxation, social justice and individual opportunity, and consumer protection.”
Mr. Telesca’s company is part of an informal alliance called Open Trust Fabric that is developing an open source contract ecosystem. He believes the freely available protocol would make it easier for companies to exchange contract volume data while ensuring that no software vendor could monopolize the development of the new measure.
According to Stieber, Brussels is interested enough in how the idea of commissioning the alliance to study the creation of a model of the EU economy as an ecosystem of contracts develops.
“In addition to complementing GDP, there are a number of obvious political applications,” says Stieber. “For example, VAT and sales tax fraud should be technically impossible if you track contract volume as the study explores, including a trustworthy framework for data exchange.”
Sally Guyer, executive director of the World Commerce and Contracting Association (WorldCC) says it’s important not only to make sure the concept works, but it is also scalable so that it can really be used by businesses without the administration and hassle increase volume.
Your organization represents more than 70,000 contract managers, procurement professionals, and supply chain officers – the people who are critical to gathering data for a contract volume measurement.
The WorldCC has long advocated increased standardization and digitization of commercial contracts as well as better visibility of data from contracts at the economic level.
“Without having to disclose sensitive business information, contracts can provide a lot of extremely useful business information, especially about the nature of the risks to business ecosystems and networks,” says Ms. Guyer.
She admits that the system would need the right balance between standardization and anonymization. However, she believes that if companies were convinced that it would help build a more accurate picture of the economy, companies would share information as a whole.
“The Covid-19 pandemic made us all more aware of the networking of companies and the global economy,” says Ms. Guyer. “In many ways, the European Commission’s initiative is an acknowledgment of the underlying reality: a reset that reflects the need for a smoother world,” she says.
The following case studies are a brief list of contributions to the FT Intelligent Business Awards event taking place online on November 19th.
All entries show the combined use of data and technology in business operations. Source: RSG Consulting
The oil and gas company created a tool for procurement workers to create contracts with less tailored clauses, speed up negotiations and reduce risk. Around 8,000 contracts are generated annually with the tool. Shell has also implemented a virtual contract wizard that uses natural language processing to determine whether a supplier’s proposed changes to a contract are materially changing their performance. By the end of 2021, Shell expects the assistant to review 70 percent of its procurement contracts.
Campaign Zero and Kira Systems
The police reform group Campaign Zero was founded in 2015 to develop research-based strategies to end police brutality in the United States. In June, contract analysis specialist Kira Systems freely offered its document review technology to help the nonprofit review 600 contracts from police unions across the country. The aim was to assess issues such as whether the conditions give officials an unfair advantage over ordinary citizens. Campaign Zero reported that Kira’s technology increased the efficiency of contract review by 70 percent and allowed her to publish results at the height of the protests against Black Lives Matter, increasing the transparency and public scrutiny of the contracts.
National Children’s Hospital and Agiloft
The legal team at Children’s National Hospital in Washington implemented workflow technology from Agiloft, a contract management company, and cut the contract length in half. Managing the contract performance schedule is of great value to the hospital’s procurement team and research institute as the multi-million dollar investment must pay off. CNH was the first children’s hospital to open a drive-in Covid test center, thanks in part to the legal team who used this contract workflow tool to enable quick arrangements for deliveries such as tents and test materials.
Public Procurement Office, Lithuania, and the Open Contracting Partnership
The Open Contracting Partnership is a non-profit collaboration that works to make public procurement more transparent through the Open Contracting Data Standard, a set of principles for the publication of data from public procurement contracts.
Lithuania released its contract details at the start of the pandemic to ensure the devices it bought quickly came from reputable suppliers. The country has committed to using the standard for all public contracts within its online procurement platform.