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Abstract
In this paper, a critical review of e-contracting is conducted. This is achieved conducting a background analysis of the concept of e-contracting in which the benefits associated with e-contracting are highlighted. The method used to achieve this is literature review. The author asserts that there are a number of challenges associated with e-contracting.
As a result, it is vital to minimize these challenges so as to achieve the benefits of e-contracting. The author identifies a number of e-contracting challenges on which he formulates a set of hypothesis.
Some of the challenges which the firm evaluates relates to modeling and representing contractual relationship, negotiation, monitoring, and contract management. Finally, a conclusion of the entire study is given together with a recommendation for further research to be conducted in order to seal the existing gaps.
Introduction
According to Grefen (2010, p.19), contracts form the basis upon which businesses establish formal relationship with various stakeholders. Traditionally, physical documents such as papers were used as evidence of an existing contract between two or more parties. However, the 21st century has witnessed rampant technological growth (Angelov, 2005. p.54).
Some of the technological fields which have witnessed rampant growth include software development and telecommunication. Currently, communication is not limited by geographical and time constraints. Due to technological advancement, it is possible to exchange information more easily and rapidly.
The high rate of technological innovation has led to emergence of electronic commerce which entails undertaking all business processes electronically. As a result of growth in electronic modes of collaboration between firms, business contracting has also been affected through emergence of a new modes of collaboration referred to as electronic contracting [here after referred to as e-contracting] (Angelov, 2005. p.54).
E-contract refers to a contract which is designed and executed through a software system. In e-contracts, business contracts are designed using computer programs which make it possible to automate the respective business processes. It is possible to map e-contracts to other related computer programs.
However, e-contract programs cannot be able to deal with complex relationship arising between the various parties to the contract. The concept of e-contracts is similar to that of traditional contracts.In e-contracts, the vendors offers their product and the respective terms such as price to potential buyers.
On the other hand, the buyers evaluate the terms, and negotiate the price. After this, they are able to order the particular product or service and make payments. However, all these activities are conducted electronically.
In an effort to improve their operational efficiency, firms in different economic sectors such as the construction industry are increasingly incorporating e-contracting in their operation. This arises from the benefits associated with e-contracting. However, there are a number of challenges associated with e-contracting.
In order to gain insight on these challenges, the researcher identifies and analyses some of these challenges. To evaluate e-contracting challenges effectively, the researcher have adopted a number of null hypothesis. All the hypotheses are based on the various elements of a contract as outlined below.
- Modeling and representing business contractual relationships using e-contracts is a challenging task.
- There are a number of hindrances which affect e-contract negotiations.
- Monitoring e-contracts is challenging compared to monitoring physical contracts.
- There are a number of issues which hinder e-contract management.
By understanding these challenges, this paper will contribute towards management teams of firms which have adopted e-contracting developing strategies aimed at eliminating challenges. This arises from the fact that they will appreciate the effects of these challenges on their contractual relationship.
For example, poorly developed e-contract can result into financial and legal implications on the parties to the contract. Therefore, understanding the contract will culminate into improvement of the firms’ overall operational efficiency, for example by strengthening contractual relationships.
Background and history of e-contracting
Through e-contracting, a firm is able to undertake a number of activities associated with contracting purely in an electronic environment. For example, the parties to the contract are able to undertake negotiations via electronic communication methods. Upon the parties to the contract coming to a consensus and a contract being established, each of the parties to the contract manages the various activities electronically.
For example, the parties may incorporate online collaboration systems in various communication processes such delivering contractual notices. In addition, e-contracting enables the collaborating parties to undertake necessary contractual amendments. This makes the process of contracting to be more efficient.
According to Camarinha-Matos, Afsarmanesh and Ollus (2008. p. 193), traditional contracting involves human actors and is considered to be slow while e-contracting is faster and cost effective. E-contracting does not result into changes of the businesses processes.
It is only the efficiency of the contracting process which is improved. E-contracting mainly involves two main processes which include contract formation or establishment and contract enactment.
According to Xu and Vrieze (2010, p. 3), contract formation involves a number of activities which include identification, negotiation, checking, and validation of all the contractual parties. On the other hand, contract enactment or performance involves monitoring contract performance.
Grefen (2010, p.19), asserts that there has been emergence of new business settings over the past few years which require new contracting paradigm. To align themselves with the changes in the environment, firms are considering incorporating e-contracting in their operation.
E-contracting process is distinct with regard to the result. This arises from the fact that e-contract is developed as a semi structured document which can be in various formats such as Microsoft Word, XML, or PDF formats. Some of these include XML based words, clauses and sentences.
In addition, e-contracts are composed of semi-structured information. In addition, some electronic contracts attain legal status through digital documents. According to Xu (2004, p.3), legal e-contracting is aimed at establishing a contractual document which addresses the intentions of all the parties.
According to Xu and Vrieze (2010, p. 3), e-contracts can either be established electronically without networks or through online networks. Additionally, contract formation can either be asynchronous or synchronous. Asynchronous contract formation entails formation of a contract through the email while synchronous contract formation entails online collaboration.
The e-contracting process can either be completed through a shared platform or one which is only established between the partners (Xu & Frieze, 2010, p. 3). This means that ownership of the platform can either belong to the 3rd party or contractual partners.
Fulfillment of e-contract depends on the nature of the goods involved. For example, if the products associated with the contract are digital in nature, then the contract can be fulfilled online through a digital transfer. However, if the goods are physical, then the contract will be fulfilled offline.
In an effort to promote e-contracting amongst companies, many governments are increasingly enacting legislations to guide e-contracting. In addition to efficiency, e-contracting is also associated with other benefits as outlined below.
- Minimizes risks associated with contractual agreement established over public networks for example the internet.
- Reduces occurrence of errors
- It is possible to re-use content after the contract is closed.
- It provides a machine-processible document
In addition to the above benefits, e-contracting enhances firm’s capacity to develop contracts which can be easily acceptable by other parties. Despite the benefits associated with e-contracting, there are a number of hurdles which have to be dealt with in order to realize the benefits of e-contracting as a new form of collaboration.
These challenges range from the conceptual, logical to implementation levels (Sommerville &Craig, 2006, p.65). For example, there are technical barriers associated with e-contracting. According to Camarinha-Matos, Afsarmanesh and Ollus (2008. p. 193), all the parties to the contract must have well implemented electronic technologies such as electronic signatures in addition to a shared platform in order to enhance collaboration.
This means that parties to the contract must be prepared to implement inter-organizational systems. In addition, some of the parties to the contract may not be willing to share critical information with their partners such as the suppliers.
According to Roddick (2006, p.4), e-contracts are specifically modeled, implemented and monitored through a software system. Due to the complexity of contracts, significant human involvement is necessary to ensure effective fulfillment of the e-contract (De Marco, 1990, p.76).
History of e-contracting
Developments in Information Technology (IT) as a result of increased innovations over the past two decades have resulted into minimization of inefficiencies amongst businesses. As a result, firms are facing intense pressure to improve their operation efficiency while at the same time maintain a high level of output.
Considering the fact that firms associate with others in their operation, there is need to minimize any possible inefficiencies. As a result, it is critical for firm’s to improve their collaboration. One of the ways through which firms can achieve this is through incorporation of e-contracts (Xu & Vrieze, 2010, p. 3).
The concept of e-contracting is not new but has been in existence from the time of emergence of the various technology and legal aspects. For example, the emergence of Information Technology and its continuous innovation has led into minimization of inefficiencies encountered in undertaking various business activities (Howard, 1998, p.1).
Additionally, changes in business environment have forced firms to incorporate more efficient methods of conducting their operations. This arises from the fact that firms are required to be faster in their operations so as to attain optimal performance.
This has led into increased consideration of artificial intelligence as one of the core elements which can contribute towards improvement of the firm’s core competencies (Gardner, 1987, p.54).
Over the past two decades, there has been an increment in the number of researchers conducted on artificial intelligence. Xu (2004, p.2) asserts that the core focus has been on representation of regulations and legislations. Similarly, there has also been increased consideration of how artificial intelligence can be integrated in contracting.
This arises from the fact that ‘contracts serve the same purpose as that of legislations’. Due to emergence of collaborative commerce, standard business processes have increasingly been considered as inadequate. As a result, incorporation of e-contracts by firms in an effort to establish business relationships has become an important trend.
According to Xu (2004, p.2), contracts are supposed to regulate the actions of all the parties involved in the legislation. During late 1980s, a number of scholars such as Gardener were interested on developing contract formation rules.
Other projects were conducted in 1990s with the objective of evaluating the possibility of developing a system which would assist in drafting contracts. An example of such projects is the ALDUS which was conducted in 1992 with its main focus being on Sales Goods contracts (Xu, 2004, p.2).
During 1990s, the development of Electronic Data Interchange (EDI) significantly boosted electronic commerce. During this period, the concept of EDI was considered to only refer to electronic transaction. For EDI to thrive, an agreement between the parties involved was necessary.
The laws are not only required to dictate the required format for transferring data from one computer to another but also to direct all the issues associated with EDI such as legal issues. As a result, it was necessary for rules to be established. The led to formation of the Uniform Rule of Conduct for Interchange Data of Trade by Tele-transmission (UNCID) in 1987.
Further legislations guidelines were enacted in 1990 through establishment of the Model Trading Partner Agreement and Commentary (MTPAC).
Despite the fact that EDI led to introduction of effective channel of communication between organizations, there were numerous challenges associated with EDI (Milosevic & Bond, 1995, p.65). Some of these include high installation costs, technological limitations and lack of flexibility. However, development of internet technology has significantly improved e-contracting.
The 1990s saw increased improvement in e-contracting aspects and also the support areas. Examples of these aspects relate to development of the first contract models and frameworks. In addition, Legal and regulatory frameworks were also instituted.
This period also saw the development of concepts such as the digital signature, certificate authority and certificate mechanisms. Other e-contracting aspects which were developed include the auctions theory, the XML [Extensible Mark-up Language] and the RosettaNet (Camarinha-Matos, Afsarmanesh & Ollus, 2008, p. 195).
However, most of the e-contracting aspects were developed during the period ranging from late 1990s onwards. Some of these aspects relate to contract monitoring, improvement in business processes web services, improvement in contracts modeled in XML, contract process negotiation, emergence of notion of contract enforcer, emergence of adhesion and consortia contracts and development of electronic institutions.
For example, in 2000, International Business Machine (IBM) company issued the first XML based EDITPA language referred to as the Trading Partner Agreement Markup Language (tpaML).
IBM’S TPA entailed an e-contract which utilized XML to define the general contract terms, security protocols, communication protocols and business processes. The emergence of EDI led to new forms of e-contracting which include open and closed e-contracting. Closed e contracting refers to utilization of EDI technologies to undertake contractual relationships between firms which have an already established relationship.
On the other hand, open electronic contracting enables firms to enter into contracts with other firms with who had no any form of relationship. Open e-contracting is also referred to as the ‘arms length transaction’ (Xu, 2004, p. 4). The chart below illustrates the various milestones and support areas in e-contracting from 1990 to 2007.
Development of the internet resulted into growth in e-contracting. For example, e-contracts do not only represent legal binding agreements between the vendor and the purchasing party but can also be utilized in different workflow systems and organizational business processes to enhance other web services.
Challenges of e-contracting
According to Roddick (2006, p. 4), e-contracts are aimed at helping organizations to adhere to the stipulated legal rules in the process of executing contracts. However, Roddick (2006, p.4) asserts that there are a number of challenges associated with deployment of e-contracts. Some of these challenges are analyzed below.
E-contracting challenges on modeling and representing contractual relationships
Considering the fact that firms in different economic sectors are incorporating e-commerce in their operation, it has become paramount for firms to effectively manage e-contracts. In order to achieve this, firms are required to develop effective formulating formal e-contracting models (Marjanovic & Milosevic, 2005, p.1).
The current e-contract models for example the logic model are aimed at enhancing inferential and expressive capability of contracts (Lee, 1998, p.3). This model emphasizes on coordination and allocation of tasks.
On the other hand, other models such as the multiparty and the pro-active monitoring contract model provide a contract model for diverse objects (Xu, 2004b, p.6). E-contract models are required to offer an integrated view with regard to technical and regular contracts to enable e-contracts to be undertaken through the various networks.
According to Burgwinkel (2002, p. 101), a number of studies conducted have revealed that XML can be used in the process of contracting in different domains. For example, the parties to the contract can develop the contract from already existing templates.
In addition, XML gives the collaborating parties an opportunity to exchange, negotiate and sign the contract over the internet. However, to fully utilize the XML, other types of knowledge representation must be integrated. This requires other technologies such as configuration tools which are based on new semantic web technology must be incorporated.
E-contracting challenges on negotiation
Negotiation refers to an interactive communication between parties with the aim of reaching a consensus (Camarinha-Matos, Pereira & Ribiero, 2010, p. 85). Alternatively, contract negotiation can be defined as the process through which the parties involved in a contract arrive at a mutual agreement. For a contract negotiation to be effectively reached, a number of aspects must be considered.
These include the legal validity of the contract and a clear understanding of the contents of the contract. In addition, the price of every clause in the contract should be inline with the legal terms and the associated quality of deliverables (Burgwinkel, 2002, p.7).
In e-contracting, negotiation is conducted through online technologies. An example of online collaboration technology which can be used to undertake online contracts is eTenderer (Teamwork and Online Collaboration Solutions, n.d, para. 1).
This technology enables firms to purchase online through compilation of detailed electronic tender documents. It also enables the parties to submit the tenders electronically. In most cases, eTenderer is used in construction industries. The tenders can be safely transmitted and only opened by a specific party and at a specific date.
According to Sun and Howard (2004, p.40), computer aided negotiations provide a faster method of negotiating especially if the parties to the contract are geographically distributed. In addition, e-negotiations result into mutual satisfaction and high quality agreements. Previous studies conducted indicated that parties involved in e-negotiations tend to behave differently.
E-negotiations can be conducted on various platforms such as the email. However, e-negotiations tend to be challenging with regard to their legality. This arises from the fact that there are no well established laws which regulate e-negotiations. Therefore, there is need for there to be laws and legal frameworks for e-negotiations to effectively support e-contracting.
One such framework entails formation of e-notaries. According to Camarinha-Matos, Afsarmanesh and Ollus (2008, p. 85), confidentiality of electronic negotiations using communication channels such as the email can be compromised.
According to O’Shea et al (2008, p. 14), email communication is considered to be insecure. This arises from the fact that it is possible to read and alter an email in the process of its transmission before it reaches the intended party.
Insecurity of the email is mainly common if the service provider have not implemented secure internet protocols. Examples of these protocols include the Transport Layer Security and the Secure Socket Layer (O’Shea et al, p. 14). In addition, lack of effective encryption and decryption by the parties involved can result into the transmission being hacked.
In addition, some of the e-contracting negotiation platforms such as the email do not offer a comprehensive system which can be used in auditing electronic records. This means that the evidentiary value of e-documents and records is diminished. The resultant effect is increased inefficiencies with regard to disclosure process if a dispute occurs (O’Shea et al, p. 14).
This illustrates the fact that each of the e-contracting stages results into emergence of security and legal risks. An example of industries which have increasingly incorporated the concept of e-contracting in their operation is the construction industry. In order to minimize the associated risks, it is vital for the management teams of these firms to take into account the associated risks.
To eliminate these risks, construction companies should ensure that their e-contracting system is well configured. This can be achieved by considering a number of security goals which include confidentiality, integrity, authenticity, availability and cryptographic non-repudiation. Confidentiality will entail ensuring that only authorized parties can read the details of the contract.
The integrity of the e-contracting system entails ensuring that the e-contract documents are not modified, deleted or duplicated. On the other hand, authenticity entails ensuring that individuals who have access to the e-contracting system are the real parties to the contract. Availability entails ensuring that the parties to the contract can access the e-contracting systems and other e-contract documents (O’Shea et al, p. 14).
E-contracting challenges on monitoring
Contract monitoring refers to the process of analyzing the activities conducted by the parties to the contract. This aids in detection of any possible contract violations (Meersman & Tari, 2007, p. 303). According to Camarinha-Matos, Pereira and Ribiero, (2010, p. 85), it is necessary for the parties to the contract to closely watch the activities of the collaborating parties.
This will aid in ensuring that the activities by the parties are according to the stipulations of the contract. Contract monitoring can be classified into two. These include proactive monitoring and reactive monitoring. In the proactive monitoring, it is possible to identify any anomalies and take necessary actions to avoid their occurrence.
In reactive monitoring, the parties responsible for the occurrence of the anomalies are identified. In this case, compensation to the affected party is necessary. One of the purposes of electronic contract is to clearly distinguish what is expected from the collaborating parties (Xu & Vrieze, p.4). In addition, the contract also stipulates the acceptable behavior.
During the contract fulfillment phase, messages related to the contract are transmitted through the established network. These messages can be used as a source of additional information to aid in pro-active monitoring.
However, e-contract monitoring is challenging since most of the networks being used in the e-contracting process of on automation of the entire process instead on developing services which would aid in supporting contract fulfillment. Some of the services considered to support contract fulfillment include monitoring. Lack of these services limits the effectiveness of creating a trustworthy electronic commerce environment.
E-contract challenges on contract management
Over the past few decades, the concept of contract management has increasingly become prominent. This is mainly so amongst project oriented companies such as construction firms. Demand for contract management has resulted from the fact that the business environment is experiencing rapid changes. As a result, it has become paramount for firms to be effective and efficient in how they manage their contracts.
In an effort to move with the market changes, firms are incorporating e-contract management systems. An effective electronic contract management system should have the capacity of supporting the firm’s networking development. In addition, the system should be effectively distributed and connected to the internet.
Camarinha-Matos, Afsarmanesh and Ollus (2008. p. 193), asserts that the system should support end to end integration. In addition, other features which should be ensured include flexibility, security and accessibility. This will increase the systems efficiency in handling complex contracts.
According to Xu and Vrieze (2004, p.5), there are various aspects associated with contract management. Xu and Vrieze are of the opinion that contract management should involve establishment of a single repository. In addition, contract management also involves tracking the performance of each contractual partner.
This should be achieved through incorporation of Key Performance Indicators (KPIs). The information obtained should be used to determine the necessary improvement actions and establishment of ranks. In addition, contract management also entails informing and reminding the partners on the milestones.
Contract management entails ensuring that parties to the contract honors the contract terms (Betts, 1999, p.76). Through contract management, a firm is able to save on its operating costs. Despite the fact that e-contracting is considered to be cheap, there are some challenges which may result.
This is mainly experienced if the firm has entered into a number of contractual agreements with firms which have adopted different electronic commerce standards. In such a case, it becomes difficult for the firm to manage the contract.
This arises from the fact that the firm will be required to monitor the operations of every party which is a daunting task. In addition, the firm may not be able to maximize the expected benefit in the contractual relationship. This arises from difficulties in its effort to minimize potential costs and determining the cost of the contract violation.
According to Xu and Vrieze (2004, p.6), multiparty contractual relationships may result into loss of variable information. In addition, e-contracts involving a large number of parties result into increment in the degree of complexity. This arises from the fact that the large number of collaborating parties makes the relationships to be hidden.
In addition, it becomes difficult to manage e-contracts involving multiple partners with regard to modeling the contract and identification of responsible parties. Xu and Vrieze (p. 6) further assert that multi-party e-contracting is challenging with regard to provision of extra services such as monitoring.
Conclusion
As a result of technological innovation, firms are increasingly being pressurized to improve their operational efficiency. One of the technological innovations which have affected firms entails the emergence of electronic commerce. In an effort to attain their profit maximization objective, firms are integrating online services in their operation. E-commerce has also affected other business processes such as contracting.
This is evident in the fact that firms in different economic sector are increasingly incorporating the concept of e-contracting in their operation. Through e-contracting, firms are able to enter into business contract with various parties electronically. The shift is also associated with the benefits resulted from e-contracting. For example, through e-contracting, a firm can be able to minimize the costs involved in contracting.
Additionally, electronic contracts result into reduction in paper work. A firm’s operational efficiency is significantly improved as a result of incorporating electronic contract. This arises from the fact that human errors which may occur during traditional method of contracting as eliminated.
Electronic contracting also minimizes risks associated with contractual agreement established over public networks for example the internet. This arises from the fact that issues such as confidentiality, authenticity, integrity and security of the contract may be compromised. It is also possible to re-use content after the contract is closed in addition to provision of a machine-processible document.
E-contracting will also result into improvement of business relationships thus minimizing legal and financial risks. The resultant effect is that e-commerce will be greatly enhanced. Through e-contracting, there is a high probability of firm’s improving their productivity and hence their competitiveness.
Despite these benefits, there are a number of challenges associated with e-contracting. This means that it is necessary for firm’s to consider ways on how to eliminate these challenges. These challenges are related to technical, legal and business perspectives.
For instance, for e-contracts to be effective, it is necessary for there to be effective modeling and representation of the contractual relationship. This presents a challenge to most firms since they may not be acquainted with e-contract modeling knowledge. In addition, firms may be required to have the necessary web-technology.
E-contracting is also faced with a challenge with regard to negotiation. Contract negotiations ensure that all the parties to the contract are acquainted with sufficient understanding of their obligations to the contract. Contract negotiation may be compromised for a number of reasons.
One of them arises from the fact hat there are various electronic platforms upon which e-contracting negotiations can be conducted. Some of these platforms such as the email may pose a threat to the contract with regard to confidentiality. This is mainly so if the security protocols are not well configured.
Therefore, e-contract negotiations require the support of other technologies in order to improve security, confidentiality, integrity and authenticity of the contract. The success of an e-contract is also determined by the efficiency with which the collaborating parties monitor the activities of the parties involved. However, monitoring e-contracts may not be effective due to lack of the necessary support services.
E-contract management is also challenging if the parties to the contract have adapted different e-commerce standards. In order to deal with the challenges associated with e-contracting, it is necessary for further research to be conducted. These studies should focus on the best way to seal the challenges associated with e-contracting.
In order to succeed in their e-contracting processes, firms should continuously evaluate the external environment in order to identify possible technological changes. This will enable them to update their e-contracting systems appropriately hence improving their operational efficiency. The resultant effect is that the firms will be able to maximize on the benefits associated with e-contracting.
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