Depending on its size, age and industry sector, an organisation can have hundreds to hundreds of thousands of active contracts. Managing these contracts can be a real challenge, even when a Contract Lifecycle Management system (CLM) is in place.
An enormous amount of critical and useful information is buried in these contracts and their associated documents. That’s because contract documents consist of generally unstructured data that may use the same words for different things and different words for the same thing from one contract to the next.
Writing style, grammar, terminology, layout and punctuation can seriously affect understanding through ambiguity, complexity and uncertainty.
Until relatively recently, if you wanted to include anything more than just the key information in the CLM record, it had to be physically located in contract documents - a slow and tedious process.
The value of the buried information has long been recognised though, and several technologies developed to discover and extract various elements of that information. However, the sheer variety of contract content to be dealt with means this challenge is ongoing.
However, breakthrough technologies have been invented and made viable by the phenomenal increase in available computing power over the last decade or so.
Help is at hand now. It comes in the form of the ever-expanding capabilities of Contract Analysis.
In this article, we’ll describe:
- What Contract Analysis is
- Typical Contract Analysis capabilities and dependencies
- How Contract Analysis delivers value
What is Contract Analysis?
Contract Analysis is the automated, AI-enhanced discovery and classification of information deeply embedded in contract documents, plus its extraction and storage for on-demand availability. It can be implemented as either an integral component of, or a standalone system that can be tightly integrated with, a Contract Management System.
Deriving consistent meaning from similar but different word usage, writing styles and sentence structures allows classification of contract text into recognisable categories with understandable values.
Typical Contract Analysis capabilities and dependencies
The ‘what’ that Contract Analysis delivers is much more relevant and interesting than how it does it.
The capabilities generally available in a Contract Analysis tool today might include:
- Discover key contract metadata values and clause types. Save these details to prevent having to reanalyse a contract if it hasn’t been changed since its previous analysis
- Uncover the inherent risks in a contract through the detection of clauses that:
- are absent when they are preferred or required to be present, and vice versa
- deviate significantly from the organisation’s preferred positions
- deviate from a third party’s previously agreed position
- Collect statistics showing acceptance and rejection frequencies of preferred clause settings, rejection of required clauses and acceptance of forbidden clauses, the number of contracts analysed, and the time taken for each analysis run
- Simplify and accelerate:
- contract review, by marking up the contract document to show all key information and issues discovered
- contract negotiation, by showing proposed clause settings against preferred or previously agreed settings
- contract search, by accessing the previously saved contract information
Many Contract Analysis capabilities can only be used if the organisation has other capabilities, technologies and processes in place, such as:
- A centralised and searchable electronic contract documents repository, allowing discovery of features and attributes of a contract or group of contracts, showing all contracts matching the search parameters
- A database capable of storing all data extracted from each contract, allowing a high-performance search capability
- A contract clause library, showing preferred, alternative and fallback clause settings, allowing comparison against the settings of a clause of interest for deviation analysis and risk assessment
- Tight, secure, high-availability and high-performance integration with any desired third-party tools or systems, whether in-house or external, such as an online contract negotiation workbench
- Contract Analysis success metrics and measurement methods, allowing training and tuning of the capability.
How Contract Analysis delivers value
There are typically two different use cases for Contract Analysis:
1. Contract development, management and maintenance
Although many business functions may be involved in this area, Legal and Contract Management are usually the main players.
The most common ways that they can receive value from the use of Contract Analysis include:
- More accurate, broad, consistent, in-depth, insightful, rapid and standardised contract review than people can achieve, via the highlighting of all desired details or situations in the contract document, plus the extraction and storage of key contracts metadata. Particularly useful when reviewing contracts in bulk, say during due diligence for a potential business acquisition, or when reviewing a potential supplier’s standard contract during the supplier selection process.
- Shorter contract negotiation time, via online or offline comparison of supplier-proposed clause settings against the organisation’s preferences or as previously agreed with the supplier in existing contracts.
- Detection of areas of increased risk and opportunities to review preferred clauses and settings that are often challenged in order to improve their commercial acceptability, and to identify inconsistent or risky terms across a supplier’s contracts.
- High visibility of major regulatory and commercial obligations and rights across all active contracts.
- Discovery of new clause types not currently contained in the contract clause library that could be worthwhile additions.
- Identification of reasons behind any failure to reach agreement on a contract with a third party, in terms of clause presence or absence, acceptability of clause settings, the duration of the negotiations, or other factors, plus any trends.
- More comprehensive search functionality, within a contract or across contracts. This is particularly helpful when the organisation’s contract clause standards need to be changed, requiring the change to be applied to all contracts containing the affected clauses.
- The opportunity for more of the less important contracts being included in elements of Contract Lifecycle Management than might be currently possible or practical.
- The ability to react quickly and accurately to senior management requests for specific information about the organisation’s contract inventory, such as the number and value of contracts with or without a Force Majeure clause.
- Relief from many of the tedious and labour-intensive manual processes needed when Contract Analysis is not available, allowing minimisation of bottlenecks and a focus on higher value-add work.
2. Contract operation
Depending on the relevance of a contract to its purpose and activities, any business function can be involved in the operation of a contract. This can be as an owner, a manager, a user, an examiner, an assessor or some other type of stakeholder.
The key benefits delivered by Contract Analysis to owners and users of an organisation’s contracts can include:
- A measure of independence from Legal in terms of self-service, on-demand access to contract details. This can be facilitated by a dedicated employee portal.
- Improved accessibility to contract data via the enhanced capabilities of the contract search function within a contract and across contracts, and the in-place highlighting of key details in contract documents
- More effective contract-related workload planning through increased awareness of applicable compliance obligations and date-driven contract events
- Increased understanding of the ongoing relevance and efficacy of manual and automated processes specific to a contract.
Contract Analysis is an extremely useful tool that can augment the power of a CLM. It can deliver significant time savings, enhance contract content visibility, improve clarity on contract risk potential, facilitate higher obligations compliance levels, and increase awareness of key contract dates.
It helps to streamline the contracting process, and that has a positive effect on throughput, which reduces the time-to-contract.
It simplifies the ongoing use, management and policing of contracts, by reducing the barriers to contract data access, which allows for more informed business decisions, including responses to changes in the business and regulatory environments.
It also institutionalises contract knowledge, making it part of organisational memory, which reduces reliance on people’s memories and the risk of the loss of that knowledge when those people are temporarily or permanently unavailable.
However, Contract Analysis cannot do all the work and solve every problem, and it would be unrealistic to have such an expectation. Its capabilities can be expected to grow over time, and that might involve nurturing by people in respect of the particular nuances of the organisation’s industry, accepted practices and contract types.
Once operational, it would be prudent to periodically use human judgement to validate how well the Contract Analysis capability is working.
You never know, people might even learn something new and beneficial during the process.
If you would like more information about how Gatekeeper can assist with your contract management activities, then contact us today.