With AI's capability to process and analyze large data sets rapidly, what used to take days or weeks can now be accomplished in a fraction of the time.
This shift isn't just about speed, it’s about enhancing accuracy and opening up new possibilities for in-depth analysis without racing against time.
In this blog post, we will explore how AI is revolutionizing due diligence, making the lives of legal professionals easier and their work more efficient and precise.
The downsides of traditional due diligence processes
In the world of mergers and acquisitions, traditional due diligence is a bit like a trusted old recipe—familiar and reliable, but not without its drawbacks.
#1 Manual work prone to human error
For starters, traditional due diligence is as labor-intensive as it gets. A team of legal experts…sifting through a mountain of documents—contracts, financial records, legal compliances, you name it.
The process is filled with manual methods that become inefficient and unsustainable as organizations grow.
#2 Too much tech or too little of it?
The reliance on spreadsheets and email further complicates the due diligence process, making it not just tedious but also slow.
The common use of these tools in due diligence slows down a process that's already pricey per hour.
#3 Wasting hours collecting relevant data from all the different departments
Not surprisingly, one of the biggest challenges is internal communication. Different teams (operations, finance, legal, etc.) often work in silos, leading to a fragmented process. This lack of coordination can be a significant obstacle in achieving a transparent and cohesive due diligence process.
#4 The race against the clock
Time is a luxury rarely afforded in traditional due diligence. This race against the clock can strain relationships between buyers and sellers and often leads to a compromise on the depth of information gathered.
Moreover, the costs associated with this drawn-out process can be significant, especially for smaller companies with limited resources.
#5 Gaps in the level of expertise conducting due diligence
Finding the right people with the necessary expertise is another hurdle. An average accountant might not cut it when it comes to in-depth financial analysis required in due diligence, highlighting a gap in expertise that can be costly.
#6 Inaccurate or incomplete data causing hazy judgments
Due diligence decisions are often made based on incomplete or imperfect information, making the process somewhat subjective. This can make forming a clear judgment about a business relationship challenging.
Plus, limited access to information, whether due to poor record-keeping or other factors, compounds this challenge.
Also read: Company Due Diligence Checklist
Is AI really that good for due diligence? What are its benefits?
When asked about which stage in an M&A transaction they are most likely to use AI, a staggering 56% of lawyers picked due diligence.
More research suggests that AI could reduce the time taken to perform due diligence to less than a month.
“Due diligence reviews for a corporate transaction typically involve a bunch of lawyers going through documents (hard copy or in an e-room) looking for litigation issues, key contract clauses (e.g., change of control, assignment, etc.), corporate governance, intellectual property, etc. Generally it takes many hands (usually outside counsel) and many hours/days to complete. AI can do this in a fraction of the time.”
~ Sterling Miller, CEO and Senior Counsel, Hilgers Graben PLLC
Ten Things: Artificial Intelligence – What Every Legal Department Really Needs to Know
What could be the key areas where AI could help in the due diligence process?
Well, for starters, it can help with compliance. Since AI excels in sifting through documents, it can identify compliance issues and potential risks quickly.
Also read: What is AI Contract Compliance?
Also, AI algorithms are capable of analyzing vast amounts of data rapidly. This speed and depth of analysis enable more informed decision-making. AI not only cuts down the labor-intensive work junior attorneys do but also enhances the quality and thoroughness of document analysis.
Here are some more ways in which due diligence with AI is better:
#1 Cuts document review time by 70%
AI's ability to process information rapidly translates to significant time savings. For instance, AI can reduce due diligence document review time by up to 70% on average. This can help you uncover critical provisions across thousands of documents in mere minutes.
#2 Has zero chance of human error (duh!)
Human error is inevitable. But AI can change that. You get more accurate and reliable outcomes with an AI due diligence process.
#3 Gives you some free space while cutting costs
“The ROI of AI will be heavily fact-dependent for each organization based on what AI tools the department wants to utilize, the amount of customization needed, the number of users, and so forth. But of course, over time, as adoption increases and Moore’s Law takes over, the power of AI will increase and the costs will come down, probably dramatically within the near future.”
~ Sterling Miller, CEO of Hilgers Graben PLLC
Ten Things: Artificial Intelligence – What Every Legal Department Really Needs to Know
The efficiency and accuracy of AI lead to substantial cost savings. Not only does it reduce the time spent on due diligence, but it also enables legal teams to conduct more accurate reviews at a reduced cost and in a shorter time frame.
#4 Pulls out important information quickly
AI's advanced analysis capabilities can uncover hidden insights that might otherwise go unnoticed. You can simply prepare a list of questions to ask AI after it has read or analyzed the document.
These questions could be, “What are the important numbers and cost figures from the document?” or “Can you find any anomalies in the document?”
6 Best practices for implementing AI in due diligence
Incorporating AI into the due diligence process can be a game-changer. However, to truly harness its potential, you must approach its implementation strategically.
Here’s how you can effectively integrate AI into your due diligence toolkit.
#1 Identify your AI objectives
This step involves understanding the specific challenges your team faces and how AI can address them. These could include:
#2 Choose a good AI due diligence tool
Find a solution that not only understands the intricacies of legal data but also fits seamlessly into your existing legal workflow.
- Seek AI tools that are specifically designed for legal applications. These tools should be adept at analyzing legal documents, understanding legal jargon, and identifying legal issues.
For example, an AI tool that can parse through and interpret the nuances in contracts, legal filings, and compliance documents is invaluable. Tools like SpotDraft AI are designed by legal experts to extract and analyze key information from contracts and legal documents.
SpotDraft AI can answer questions about batches of contracts in plain English, giving instant insights.
- The tool should have a user interface that is intuitive for legal professionals. It shouldn't require extensive technical knowledge to operate.
A good AI tool for legal teams is one where the learning curve is minimal, and the focus is more on leveraging the tool's capabilities rather than figuring out how to use it. A user-friendly dashboard that allows easy access to key features and data can significantly enhance efficiency.
SpotDraft has a minimalistic dashboard with everything important listed there. You can filter contracts, find the latest version, and even check what stage it’s in.
- Different M&A transactions involve a range of documents, from financial statements to employee contracts. The chosen AI tool should be versatile enough to handle various types of data and document formats, be it PDFs, word documents, or spreadsheets. Moreover, it should be capable of extracting data from these diverse sources accurately.
- The AI tool should easily integrate with your team’s current legal management software and databases. This integration is crucial for ensuring a smooth transition and continuous workflow.
For instance, if your team uses a particular CRM, the AI tool should be able to integrate with it, allowing for the seamless transfer and analysis of data.
SpotDraft offers compatibility with a wide range of software applications commonly used in business operations. Whether you're using CRM systems like Salesforce or HubSpot, project management tools like Jira and Slack, or electronic signature solutions like DocuSign or Adobe Sign, SpotDraft ensures smooth integration and seamless data exchange.
- Look for AI tools that offer customization options to tailor their functionality to your specific needs. The tool should also be scalable to accommodate the growing and changing needs of your legal department.
SpotDraft seamlessly scales to accommodate your business's growth at every stage. Try this end-to-end platform crafted to evolve with your needs. Request a demo!
- Given the sensitive nature of legal work, the AI tool must meet the highest standards of data security and comply with relevant data protection laws. Ensure the tool has robust security measures in place to protect confidential information.
SpotDraft is built with cutting-edge security and compliance in mind, ensuring that your sensitive data and contracts are always safe and secure.
- Consider the vendor's reputation in the market. Look for reviews or case studies that demonstrate the tool’s effectiveness in legal settings. Additionally, evaluate the level of support the vendor provides, such as training, customer service, and technical assistance.
“SpotDraft streamlines our workflows so we can focus on true legal requests, not the repetitive general requests that can be resolved via standard fallbacks and appropriate approvals. Everything simply works, the team is open to feedback, and the team is constantly improving the product!”
~ Taylor Smith | Contract Manager, PostScript
Read more of SpotDraft’s reviews here!
#3 Ensure high-quality data
AI tools rely heavily on the quality of data they process. High-quality data is the fuel that powers AI engines, enabling them to generate accurate and insightful outputs.
Here's a more detailed look at how you can ensure the quality of your data:
- Start with a thorough audit of your existing data. Review and verify the accuracy of the data in your repositories. Inaccurate or outdated data can lead to misleading AI analyses.
Consistency in how data is formatted and stored is also crucial. Ensure that all documents and data follow a uniform structure to facilitate easy processing by AI tools.
- Organize your data repositories for ease of access and navigation. This might involve categorizing data into specific folders or databases, such as contracts, financial records, legal documents, and correspondence.
- Perform data cleaning—remove duplicates, correct errors, and fill in missing values. Preprocessing may also include converting data into formats that are compatible with your AI tools, such as digitizing paper documents or converting files into machine-readable formats.
- Establish a routine for regular data maintenance. This includes updating data repositories with new information, removing obsolete files, and reorganizing data as necessary. Keeping your data fresh and relevant ensures that your AI tools have the latest information to work with.
- If your data is spread across different systems or platforms, consider integrating these systems. Data integration allows for a centralized view of all relevant information, making it easier for AI tools to access and analyze data from multiple sources.
- While focusing on data quality, don't overlook data privacy and security. Ensure that your data handling practices comply with all relevant data protection regulations, and implement robust security measures to safeguard sensitive information.
Note: To ensure safe use of AI in your organization, you could benefit from an AI use policy. Here’s how to create one.
#4 Integrate AI smoothly into existing systems
The AI tool you choose should integrate well with your current systems and software. This integration helps avoid disruptions and ensures your team can adapt to the new tool with minimal learning curve.
- Before selecting an AI tool, evaluate how well it will integrate with your existing legal management software, databases, and workflow tools. Like we said before, the AI solution should be compatible with the technologies you currently use.
- Engage your IT department or tech support team from the outset. Their technical expertise is invaluable in assessing the compatibility of the AI tool with your current systems and in managing the integration process. They can help identify potential technical issues and work on solutions to ensure a smooth transition.
- Rather than a full-scale rollout, consider a phased approach to integration. Start with a pilot program or a specific department before expanding to the entire legal team. This approach allows you to iron out any kinks and make necessary adjustments before a full-scale deployment.
- Keep the lines of communication open with your legal team and IT support throughout the integration process. Regular updates and open discussions about the integration progress can help manage expectations and address any concerns promptly.
#5 Train your team
Provide training sessions for your team to get comfortable with the new AI tools. Understanding how to use these tools and interpret their output is crucial for leveraging their full potential in due diligence processes.
- Develop training sessions that are tailored to the specific AI tools you are implementing and the roles of the team members using them. For instance, in-house counsel might need in-depth training on interpreting AI-generated analyses of legal documents, while administrative staff may require basic training on data input and retrieval.
- Often, AI tool vendors offer training programs as part of their service. Take advantage of these resources. Vendor-led training can provide comprehensive insights into the tool’s features and best practices for its use.
- Different team members may use the AI tool in different ways. Create role-specific training modules that address the unique needs and usage scenarios of various team members. For example, senior attorneys might focus on using AI for strategic insights, whereas paralegals might use it for document organization and retrieval.
- Develop a repository of training resources, such as guides, FAQs, tutorial videos, and best practice documents. Make these resources easily accessible for team members to refer to as needed.
- Encourage your team to explore and experiment with the AI tools beyond the basic functionalities. This exploration can lead to discovering innovative ways to use the tools that are specific to your team’s needs.
#6 Adhere to ethical AI use guidelines:
Use AI tools ethically. This means being transparent about how AI is being used in your processes and ensuring that the AI does not introduce biases or inaccuracies.
- Be open about how AI is being utilized in your processes. Inform relevant stakeholders, including clients, about the role of AI in your due diligence efforts. Transparency helps build trust and demonstrates your commitment to ethical practices.
- AI systems can sometimes reflect or amplify biases present in their training data. Actively work to identify and mitigate any potential biases in your AI tools. This might involve reviewing the data sets used for training the AI and ensuring they are diverse and representative. Regular audits of AI outputs for potential biases are also crucial.
- While AI can provide valuable insights and recommendations, final decisions should always be made by human legal professionals. Ensure that your team understands that AI tools are there to assist, not replace, their judgment and expertise.
“AI can be a tool in your toolbox that can help support decision making, but it shouldn't make the decisions.“
~ Cory Lamz, VP Legal, Buoy Health
Building relationships with a problem-solving mindset
- Provide training to your team on ethical considerations in using AI. This includes understanding the limitations of AI, recognizing when and how to question AI outputs, and being aware of the potential legal and ethical implications of relying on AI.
- Keep detailed records of how AI tools are used in your due diligence processes. This documentation can be crucial for accountability and in case any ethical or legal questions arise regarding AI use.
Also read: 6 steps to write a generative AI use policy
Embracing the future with AI-enhanced due diligence
The integration of Artificial Intelligence (AI) in legal due diligence marks a significant leap forward. AI brings a new level of efficiency and insight, transforming the traditionally arduous due diligence process into a faster, more precise, and insightful practice.
As we look to the future, AI's role in legal due diligence is set to expand, becoming an integral part of legal teams’ toolkits. For legal professionals ready to embrace this change and lead the way in technological adoption, exploring AI solutions like SpotDraft AI is a step towards the future.
SpotDraft AI offers the advanced capabilities and user-friendly experience that you need to stay ahead in the evolving landscape of legal due diligence. Try SpotDraft AI and be a part of this transformative journey.