Do you know that nearly a third of business operations have a steady requirement of managing multiple contracts? Whether it’s NDAs, procurement contracts, sales contracts, licensing agreements, partnerships, or joint venture agreements. However, processing these contracts is no easy task, and a lot of time, effort, and risk is involved.
But here comes the advent of AI in rescue. Businesses are now adopting powerful AI in contract automation systems across all the stages of the contract lifecycle to streamline the process and make it as efficient and risk-free as possible.
AI has particularly flourished to become a leading modern technology of the 20th century in contract management that is evolving by the minute. Legal and financial teams can now focus on more strategic and productive parts of the business by automating labor-intensive tasks like data extraction, document scanning, and contract analysis.
What Is AI-Based Contract Management?
As the name suggests, an AI-based contract management system uses complex AI technology like NLP (natural language processing) and machine learning to streamline and automate the complex life cycle of a contract. It integrates with your existing CRM or ERP system for smooth data flow transfer between the systems for enhanced insight.
Primarily, the system handles these parts of the contract management:
- Creation of the contract,
- Scanning and storing,
- Indexing and extracting information,
- Scrutinizing and organizing,
- Analyzing and approving the agreements.
This AI-based system can handle even complicated processes like negotiations, termination, renewal, and rescission of the contract. The system compiles and stores all the documents and does all calculations (including the document’s ongoing accuracy and compliance check along the timeline). It goes one step ahead by monitoring the current contracts with the latest business policies.
How AI Revolutionizes Contract Automation Systems?
AI revolutionizes contract management in several ways. As briefly mentioned, AI can transform a contract management system by automating routine tasks, enhancing decision-making, and standardizing contract processes.
Here’s a look at some standout points to consider:
Extending Automated Capabilities
Traditional contract management software is bound to a certain limitation when it comes to automation, which in no way competes with the needs of today. AI-powered systems are more scalable; one can easily automate contract categorization, drafting, and data analysis tasks.
For example, AI can use a pattern-matching algorithm to identify contracts based on purpose and their types. It detects structure, wording, and specific marks throughout the existing document as a reference. So, you can create a new contract (referencing the existing contract as a template) or set up alerts for the renewal/expiration of the existing agreements.
Enhancing Efficiency and Reducing Errors in Contract Management
AI contract management software can streamline the creation of agreements. The system thoroughly reviews and scrutinizes the documents’ terms. Legal forces are relieved from doing the tedious, repetitive tasks so they can focus more on the strategic part of the contract. This results in significantly fewer chances of errors at crucial points in the contract.
As with critical dates, deadlines, and complex terms that are difficult to track manually, AI provides comprehensive oversight. Not only does this shift take the monotony out of contract management, it allows for focus, decreasing the risk of oversight due to fatigue or loss of attention.
Handling Vast Amounts of Contract Data and Enhancing Decision-Making
AI, with the help of NLP, can handle vast datasets by efficiently extracting and analyzing key metadata from the contracts, like the parties involved, effective dates, termination clauses, payment terms, renewal conditions, and confidentiality clauses. The system successfully gives you every assessment/identification it detects that may require your attention for improvement.
If done manually, this could take weeks or, in some cases, months to review.
These systems identify the patterns involved and infer insights by analyzing thousands of contracts from their repositories simultaneously. It streamlines the creation, modification, and finalization of future business contracts without worrying about compliance.
AI in contract management serves more than just a large repository of contractual data – its expert systems guide you with reasoning, like any human being, for decision-making in organizational contract management.
Facilitating Standardization and Analyzing Historical Clauses
When you integrate your current systems with those of AI-based systems, you will notice the standardization of complex contracts. It ensures consistency (while taking care of compliance and current laws) by reviewing similar contracts to create a new standardized template, which you can customize according to your current needs.
The system cleverly identifies and rectifies vague terms or poorly defined sentences so that the newly created contracts are more clear and enforceable.
Key Areas Where AI Can Streamline Various Stages of Contract Management
AI supports various stages of contract management, as we have briefed in the previous sections. Now, here’s a closer look at some of the critical stages of contract management and how AI is streamlining it:
1. Drafting of Contracts
AI streamlines the drafting process by automating the creation of an initial draft, which is created using predefined templates and standard clauses. This process saves up to 80% of time on standard contract analysis with almost 95% accuracy. This means less time spent reviewing, researching, and analyzing & correcting according to current laws and regulations.
As mentioned earlier, AI can smartly identify vague or poorly defined statements. It goes a step further to suggest alternative clauses with protection mechanisms on specific business parameters.
2. Contract Review and Analysis
AI-based contract management systems automate identifying and extracting key information like all parties involved, important dates/deadlines, obligations to the business, and payment terms. NLP algorithm processes and understands the context behind the clauses for better reasoning and guidance for any discrepancies.
3. Contract Negotiation
AI can significantly streamline the negotiation process by analyzing the historical data from its repository. Using ML, the system provides insights and recommendations to the existing contract for better decision-making.
For example, during the negotiations with the supplier, AI analyzes past contract data and compares it with current market trends to suggest “almost” accurate pricing. The systems also track negotiation changes, ensuring full transparency and better accountability.
4. Contract Lifecycle Management
AI automates the entire contract management lifecycle, including tracking, renewal, and termination. Critical dates like expirations or renewals are automatically reminded, so there’s no chance of missing the opportunity or non-compliance.
Contract performance is assessed using AI algorithms that determine how to optimize relationships and outcomes.
5. Risk Management and Compliance
To identify potential risks within contracts, AI’s job is to analyze legal documents and suggest favorable terms. It keeps teams up to date on regulatory changes, monitors legal changes, and alerts teams on what they need to do to keep their contracts updated.
AI constantly manages risks and compliance to significantly reduce the risks of litigation, penalties, or any reputation damage. For example, using AI can simplify the traversal of complex legal landscapes and facilitate compliance with regulatory standards.
Deploying an AI Contract Management System
To successfully integrate the AI contract management system into your current setting, some essential steps are required:
- Assessment of Current Systems: Start the process by inspecting your existing contract management practices (both manual and automated processes). Identify any areas which require improvement. This inspection will help you understand the basic foundation of your system and will give you a roadmap of all the areas where AI will help you in the future.
- Developing an Implementation Proposal: After you are done inspecting, now prepare for a meeting with all the key stakeholders in the business, including senior leadership, legal team, and employees/departments that will utilize this system. Prepare the proposal by outlining benefits, challenges, and expected costs related to the system along with the expected “post-impacts” to the business for their support (use clear figures from the research to showcase the values of the product better). Having a word early on with the key members ensures transparency and prepares the business members to evolve.
- Building an Implementation Strategy: Make a straightforward roadmap for the implementation process. Clearly define the expected timeline to stakeholders and the contract management solution you are hiring. Make sure all parties agree with the key milestones.
- Choosing the Right Software: Before hiring a contract management solution that fits your organizational needs, you should consider factors like ease of integration, user-friendliness, scalability, and specific AI capabilities like NLP and ML. It’s important to select a reputed firm with a proven track record, both online and offline. Check online testimonials, including BBB ratings, and consider consulting a colleague or industry expert for the offline reputation of a business.
- System Integration and Testing: Ensure the AI system seamlessly integrates with existing business systems after all is done. Methodical testing can be done for better results across various tiers to evaluate its “real-world” performance across multiple contract types and scenarios. You should carry out manual and automated tests involving complex calculations and using current laws and regulations to ensure the systems comply with current legal standards.
- Training and Change Management: Training is essential for all users so that they can use the system efficiently. Every key member should be present during the training process provided by the contract management solution.
- Ongoing Monitoring and Refinement: Continuously monitor the system’s performance and efficiency. Take feedback from the users and optimize the AI functionalities according to their needs. You will also be required to regularly update the systems with the new regulations and laws, industry standards, and internal policies.
Conclusion
Today’s AI has transformed every aspect of the business, including contract management. This automation streamlines the process without compromising the quality and accuracy of the contents in the contract. With the help of ML and NLP, AI systems successfully draft, review, and process the contracts. These systems save your business time and improve efficiency while complying with the current legal framework.
Additionally, as a cheaper alternative to traditional systems, AI-based contract automation systems are the key to competing in the fast-paced industry.
If you want to set up in-house AI-based contract management systems, ensure you are well-versed in the implementation process stated in this article. From evaluating your business and choosing the right provider to ongoing training and optimization, each step is crucial for successful deployment and reaping benefits in the long term.