September 2020SHARE
September 2020
SHARE

Summary

Every business deals with multiple contracts and disputes related to contracts often end up as litigation. The key issue in contract management lies in the ability to identify leakages and risks by finding relevant information on demand, in an easy to use manner. Most organizations have adopted one of the top Contract Lifecycle Management tools, but they often fall short on expectations and fail to impart intelligence in the process. This is where AI capabilities, including Computer Vision, Natural Language Processing(NLP), and Deep Learning come in to unlock value across the contract lifecycle. Read the article to know how your organization can make contract lifecycle more intelligent.

Managing contracts is a critical aspect of any business. According to studies, poor contract lifecycle management (CLM) can cost businesses as much as 9% of their revenuesi and 5-15%ii of the contract’s overall value . Contract related disputes often end up as litigation, eating up one-third of corporate profits in the US alone. The key issue in contract management lies in the ability to identify leakages and risks by finding relevant information on demand, in an easy to use manner. Corporate contracts may run into tens to hundreds of pages and on an average an enterprise has around 40,000iii active contracts . As legal teams battle with increasing complexity of contracts and the need to proactively manage them through the contract lifecycle, the usual suspects in digital CLM are falling short on expectations.

Most organizations today have adopted one of the top CLM tools in order to acquire key capabilities like creating online contract repositories, monitoring contract status, and managing contract requests from business (See Fig. 1). However, most of these tools are at best used as contract repositories with little to no intelligence from contracts available for decision making and unlocking value from these contracts.

Fig 1. Adoption of contract automation – Source: IACCM 2019 Benchmark Survey

Run of the mill CLM tools lack intelligence

While all CLM tools offer workflow to manage a contract, they lack the intelligence required to:

Every contract has value associated with it. But most organizations are unable to use this information as the CLM acts as a mere repository of legal version of the contract. It is unable to operationalize the same by digitizing this legal version of the contract. This leads to multiple challenges downstream including disputes in case of overbilling or incorrect billing or missed opportunities on account of under billing or excess discounts.

By failing to prevent billing disputes & compliance checks, regular CLM tools are unable to reduce the time and effort spent by the business operations team and the number of cases that require reading contracts and legal support.

It’s not easy to find all contracts that are impacted by a new/updated regulatory compliance. The CLM tools do not have the ability to create a contract hierarchy to find latest commercial and legal terms from any contract which is very important to understand the impact of regulatory compliance on a contract.

Regular CLM tools cannot provide insights – with data digitized from contract and/or other similar documents and integrated across systems – that could help a company create new business models or find areas for savings or revenue uplift by co-relating contracts of similar customers.

Stay in the know: Do you have the power of right information?

Every organization has a process to evaluate current contracts for current value, risk, completeness etc. Before someone decides they should renew a contract they need to know everything about the current contract. Therefore, even before a contract is drafted, there is need for a deep dive into the existing information. This research can be time consuming, but if not done right, it can leave a lot of risk on the table, even to the extent of disrupting the organization’s business.

Unfortunately, present CLM tools are inefficient and lack intelligent search capabilities that can help finding information using natural language queries. So, if a company wanted to check how events like GDPR, Tax Law changes, and Force Majeure are impacting them, they would need to use up a lot of legal bandwidth to identify the impact. For instance, the CLM tools would not be able to show them all contracts where a force majeure contract is available and whether it offers pandemic coverage. Without reading the document, they would not know if there is provision for a termination for convenience and if so, what is the notice period. They would be hard pressed to find out what are the other performance criteria that get triggered

Time is money: Is your contracting process agile and efficient?

Once a contract request is received, the actual contract creation goes through multiple stages – drafting, negotiation, approval and signatures, and storage. This process, starting from the drafting stage, is suboptimal in most companies.

CLM tools typically provide templates that can be used to draft the initial contract versions. However, there is a possibility that users pick up incorrect or obsolete templates and insert irrelevant or old clauses in the contract. In absence of a set of legal mandates in the tool, the legal team has to review every contract. This makes the process time consuming and can take weeks and sometimes months to finish.
Even after the contract is drafted and sent to the other party, there is much to be done manually in the negotiation phase. For example, if a supplier changes a clause, or the value of a liability, or if they remove some section of the coverage, or change payment terms that impact cash flow then the current tools can’t tell you whether the change is positive or negative for the organization. Also, they can’t identify what’s the risk, the change brings in whether it is an acceptable risk. This means that when a redline comes back, the legal team must review the entire document again and this adds time to the contracting lifecycle
Once negotiations are complete; the contract needs to be signed. In contracts that run into 50-100 pages, checking that all signatures are done correctly and in the appropriate places is also a task. The signed contract is uploaded in the CLM tool usually as an image or PDF file and contract metadata extraction is done manually. This process is rife with inaccuracies and contract search suffers due to incomplete details and incorrect versioning.

Stay compliant: Is your ERP in sync with your CLM tool?

Once a contract is signed, business needs to ensure compliance with the terms. Most organizations have two versions of a contract – a legal one in the CLM tool and an operational one in the billing and procurement or ERP systems. More often than not, these contracts are out of sync, creating non-compliance issues that impact reputation, relationships, experience, and loss of business.

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Unlock value across the contract lifecycle with Artificial Intelligence (AI) for Contract Analysis

AI in Contract Analysis enables intelligence across the contract lifecycle management and helps users make contract data-based decisions or work based on information in contracts. AI capabilities, including Computer Vision, Natural Language Processing (NLP) and Deep Learning helps locate specific information based on complex criteria from lengthy documents and isolates it for users to monitor, review and update. Organizations have transformed their entire Contract Lifecycle processes by leveraging AI in Contracts Analysis:

  • One of the world’s largest telecom company has successfully leveraged AI to unlock millions of dollars in savings from their lease contracts by getting intelligence on key clauses like the rent reduction and capital refund.
  • A large banking organization is successfully leveraging AI for Contract Review Automation, helping them reduce turn-around time for reviews by 90%.
  • A multinational Hi-Tech conglomerate’s procurement team with 5000 buyers globally is using AI for Contract Analysis to identify non-standard language and reducing risk to their organization’s supply chain.

AI helps unlock value, minimize risk and increase compliance across the contract lifecycle See Fig. 2

Fig 1: The building blocks of a document extraction, processing and comprehension solution

Few of the powerful AI use cases in Contract Analysis across the contract lifecycle stages are as follows:

AI can rapidly digitize all contract clauses and metadata values. Then it can help enable intelligent and comprehensive search using natural language, making it very easy for users to find such information.

E.g., In the current scenario, almost all organizations are looking to reduce the impact of COVID on their supply chain. However, to even assess the impact, organizations need to find which contracts have pandemic coverage. AI can help in this scenario by providing a search that can identify impacted contracts.

AI can help in reviewing all contract documents and highlighting risks in a clause. This feature is unique as it keeps the legal review process agile and highly effective. Moreover, the risk parameters can align with the organization’s legal guidelines. This is highly effective in scenarios where legal does the MSA review, and SOW linked to the MSA is generally not reviewed by legal, which brings unwanted risk for the organization.
AI can help build contract hierarchy post-execution, which helps in the identification of the latest values from a contract. This metadata can then be extracted and updated in underlying operational systems like ERPs and billing systems to ensure that operational and legal versions of the contract are in sync, ensuring Contract Compliance in the organization.

There are multiple other AI use cases for Contracts Analysis like:

  • Simplifying contract signatures by marking areas that need to be signed, and checking if all required sections have been signed.
  • Track contracts that are coming up for renewals and providing an opportunity for teams to avail of any discounts associated with timely renewals.
  • Post-merger integration is another area where AI can help. By extracting metadata from the contract like total value, liability and indemnity, and linking it to the operational data, an organization can quickly find about the health of the acquired company. It can help understand the supplier, customer and regulatory obligations of the acquired company and highlight synergies and discords in contract clauses to reach business-as-usual quickly.

Not all AI for Contract Analysis are created equal

Just like every business is unique, all AI solutions that claim to add intelligence to Contract Analysis are not the same. Any organization that wants to evaluate such solutions should look at the following key criteria:

  • Accuracy of Model Output
  • Processing speed and speed for retraining
  • Experience of handling enterprise scale data
  • Built on advanced enterprise grade AI platform
  • Domain/Industry Agnostic
  • Supported by expert Legal AI team that takes bottom line on the output
Infosys Nia Contracts Analysis is an AI product to help organizations get contract visibility, automate contract reviews, reduce legal risk, increase contract compliance, and unlock business value locked in their contracts in a rapid manner.

It integrates with existing CLM systems and contract repositories and enables intelligence across the contract lifecycle management, thus helping users make contract data-based decisions or work based on contracts. It extracts and digitizes the contract data, enables multiple use cases like intelligent search, and enables organizations to build consumption use cases and analytics for business. Nia Contracts Analysis also brings together a comprehensive learning methodology along with the unique concept of a Parallel Neural Pathway- that helps AI to understand documents like humans while using humans in the loop for strategic work. With its cutting edge AI, Nia Contracts Analysis has delivered excellent business benefits to customers within the first few months and has replaced top vendors in this space. Its value proposition goes beyond just productivity to actual measurable business benefits by minimizing leakages.

Weather storms with a resilient contract management process

This has been a time of uncertainty and unprecedented change. In just a few years, we have seen high impact events like Brexit, LIBOR transition, new lease accounting rules, CCPA, GDPR, and Force Majeure invocation due to COVID-19. Navigating through reams of legal contracts every time an unanticipated change happens can be taxing – both in terms of effort and cost – and risky. For example, many companies are now finding out that they cannot invoke Force Majeure because their contracts do not have the clause for pandemics covered in it. Arriving at these insights and taking quick – and sometimes preventive – action can help minimize contractual impact.

Turbulence is the new truth of the business landscape. Business leaders must re-look at contract management and invest in technologies like AI and automation to navigate a whitewater world. Getting intelligent contract management in place would be key to identify opportunities for cost cutting and revenue protection – something that will be key for survival in the post-COVID world.