When done manually, contract analysis can be costly for legal teams. Sifting through lengthy legal documents full of jargon makes for a time-consuming process. On average, it takes legal teams more than two hours to find specific language within a contract.
Legal teams need a solution, but what?
Here's where artificial intelligence (AI) enters the fold. AI took the legal world by storm with technology tools using AI to track contracts through their lifecycle. Humans are no longer responsible for locating discrepancies and valuable contract information.
Are you curious about how AI can change your contract analysis process? In this article, we're taking a deep dive into how AI revolutionized contract analysis. Let's jump in.
What is contract analysis?
Contract analysis is the tracking and collection of contract data throughout its lifecycle. It's an in-depth and ongoing review of a contract. By monitoring contracts throughout their lifecycle, you ensure stakeholders stick to their obligations.
“Try to glean as much info about what causes friction as possible. Your biggest wins will come from addressing these knowledge gaps or hesitancies that are blocking/slowing deals.”
~ Sue So, Head of Legal, Hopin
Commercial Contract Management in Hypergrowth Startups
Now, here's where contract analysis becomes even more interesting. The process can provide far greater insights than ensuring the completion of its obligations.
AI opened the door to gathering contract information with ease. This process streamlines contract management by flagging potential friction points and finding bottlenecks before they become issues.
Contract analysis vs. contract review
It’s important that you're familiar with the distinctions between contract analysis and contract review to ensure they're used properly.
A contract review happens before the legal agreement receives signatures. All key parties go over the contract's contents to review its terms and clauses. Here is where they can voice confusion or concern about the contract's obligations. Should the contents not feel fair, signing parties can renegotiate its terms.
Contract review is a single step in the contract's lifecycle. Once all parties have looked over the contract and finalized it, signatures make it enforceable.
Contract analysis occurs throughout a contract's entire lifecycle. It's a continuous measurement of a contract's performance while it's active. The analysis ensures responsible parties fulfill their duties. With the help of AI, this same analysis can collect valuable insights and patterns. These patterns highlight what's working well and what isn't. Based on these findings, your in-house legal team can identify where to adjust contract terms and processes.
The ability to iterate for future contracts is crucial for strategic business decisions. Regular and precise contract analysis makes this possible.
How does contract analysis work?
Effective contract analysis starts with reliable contract lifecycle management (CLM) software. Here’s where AI enters the scene.
CLM software uses natural language processing (NLP) to compare the terms of your current agreement to the average compiled from your existing contracts. The software turns the contents of your contract into searchable text and scans it. Next, the tool holds the contents of the new contract up against the average. This comparison identifies discrepancies and potential setbacks in the new contract.
Specific terms, clauses, warranties, dates, and other key contract data get recorded to create the baseline within the CLM software. It uses the data from existing contracts to build a foundation. Because of this, the more contracts you have in the software, the more accurate its results will be.
“Start with agreements that are easy to compile, such as NDAs. Gather as many attorneys as possible to test the tool and take some time till every attorney in the system gets used to the interface of the CLM. Then, start building out more complicated agreements, such as third-party contracts. Finally, move on to using the tool for templatising sales contracts.”
~ Nadia Louis Hermez, Legal Ops Manager, Next Insurance Inc
Building a Robust Legal Ops Function
Once the tool flags potential problem areas, you can make any adjustments to smooth out the process.
How does AI automation impact contract analysis?
AI helps transform legal data into actionable insights. Legal teams can use this information to improve their contract management processes and make smart business decisions. In a time when contracts can be hundreds of pages thick, having a tool that can parse through all that legal information for you is a game changer.
The International Association for Contract and Commercial Management (IACCM) found that AI in contract management is up from 12% to 36% between 2018 to 2022. It’s not hard to see why—AI mitigates risk and provides valuable insights in just a few clicks.
More and more companies recognize AI’s enormous impact on improving their contracts. It streamlines the process of checking for contract discrepancies, outdated information, and potential mistakes. It allows legal teams to keep up with a fast-paced industry and cover all their bases.
Why is contract analysis important?
Contract analysis creates space for growth. It's easier to spot opportunities for improvement when you have data from several contracts. It calls out language within contracts or places within the process that could be better. You calculate the risk of each potential roadblock and implement solutions before they become larger issues.
Little iterative adjustments can reap enormous impacts on your contract management process. Identifying potential problem areas now saves time by avoiding costly mistakes or setbacks.
For example, say there is one clause within your contracts that regularly causes signers to pause. It results in delays while finalizing the contract, thus costing your team more money and time. Information collected with a contract analysis tool would flag this problem area. The problem clause might be difficult to spot, but a tool using AI would find it immediately.
Now, you can revise this part of the contract across the board. Problem solved. You've taken a small iterative step toward fine-tuning your process, opening the door to long-term success.
From ensuring timely contract fulfillment to using data for smart business decisions, contract analysis supports legal operations on multiple fronts.
4 benefits of contract analysis
#1 Improved visibility and decision making
You likely process hundreds of contracts throughout a single calendar year. It’s easy for old contracts to be left behind. Contract analysis software parses through legal jargon immediately and transcribes it into actionable data. Now, anyone at the company can jump in and offer insights.
“To me, AI is the next internet. If you're not using it, you're falling behind. AI is going to move rapidly in a direction where it will help a lot of us make processes more efficient. I don't think the GC goes away. AI is a tool but it doesn't replace decision making.”
~ Celaena Powder, VP of Legal, Seismic
From Security to Sales: Building Cross-functional Bridges
This level of transparency also makes it easier to identify new opportunities and make strategic business decisions. Contract analysis creates space for detailed reflection on the process, highlighting places where you could boost revenue or further mitigate risk.
Contracts create a huge amount of information over their lifecycle. This information can be a game changer for your business to make an impact.
#2 Improve accuracy and mitigate risk
The improved visibility you get from contract analysis is also helpful for risk mitigation. After all, avoiding risk is top of mind as you create and review contracts. CLM software that uses AI for its analysis will identify if certain clients regularly run into bottlenecks with the phrasing of contract clauses or specific terms within their contracts.
It has the capability to review hundreds of contracts with the exact same level of precision each time. Any deviation from the regulatory language standards set by your organization gets identified and remedied quickly. By flagging these problem areas and ensuring consistency, you can clarify the content to reduce the friction a client experiences during signing.
AI also reduces the risk of human error. AI algorithms allow contract analysis to happen without any pre-existing biases or judgments that could inadvertently hinder a contract’s progress. It examines contracts with intense precision that the human eye cannot. This also helps ensure that all contracts comply with regulatory requirements.
#3 Enhanced contract processes
Contract analysis means continuous improvement. Bottom line: AI can read a contract faster than a human. It will call out anomalies and trends that the human eye might pass over. Using solid CLM software to catch these potential setbacks allows you to improve your processes. You can provide solutions before setbacks prevent your team from finalizing contracts.
An enhanced contract management process also lends itself to scaling. As the number of contracts you work with increases, AI helps by quickly extracting contract metadata and saving legal experts time. With more time, teams can focus on work that moves toward achieving business goals while resting assured their contract data is securely captured.
#4 Easy cross-functional collaboration
Legal teams might handle the bulk of contract management, but they’re by no means the only stakeholders. People from sales, marketing, IT, and other teams play a role in finalizing a contract. By capturing and storing contract data in one place, AI makes this knowledge accessible to everyone. This helps boost accuracy amongst teams at every step throughout the contract lifecycle.
“As business co-leaders who happen to have a legal skill set and are managing a function like a business unit, I would build trust with the CFO through quantitative metrics after trying to understand what was moving the needle for the business. In a lot of cases, it was contracts. To gain the trust, it was important to track how effectively and quickly we were helping the business close deals without wasting time NDAs, MSAs, and other repeatable stuff.”
~ David Lancelot, ex-VP Global Head of Legal, eBay Classifieds
Embracing Legal’s Role as Business Co-Leaders
Tools like SpotDraft implement features like automated request management, contract repository knowledge sharing, and cross-functional editing to speed up contract review. With the right teams focused on the right parts of the contract timeline, you’re sure to avoid potential risks and run an efficient process.
Use AI to streamline your contract analysis process with SpotDraft
Using AI for contract analysis can be a game changer for organizations. Teams looking to improve their processes to spot potential risk factors—and capitalize on improvement opportunities—shouldn’t sleep on adopting a CRM tool with AI.
SpotDraft AI can do just that.
With comprehensive due diligence, template creation, and much more, SpotDraft has the resources you need to make contract analysis fast and easy. Built-in analytics and reporting ensure you never lose an important piece of contract metadata. When you have all the information you need, you can do more.
SpotDraft is the end-to-end contract management solution designed to support your entire contract management workflow:
- Build a single source of truth for contract metadata
- Seamlessly integrate to create, share, and store contracts company-wide
- Create customizable templates based on your contract analysis learnings
- Have contract data safely and securely stored for internal audits
Are you ready to take the next step toward smoothly managing and analyzing contracts? Head over to SpotDraft to sign up for a free, personalized demo to learn more.