Contract Analytics: How to Turn Contracts into Information

Data drives today’s businesses. All the contracts you create generate a wealth of data that can make future contracts less risky and more profitable. The challenge is accessing and analyzing that data in a way that improves your decision-making process.

To gain more sophisticated insight into your contract process, you need to turn those raw contracts into actionable information. This is done via the use of contract analytics – a process that helps you negotiate and create more effective contracts, more efficiently.

What Contract Analytics Is – and Why It’s Important

According to Cambridge Network, contract analytics is the collection and study of contract data to determine ways to increase efficiencies and improve the contract process. It’s an advanced analysis of the data contained in a company’s contracts, with the goal of creating stronger and more profitable contracts in the future.

Contract analytics is more than just the reporting of raw data or the conversion of that data into pretty tables and graphs. Contract analytics goes beyond simple reporting into a detailed analysis of contract data – and the conversion of that data into actionable information.

Companies employ contract analytics to help them develop a more efficient contract process, create contracts that are more solid and beneficial to the company, and reduce the risks inherent in the contract process. Contract analytics can also help improve the efficiency of the contract negotiation, creation, and approval process, as well as ensure more consistent compliance with the contract terms.

How AI Impacts Contract Analytics

Modern contract analytics is driven by artificial intelligence (AI) technology. AI has the potential to take contract analytics to a new level – both in terms of what can be analyzed and the insights revealed.

It all starts by using Natural Language Processing (NLP) and Optical Character Recognition (OCR) technologies to quickly and accurately input large amounts of data stored in PDF, Microsoft Word, and other types of digital files. NLP is especially useful in this process, extracting context and meaning from raw text data.

AI-powered algorithms identify and extract key metadata for terms, clauses, provisions, dates, and the like. This includes finding similar content that might be worded differently in other contracts. The information is then made fully searchable for future use.

More importantly, AI technology can analyze the data and use it to provide actionable insights into the contract process. The AI system can identify elements that are likely to contribute to friction with suppliers, and then recommend ways to reduce that friction. Similarly, AI can identify risky elements and help to reduce that risk.

It’s more than just presenting statistics and trends. AI helps to improve your entire contract process – which is why 37 percent of legal professionals who participated in a recent survey by Ari Kaplan Advisors said that they’re currently using AI in their contract process.

How to Turn Contract Data into Actionable Information

AI helps to turn raw contract data into actionable information that can help drive key decisions. The insights gained from deploying artificial intelligence in contracting operations can smooth negotiations, speed up the entire contract process, reduce your company’s risk, and improve the entire contract process.

Here are just a few of the ways you can use AI-powered contract analysis to improve your business.

Improve Contract Workflow

In a normal business environment, it’s difficult to determine the status of any given contract. You have to sort through emails and messages and conference calls just to find out who has what, and when the next steps will happen. AI-powered contract lifecycle management (CLM) solutions can gather and analyze all that information and present it visually in an interactive onscreen report or dashboard. You can see at a glance where a contract is in the workflow process, and what steps need to come next.

This type of workflow analysis also lets you spot trends and identify bottlenecks in the process. You can easily see where contracts are getting stuck and have the system recommend ways to improve workflow efficiency. Speeding things up may be as simple as identifying one overworked individual, or you may need to overhaul your entire system.

Reduce Risk

Risk is part and parcel of any contract negotiation and implementation. Are the negotiated terms profitable? Will the other party deliver as contracted? Did you comply with all necessary legal and industry rules and regulations? Does the contract have fee increases or automatic renewals baked into the language? Can you uphold your end of the contract? What is your potential liability?

McKinsey says that contract risk can cost a company up to 9 percent of its annual revenues. Can you afford to lose that much off the top every year – or would you like to gain back that lost revenue?

The key to reducing contract risk is obtaining and using the right information. This is where contract analytics comes in. AI-powered analytics learns from past contracts – the good ones and the mistakes – to identify potential areas of risk. It looks for nebulous language that can become problematic in the future. It identifies clauses and provisions that expose you to unnecessary risk. It even analyzes the pros and cons of specific terms to provide a detailed risk analysis – and recommends changes to reduce the risk.

Improve Relationships

Finally, contract analytics provides the information you need to reduce the friction in your relationships with suppliers and other partners. By analyzing the results of past contract negotiations, an AI-based system can identify potential points of contention in advance and recommend solutions that are likely to be amenable to both parties. The system can also suggest terms that satisfy both parties – providing you and your suppliers with the minimum necessary profit for each contract. Because more items are agreed upon upfront, there’s less need to negotiate.

By reducing or eliminating the need for tense and prolonged negotiations, you get to develop a better relationship with each of your suppliers. Removing drawn-out negotiations also speeds up the contract process, enabling more just-in-time purchases. (According to Aberdeen Strategy & Research, contract analysis can reduce the average contract approval time by an incredible 82 percent.)