What is Contract AI?

And how can you use it automate contract reviews?

Photo by Romain Dancre on Unsplash

Introduction

A crucial aspect of the business is contract management. The American National Association of Purchasing Managers estimates that the turnover of thousands of the largest corporations in the world involves between 20 and 40 thousand contracts annually. 10% of contracts are still maintained in paper form, which makes them challenging to work with and vulnerable to lose. According to studies, ineffective contract work can cost a company anywhere between 5% and 40% of the whole transaction cost.

Currently, more and more businesses are using specialized software to automate contract work. Furthermore, during the next five years, businesses will increasingly adopt artificial intelligence-based solutions to automate contractual operations. As an illustration, the US and EU have already invested $3 billion in the implementation of LegalTech solutions based on AI. AI, according to experts, will be the technology that transforms the legal sector.

How does a traditional contract work?

Assume you work for a big IT company with a startling number of procurement contracts, each with a different renewal date and renegotiation clause. The majority of firms use a manual procedure for employees to process paperwork. Objectively speaking, this would take a team of contract managers hundreds of hours to not only analyze them all but also figure out how to efficiently track all the data to make sure that no renewals or opportunities are missed. As business policies and legal requirements change, the number of information professionals must work with grows yearly. Do you have the necessary time, money, or resources? Most likely not. Even the traditional contracting process has its pros and cons.

Image from: https://tallyfy.com

What is Contract AI?

Nowadays, medium and large corporations use AI technology widely. We must have a clear understanding of what contract AI is in order to drive value and compete with it. Contract management is being advanced through the use of artificial intelligence. Now, manual inputs and sifting through extensive email threads are things of the past.

There are various technical definitions of "contract AI," but according to one, "contract AI converts the unstructured textual data found in contracts into structured information. It applies text-based machine learning to contracts and makes use of both algorithms and rules-based text searches instead of delving into the voluminous scholarly literature on the mathematical and technical foundations of contract AI.”

AI contracting software typically uses algorithms that have been taught to spot specific contract patterns and behaviors and convert unstructured data into structured data. Natural Language Processing is the name given to this process.

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AI Contract Lifecycle

The three main categories that make up the role of artificial intelligence in the life cycle path to adopt AI are in the order shown below.

1. Contract data extraction from active contracts, using machine learning
2. AI-powered assistance during Authoring
3. AI-based obligations Management

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If a contract lifecycle management (CLM) system is built-in with contract review AI, it will reduce the time-consuming tasks of manually reviewing contracts. The fundamental steps in the AI contract review process are as follows:

1. The CLM solution receives the contract and transforms your unstructured data into structured, searchable data.
2. The AI recognizes clauses and compares them to the clauses you’ve previously established to find any risky or unidentified clauses that require your attention.
3. You can accept, modify, revise, or reject the AI’s ideas.

Different Types of AI Contract Software?

Understanding what AI contracting platforms are available and how they can be useful is crucial since contract AI software is a vast category of AI-powered contract solutions. Two major subcategories of contract artificial intelligence software are mentioned below.

1. Contract drafting software — AI-powered contract writing applications typically support the contract creation process by automatically substituting certain terms with pre-approved wording and suggesting revisions.
2. Contract review software — NLP is typically used by AI contract review software to rapidly and effectively identify, extract, and review contracts. This reduces a significant reliance on human review processes.

Advantages of Using Contract AI

As per this post published inMarketing Technology News, there are various advantages to companies if they adopt contract AI features and software related to it.

1. Can Handle High Volume of Contracts — Since it is designed to do volume-driven analysis, contract AI performs best when managing a large number of contracts. Since the software makes it possible for these to be examined swiftly and at scale, large and growing volumes of contracts are one of the most often used applications of contract AI.
2. Reduce Contract Drafting/Review time — As compared to manual review, contract AI tools can cut down on the time needed. It’s because they look for dangers and opportunities in particular conditions and alert the contract owner to them. The legal teams can expedite legal review as a result. The majority of AI-powered AI contract tools will have this feature.
3. Minimizes Error — Contract AI can reduce the chance of human error because the algorithms won’t repeat mistakes that humans occasionally make as a result of fatigue or bias.

Disadvantages of using contract AI

1. Expensive — Contract AI software is expensive which makes it unaffordable for many startups and small to medium size companies. The high price is due to AI being incredibly expensive to develop and train.
2. Not completely reliable — Contract AI is definitely not 100% accurate. There is tremendous risk associated with creating, analyzing, and signing legally binding contracts, using AI contract software. Therefore, it is frequently preferable to invest in contracting software that minimizes the administrative work required in contract review and negotiation rather than fully eliminating the need for human review.

Conclusion

In the end, we can say that contract AI is a fantastic choice for legal teams looking to automate the process of thoroughly analyzing their contracts. It’s a sophisticated solution that excels in particular situations.

However, contract automation is what you need if you’re searching for a more comprehensive solution that eliminates bottlenecks from the contract collaboration process, automates low-value contract admin, and enables users to manage contracts in a single location from start to finish.

We have discussed the role that AI technology plays in contract management in this article. Also covered in detail are how non-automated contract processes work, how AI-based solutions support contract processes, and the benefits of AI solutions.

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