Contracts are the foundation of every business relationship. From vendors, suppliers, job applicants, and customers, the contracts that power these relationships contain rules of engagement, rights and obligations, conflict resolution roadmaps, and countless business risks and opportunities.
That’s why organizations need to know exactly what’s in their contracts to stay competitive and mitigate risks inherent in any business relationship. In this increasingly complex business environment, the risks are aplenty. As companies grow, so too does the risk of noncompliance with internal policies — and as regulations like California’s CPRA proliferate, contract risks multiply.
These complexities also bring challenges in day-to-day contract management. Most teams lack the resources to efficiently move deals from negotiation to signature and track contractual obligations on an ongoing basis. That’s where smart teams put contract AI to work.
The last decade, has seen a rapid shift from manual contracting to technology-powered contract lifecycle management (“CLM”) tools that automate processes like drafting, approvals, storage, and analytics. Today, teams use contract AI to drive efficiency and reduce risk, with capabilities like advanced OCR to surface contract data in agreements of varying languages, document quality, and complexity.
Understanding Contract Risks
Contract risk comes in many forms. Nearly every agreement brings with it risks of:
– Financial loss
– Increased regulatory scrutiny
– Missed opportunities
– Reputational damage
Consider the procurement team that cannot accurately track vendor renewal dates and misses an auto-renewal that results in 5-, 6-, or even 7-figure financial losses. r the sales team that misses out on a baked-in subscription increase with a customer because the provision lived in an addendum housed in someone’s email inbox. Or the compliance team that lacks visibility into its data breach notification obligations, which can lead to harsh penalties (e’ve all heard about the company that inadvertently agrees to an offensive consumer data-sharing provision with a vendor that draws public outrage).
The importance of knowing all of the risks in your contracts cannot be overstated.
Minimizing Risks with Contract AI
With the right AI tools, teams can automatically track and ensure compliance with relevant laws, regulations, and organizational policies. Take, for example, the EU’s new Digital Operational Resilience Act (DORA). If you’re a legal or compliance professional in financial services, you’re well aware of this sweeping regulation that calls for specific contract safeguards for tech vendor-related interruptions. With contract AI, you can surface, organize, and track those contracts that contain relevant provisions for DORA compliance, and contracts that don’t. You can also automatically enforce internal contracting policies and procedures.
Say your organization has an advanced privacy review process that is triggered if a vendor processes consumer data. With advanced contract AI, you can prepare a set of standard questions for vendor contracts and task the AI with finding answers within every vendor contract – for thorough and systematized privacy reviews. Equipped with these tools, you can free up team resources and significantly curb risk in one fell swoop.
Beyond risk mitigation, AI-powered CLMs make every step of the contracting process more efficient. For pre-signature workflows, generative AI tools like clause creation and automated redlining are a must.
With these tools, AI can flag language in a contract that doesn’t conform to your team’s playbooks – and automatically generate precise redlines to conform. If language is complex enough to require human review, these will be escalated, allowing many negotiations to pass without a human touch.
Once a contract is signed and stored, robust OCR extraction paired with tools such as conversational assistants can significantly reduce the time spent searching, analyzing, and reporting on signed agreements. With these tools in place, teams can accelerate deals, reduce outside counsel spending, and free up bandwidth for more strategic initiatives.
Choosing the Right AI Solution
Bear in mind that not all AI is created equal. For true accuracy and efficiency, every stage of your vendor’s CLM product development should be informed by machine learning principles. With each new layer of development, the intricacy of AI integration increases, so it’s essential to address AI from the start to prevent compounding complexities down the line.
For example, a contract search tool will have limited use without a foundational layer of robust data extraction capabilities. Without incorporating an LLM that is specifically trained on a large volume of contract data, generative AI functionalities will fall short in accuracy and reliability.
Are your contract negotiations and approvals moving at the speed of your business? Perhaps you don’t need a robust pre-signature workflow solution. But, will you need global visibility into specific contract terms? Consider providers with robust OCR extraction and search functionality. Here’s a simple three-step process to make sure you’re properly vetting your vendors.
First, ask: Does the vendor’s AI support the capabilities you need? For instance:
– Automatic extraction of any term (business or legal) that matters to your organization?
– Ingestion of contracts of varying quality (e.g., handwritten), complexity (e.g., hundreds of pages), and languages?
– Agreement summaries?
– Conversational search?
– AI-powered contract risk profiling?
– Precision automated redlining and clause creation?
Then, ask: Will the vendor let you test out their AI capabilities on your contracts in real time?
And finally: Does it work?
By following these steps and evaluating CLM vendors with intentionality, you can avoid poor outcomes and recognize immeasurable benefits.
We’re at an exciting inflection point in the world of contract AI. Teams of all shapes and sizes are leaning into powerful tools such as advanced OCR for extraction, machine learning-based analytics for risk assessment, and generative AI for automated redlining.
Expectations are finally where they should be, and these tools are here to stay. Organizations can understand much more about their contracts than ever before – without having to read through them.
That is, if they’re diligent about finding the right vendor for their needs.
Author: Memme Onwudiwe