Abstract

Contracts are essential to an organisation’s success (it means “spoken words fly away, written words remain,” in case you were wondering). For lawyers and their organisations, contracts are critically important, as is the effort that goes into creating and reviewing them. However, contracting is rarely done efficiently or effectively. According to research by EY and the Harvard Law School Centre, more than half of business development leaders say contracting inefficiencies have led to slower revenue at their organisations, and 50% say they have caused them to miss out on business.

In-house legal departments handle huge numbers of contracts at any given time, all of which have obligations to monitor and risks to mitigate. Some are as simple as a standard non-disclosure agreement; others are excruciatingly complex and lengthy. Some organisations still operate outdated, hard-copy contract management systems consisting of little more than filing cabinets and ineffective labelling. Even for organisations that operate modern filing systems—usually little more than a hierarchy of folders on a local or shared drive and a spreadsheet to record them—keeping track of these documents and the terms therein is difficult to say the least. Lawyers and business leaders can’t use these static data repositories for anything more complex than basic queries. Identifying key risks and opportunities, obligations and rights in your contracts is crucially important, yet meaningful extraction, analysis, and review of contract terms and associated data is near-impossible.

Introduction

Contract AI describes the use of text-based machine learning applied to contracts to make the process of drafting, reviewing, and tracking contracts more efficient. Like a human lawyer, contract AI begins by understanding and familiarising itself with the language used in legal contracts. The algorithms that power contract AI tools are trained to identify and flag patterns and behaviours in contracts. This enables the AI to recognize key terms, phrases, and concepts by repeatedly seeing words and phrases in context. Contract AI then applies this advanced understanding of contracts to reduce repetitive contract admin tasks throughout the contract lifecycle.

How AI is Changing Contracts

The idea of a machine doing your job is never comfortable – especially when the machine is as powerful as artificial intelligence. But frankly, contract management AI is not so much a replacement for legal teams as tools to be used by them. The advent of AI doesn’t necessarily mean that companies will need fewer lawyers, it simply means that their roles will transform to be less mundane.

Pre-AI, a highly-trained lawyer would spend valuable time doing grammar checks and proofreading standard clauses. Letting the AI handle the boring stuff frees up human resources for higher-level work such as risk assessment and document refactoring. Lawyers can spend their time shaping legal strategies to tackle complex contract problems for higher-priority transactions, improving the firm’s productivity.

Therefore, AI contract management systems can act as tools to focus and heighten the impact of a legal team — it doesn’t mean that they’re being replaced. Incorporating AI for contract management means that you get greater impact and reach for the same resource expenditure, vastly increasing your firm’s productivity.

Tips for Deploying AI Contracts

1. Assess: Check your current contract management systems, whether manual or automated, and determine where you need improvements.
2. Develop an implementation proposal: An AI contract management system will affect everyone in your company, from the lawyers to the accountants. Create a proposal to get the senior leadership on board with implementation, and remember to include internal business associates.
3. Build an implementation strategy: It’s crucial to define clear goals whenever your team is switching to any new technological system, AI contract management included. Having a clear strategy will help everyone adopt the new systems with greater ease.
4. Choose software: Find contract management software, like Ironclad, and stick with it. Your AI algorithms need time to learn, so resist the temptation to jump ship when the results aren’t as fast as you expected.
5. Maintain your systems: Be sure to include a maintenance plan to ensure your AI-based contract management system operates at maximum efficiency.
6. Provide training: Make sure every member of your team knows how to use AI-powered contracts within your new system. They should feel confident using the new contract execution processes. Your AI solution works best if everyone is on the same page.

AI Tools for Contract Analysis

1. Natural Language Processing (NLP)

If you have hundreds, thousands, or tens of thousands of contracts, searching for the one you need is daunting. This is where NLP makes a big difference. NLP processes all the data in contracts into the natural language of AI. Then, NLP-powered contract analysis tools systematically manage that data and help draw inferences when missing data is in a contract. The result is easily searchable and accessible contracts that aid contract formatting.

2. Machine Learning (ML)

ML is your technology partner in the weeds, finding the areas where automation can improve workflows in areas easily overlooked. For example, with machine learning:

• You can determine how often contract renewals fail to include a new necessary clause.
• By ‘observing’ your contract review patterns over time, ML ‘learns’ to classify contracts based on their type, such as employment contracts, lease agreements, or purchase agreements.
• ML can also signal the likelihood of contract disputes or non-compliance based on historical data, enabling businesses to take proactive measures.

3. Optical Character Recognition (OCR)

Agreements stuck in old software that’s read-only images? OCR is how savvy legal teams ensure the data in these contracts doesn’t stay frozen forever. OCR converts the images to text readable by your CLM and other programs, making it easier to analyse and extract information from image-based files.

Benefits of Contract Analysis by AI

1. Time and Cost Savings

When AI is at the foundation of your CLM solution, it transforms from a contract repository to a collaborative, streamlined platform with your legal team as the gatekeepers. The time and cost savings realized from shifting your skilled legal team away from repetitive, manual tasks to strategic partnerships and expert negotiating tactics can have a huge impact on your bottom line. By automatically creating records for each contract, including dates, contract details, owners, and all the related attachments. AI-driven data and text extraction lets you upload thousands of documents from disparate locations and systems. Real-time updates and alerts reduce time spent in reactive cycles that reduce efficiency.

2. Improved Accuracy and Consistency

Unlike your legal team, which wears multiple hats, your AI-powered contract analysis has one job. AI delivers consistent and accurate information in a user-friendly interface in real time. In this way, a CLM solution supports the legal team by establishing contract management standards and accelerating contract review. Doing so automates repetitive tasks requiring precision and reduces the risk of human error and inconsistencies.

3. Enhanced Risk Management

AI-assigned risk scoring has become popular for legal teams looking to provide an objective view of their organization’s contractual risks. With bulk analysis, you can identify and extract the clauses from each contract and compare them to your established AI-managed clause library. This helps you analyse threats based on identified inconsistencies and missing information. Analysing historical contract data also gives you actionable insights into trends and drives smart decisions around the most urgent risks.

Conclusion

AI has really changed contract lifecycle management. It makes the process quicker and more accurate. Businesses can use AI tools to handle contracts better. This leads to fewer mistakes and improves compliance with rules. To use AI well, it’s important to choose the right tool. You also need to train your teams and check their progress based on user feedback. There are many examples from different industries that show the great benefits of AI. It takes care of complex legal language and intellectual property much more effectively.

Using AI tools like Legalsimpl.AI and large language models can help reduce the workload. They can make contract management simpler. Even though problems like data privacy and checking contracts by hand still exist, using AI is a smart idea. It helps improve business practices. This can lead to long-term success in managing the contract lifecycle, including signing and ending contracts and other important tasks.