Top Reasons why AI is important in Contract Management

Top Reasons why AI is important in Contract Management

Organizations across the world, depending on their nature of business will have contracts located across repositories and possibly in multiple languages. Unless the contracts are digitized and brought into a central repository there is no way one can know what is inside these contracts and if there are any potential risks with any of these contracts. Traditional contract management processes fail in terms of speed, time and resources required to get to the bottom of each executed contract.

Let us understand a use case

As a practical use case let us take an example of an organization that is into manufacturing of several spare parts of Automobiles and the organization has manufacturing facilities across the world spread across several countries. Obviously, such an organization will have to deal with multiple raw material vendors across the world and the organization must enter into agreements for supply of raw material with each of these vendors. Lets also assume that there is a central procurement department for this organization who are handling vendors through their country specific procurement teams with each country making their own agreements with the country / region specific vendors.

What are the possible pain points?
  • With such a distributed organization architecture, it becomes difficult and unviable to keep a track of all the vendor contracts, understand which contracts are expiring, which are in auto renew mode, which have penalty clauses, which are signed on company templates and which are executed on third party paper etc.
  • Not having visibility on contract key terms and metadata can lead to huge risk across the organization along with the possibility of getting into compliance issues.
  • When there are several hundreds to thousands of contracts that need to be constantly analysed and reviewed a lot of legal counsel efforts are warranted which can involve huge amount of money and human resources along with a lot of time to be able to mitigate risks.
How Artificial Intelligence can help with better Contract Management?

It is observed that inefficient way of handling the contracts can lead to business loss. Also, as per the study of International Association of Contract and Commercial Management (IACCM) almost 40 percent of the contracts fail in delivering the full financial benefits with shortfalls costing 10 percent of annual revenues on an average.
It looks like with better contract management it is possible to improve contract profitability and there is none to match with Artificial Intelligence in this aspect  .

Here are some of the ways AI can add value
  1. Creating a Centralized Artificial Intelligence Powered Contract Repository
    In order to unlock the benefits of AI it is at most important to be able to create a digital and searchable contract repository. This can be achieved by bringing the contracts from multiple repositories across the organization into a central storage. There are automated mechanisms to achieve this by way of using adapters to connect to various storage systems and the automation also works in such a way that whenever a new contract or document is added to any of the connected repositories, the contract would be automatically pulled into the central storage for further process.

    While creating a central contract repository is a decent level of automation, the actual value of Artificial intelligence comes in the ability to go through each document, understand the document contents and based on the context the document will be categorized (for ex MSA, NDA etc) and tagged. This saves an enormous amount of manual efforts that are involved in going through each document in detail and then manually categorize what is the document type and tag it accordingly.

  2. Optimize the review of contracts and reduce Organization risk
    Across the world most organizations employ in house legal teams or work with consulting law firms to provide contract review and vetting services for all the contracts they write with customers, vendors and partners. The primary reason behind employing or using a legal professional is to ensure that they thoroughly review all your contracts and make sure the contracts do not deviate from the standard templates of the organization. When it comes to using third party paper a more thorough review is required to make sure if there are any non-standard clauses.

    It will cost the organization a lot of money if there is any lapse in missing any critical information in the contracts. In order to achieve this, organizations spend a lot of money along with time

    Artificial intelligence has come a long way in helping organizations and legal teams with review and analysis of contracts. Technologies like OCR can be used to recognize and extract information from printed, scanned contracts. On top of this, NLP can be applied to process the extracted information and apply meaning to the information. This can be further enhanced by pre-training the NLP engine to understand key terms and phrases of various contract types automatically without any human intervention

    The result of this will be that without spending much time organizations and their legal teams can quickly identify the key metadata in any contract, non-standard clauses and language across the contracts and much more. This will enable organizations to be proactive on their contracts and avoid any potential risks due to missed milestones, non-performance of any of their contracts etc.

    A lot more technology advancement within Artificial intelligence is on cards which will help in much more enhanced contract management but all said and done Artificial intelligence still requires human oversight to make things work effectively.

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