What is AI in Contract Management & How It Prevents Costly Mistakes?

Contract management is often perceived as a mundane task, involving the meticulous process of drafting, negotiating, reviewing, and approving documents. While artificial intelligence (AI) was once a futuristic concept, it has now become integral to various processes, including contract management. In fact, around 50% of companies anticipate AI will significantly enhance contract management efficiency in the next 2-3 years. This article delves into how AI is revolutionizing contract management.

What is AI in Contract Management?

AI in contract management leverages AI technologies to streamline and optimize the contract lifecycle management (CLM) process. By employing machine learning and natural language processing (NLP), AI automates tasks, enhances productivity, and mitigates risks associated with contract administration. Solutions like Cenza, Contract Works, Contracts 365, Contract Logix, and Gatekeeper exemplify AI-driven contract management tools.

These tools enable contract specialists to swiftly and accurately extract and analyze data from contracts. They can identify contract types, extract and categorize terms and clauses, and map them to existing templates. Additionally, they provide insights into contract renewal frequencies, negotiation durations, and approval processes.

Six Benefits of Using AI in Contract Management

1. Automated Compliance: Managing compliance manually can be challenging, especially with evolving regulations. AI streamlines compliance functions, aiding in risk management and ensuring sensitive contract information is encrypted and protected.
2. Faster Contract Cycle Times: AI-driven contract analysis reduces the time required for the entire document lifecycle, from drafting to review. This increases efficiency and eliminates errors.
3. Cost Reduction: Mistakes can be costly. AI-powered contract management minimizes errors, thereby reducing associated costs.
4. Management of Large Datasets: AI-based CLM tools analyze large datasets to identify patterns, detect anomalies, and optimize business processes.
5. Reduction of Repetitive Tasks: AI tools handle cyclical contract development tasks, including retrieving information, thereby minimizing repetitive work.
6. Financial Optimization: AI enhances workflow efficiency, allowing teams to focus on relevant agreements and expedite payments.

How Does AI Improve Contract Management Processes?

AI enhances contract management through several mechanisms:

• Automated Contract Analysis: Utilizing NLP, AI-powered systems accurately interpret contractual terms and clauses, expediting and improving contract reviews.
• Contract Consolidation: AI automates repetitive tasks and workflows, identifying contract types, extracting terms, and pointing to templates, thus enhancing efficiency.
• Improved Risk Management: AI scrutinizes legal language in contracts to identify potential risks, ensuring compliance and reducing errors or omissions.
• Enhanced Collaboration: AI tools facilitate better interaction between service providers and clients by creating a centralized platform for communication, document sharing, and task delegation.
• Efficient Contract Assembly: AI systems automate contract generation by extracting essential details and constructing comprehensive contract records, streamlining the assembly process.
• Pattern Recognition: AI identifies critical terms such as performance, renewal rates, negotiation durations, and approval procedures, aiding in strategic decision-making.
• Increased Speed and Efficiency: AI automates repetitive tasks, improving speed and efficiency, allowing legal professionals to focus on strategic issues rather than routine data entry.

Can You Trust AI in Contract Management?

Yes, AI can be trusted in contract management. AI-powered systems are proven to be efficient and accurate in automating manual tasks like contract analysis and data extraction. However, AI should be seen as a supplementary tool rather than a standalone solution. While some firms market their services as AI-driven, human expertise remains crucial for providing context-specific advice that AI cannot offer. AI primarily acts as a text parser, scanning contracts for predefined terms and offering guidance based on rules set by legal professionals.

Disadvantages of Using AI in Contract Management

• Contextual Understanding Limitations: AI may struggle to fully grasp the context and interpret complex legal language accurately, potentially leading to errors or omissions.
• Lack of Legal Advice: AI tools cannot offer legal advice. Human oversight is necessary to ensure the legality and appropriateness of contract terms.
• Dependency on Data Quality: The reliability of AI systems depends on the quality of the data they are trained on. Biases or inaccuracies in the data can affect AI performance, necessitating regular data maintenance and validation.
• Cost and Accessibility: AI systems can be expensive, with costs including licensing fees, implementation, and ongoing maintenance, potentially limiting their accessibility for smaller organizations.
• Ethical Considerations: Implementing AI in contract management raises ethical concerns regarding data security and privacy. Organizations must ensure the protection of sensitive information and comply with relevant laws and regulations.

Conclusion

AI in contract management offers significant benefits, including supplier search, negotiation, strategic planning, and risk management. However, while AI enhances the efficiency and effectiveness of contract administration, it cannot replace human involvement entirely. AI serves as a powerful tool to support human efforts, ensuring more accurate and efficient contract management.