Does the review and analysis process of your contracts cause delays in your business operations? Are your legal experts spending a significant portion of their time on repetitive manual work related to contracts review? Then, you are not the only one. Today, contract analysis has become a nightmare for many organizations. Some of them have been approaching contract analysis manually through a team of lawyers. Others have adopted a semi-automatic approach of supplementing their legal workforce with their home-grown software programs or leveraging a third-party software tool to assist. Most of these traditional solutions to address the underlying challenges have proved to be ineffective and inhibit business agility.
Enterprises are grappling with a multitude of challenges pertaining to contract analysis and review. Some of these are as follows:
- Large turnaround time: A typical contract review process is effort-intensive. It takes a long time and multiple iterations for a lawyer to review the contract, page by page, section by section, before he or she can distil out the key clauses and their elements (entities). When the lawyer reviews similar contracts in the future, the turnaround time does not reduce significantly since the clauses and entities are different for different contracts.
- High legal fees: Good lawyers are in short supply and charge high legal fees for reviewing contracts, thereby increasing the operation cost.
- Human errors: Manual Contract analysis and review by lawyers are prone to oversight and human errors.
- Large contracts: A contract can span hundreds or even thousands of pages. Even for highly experienced lawyers, going through such large contracts manually is time-consuming.
- Large contract-volumes: Large volumes or sudden surge in volumes of contracts can make it non-viable for the fixed-capacity team of legal experts to cope with. Some organizations have millions of backlog contracts, waiting to be processed. Conventional contract analysis applications are not equipped to scale to handle such surging volumes.
- Unstructured bespoke contracts: Contracts between two parties often need to be customized to reflect the specific context, terms and conditions between the concerned parties. Modelling, interpreting and tracking such custom-contracts become all the more challenging. Here, the one-size-fits-all approach does not work. Legal reviewers take more time to understand such custom contracts as they cannot apply their pre-knowledge of standardized contracts to bespoke contracts. Also, traditional templates and rule-based applications struggle in these cases.
- Complexity of contracts: Contracts can be complex due to various reasons.
- Structural complexity: A contract is usually in natural language and unstructured text. It can have several sections, sub-sections, paragraphs, logos, and an aggregate of different types of clauses, elements, complex tables and more.
- Multiple parties: The parent organization can enter into several contracts with different parties. For example, there can be multiple vendors and associated vendor-contracts. This adds to the complexity of addressing them through lawyers.
- Multi-lingual and region based: Contracts are often in different languages and need to be interpreted and correlated semantically. A lawyer is usually not proficient in multiple languages.
- Several versions and amendments: A contract between the enterprise and its contracting parties can undergo several subsequent amendments. For example, an enterprise can have different procurement contracts for different vendors with multiple sets of amendments for each vendor-contract. There is a practical need to track and analyse the changes between the clauses and elements of the master agreement and the corresponding ones of the subsequent amendments. Addressing these manually is indeed a nightmare, prone to errors and not scalable. Here, traditional software solutions are ineffective and lack accuracy.
- Tracking contract risks: A key objective of Contract Analysis is to identify the risks within the contract and its associated amendments and linked artefacts. For instance, risks can be in the form of missing mandatory clauses, changes beyond a permissible threshold (for e.g., rent in the amendment actually increased by 10% whereas the master contract provided a guideline of 8% increase) and more. It is imperative to promptly identify and act on the risks to avoid financial loss and non-compliance.
- Compliance challenges: Organizations often incur significant financial losses and non-compliance by not taking timely action on key contract-elements such as delivery date or payment milestone. A contract often has several entities, each needing unique tracking mechanisms from time to time. Addressing these manually or through traditional software is fraught with pitfalls.
What is the solution to this nightmare?
Leveraging only lawyers in contract analysis is clearly time consuming, expensive, error-prone and not scalable. Traditional software tools have attempted to automate or semi-automate contract analysis by using templates, rules and conventional programming techniques. They suffer from limitations such as low accuracy, not being adaptable to handle bespoke contracts, inability to learn from reviewer corrections, inability to accurately extract from complex tables, inability to cope with surging volumes and more.
What we need is an effective Artificial Intelligence (AI) based contract analysis tool, which can be trained quickly to subsequently automate extraction of the contract elements, learn from reviewer corrections, scale dynamically and more. To learn more about how enterprises can realize value out of AI based contract analysis tools, keep watching this space.
Product Line Manager, InfosysMore blogs from Santanu Saha >