Industry insights

Transforming contract management with AI

31 May 2023

Artificial Intelligence has already started to transform various industries. But now, with Contract Management, it has revolutionary potential that will serve as a game-changer for the entire procurement. With its ability to automate contract-related processes, analyze contracts more efficiently than humans, and provide better analytics visibility into supplier performance, AI can help organizations save time, reduce costs, and mitigate risks.

However, as with any emerging technology, there are also limitations and risks associated with using AI in contract management. In this long read, we'll explore the trends, potential, limitations, risks, and future of AI in contract management. I will, and discuss the way forward for organizations looking to leverage this technology.

What can we expect from AI in Contract Management?

AI has been a buzzword in the business world for several years now and for a good reason. According to the PwC Global Artificial Intelligence Study, 85% of executives believe AI will significantly change the way they do business in the next five years. So what exactly is Artificial intelligence? According to Rasto Koval, the CEO of Cequence, an AI-powered contract management software solution, "AI is a branch of computer science that focuses on creating intelligent machines that can perform tasks that typically require human intelligence, such as learning, problem-solving, and decision-making."

The traditional approach to contracts

Contracts are an integral part of business operations in every industry, and managing them effectively is crucial for the success of any organization. The traditional approach to contract management involves manual processes, which are time-consuming and error-prone. With the advent of artificial intelligence (AI) technology, there has been a shift towards automated contract management solutions that can streamline the entire process. The new process benefits not only the organization but also the individual contributors for whom the AI offloads mundane tasks.

Future? Automated contract management

As Rasto Koval, the CEO of Cequence notes, "AI-powered contract management solutions have the potential to transform the way organizations manage their contracts. By automating routine tasks and providing better visibility into contract data, AI is able to save thousands of hours on manual labor." 

Primarily, we see that AI can help with contract drafting and reviews. Natural language processing (NLP) and machine learning (ML) can help analyze contracts more efficiently. Better visibility into supplier performance is also one of the benefits of. As a result, organizations save time, reduce costs, and mitigate risks. 

So how exactly does that work? 

Here are a few examples of how smart software delivers the aforementioned benefits that are also being leveraged by Cequence in everyday practice:

1. AI can automate the tedious and repetitive

AI can automate the tedious and repetitive tasks involved in contract management, such as data entry, document sorting, and contract review. This allows contract managers to focus on more complex tasks that require human expertise, such as negotiating contracts and resolving disputes.

2. AI can also provide better visibility into contract data

AI can also provide better visibility into contract data, allowing organizations to track contract performance, identify trends, and make informed decisions. By analyzing data from past contracts, AI can identify patterns and provide insights that can help organizations optimize their contract processes and improve business outcomes.

3. AI can improve risk management in contract management

Furthermore, AI can improve risk management in contract management by identifying potential risks and mitigating them proactively. For instance, AI can flag contracts that are missing key clauses or contain high-risk terms, allowing contract managers to take action before any issues arise.

Overall, AI has the potential to revolutionize contract management by streamlining processes, improving visibility, and mitigating risks. This applies to procurement, sales, human resources, and even more fields. As organizations face increasing pressure to manage their contracts more efficiently and effectively, AI-powered contract management solutions are becoming increasingly relevant and essential.

AI-powered contract management solutions have the potential to transform the way organizations manage their contracts
CEO & Co-founder @CEQUENCE

Trends of AI in Contract Management

As we mentioned before, one of the key trends in AI in contract management is automation. As Rasto Koval notes, "This can free up time for contract managers and procurement managers to focus on more strategic tasks, such as negotiating better terms with suppliers." However, to achieve that, organizations need to consistently drive opportunities to enable automation.

Contract review done by AI

One of the most promising automation enablers via AI implementation in contract management is in the area of contract review. Contract review is a crucial aspect of contract management, as it involves analyzing contracts to identify potential issues and ensure compliance with legal requirements

As everyone in legal, procurement, and contract management well knows, manual contract review is a time-consuming and labor-intensive process, and can often result in errors and inconsistencies. AI-powered contract review solutions can automate this process, saving time and improving accuracy.

AI-powered contract review solutions use natural language processing (NLP) and machine learning algorithms to analyze contracts and extract relevant information. NLP allows the system to understand the language and context of the contract, while machine learning algorithms can learn from past contracts to improve accuracy and identify potential issues. If such technology is properly enabled and integrated as a part of a solid workflow solution, contract management can change from a frustrating time-consuming process into a highly effective powerhouse that is a showcase for the entire organization. 

For instance, AI can be used to identify clauses that are missing or non-compliant with legal requirements, flagging potential issues for review by contract managers. AI can also be used to extract key data points from contracts, such as contract value and expiration dates, and automatically update contract databases and tracking systems.

Contract analysis done by AI

Another trend is contract analysis. According to a report by World Commerce and Contracting, "AI can analyze contracts more efficiently and accurately than humans, using NLP and ML algorithms to identify key clauses, risks, and opportunities. This can help organizations better understand their contractual obligations and make more informed decisions.

A better compliance check by AI

One of the possible examples from Cequence is helping organizations ensure compliance with regulatory requirements. For instance, the General Data Protection Regulation (GDPR)requires organizations to ensure that their contracts contain specific clauses related to data protection. AI in Cequence’s CLM solution is leveraged to automatically identify contracts that do not contain these clauses, allowing organizations to take corrective action.

Better supplier visibility

Informed decision-making is another trend in AI in contract management. By providing better visibility into supplier performance and contract obligations, proper AI-powered solutions can help organizations make data-driven decisions about supplier selection, contract renewals, and other key procurement operations.

To summarize, it has been demonstrated and reported by Cequenceo clients that AI involvement can help streamline the contract review processes, reducing the time and resources effort required during the entire workflow, while improving accuracy and consistency. On top of that, it is becoming increasingly important for organizations to catch up with this trend asap to stay ahead. Things are happening so fast that tomorrow may be too late. 

Overall, as organizations continue to face increasing pressure to manage their contracts more effectively, AI-powered solutions are no longer nice-to-have tools but must-have ones. are becoming increasingly relevant and essential. Do not stay behind.

Potential of AI in Contract Management

The potential of AI in contract management is vast. From assistance with contract drafting by providing suggestions for language and clauses based on previous contracts and legal best practices, through risk identification, comprehensive review, and predictive analysis to supplier performance, the value proposition of what is possible expands each day is expanding every day. 

In addition to automating contract reviews and providing better visibility into contract data, AI can even more also be used to automate other routine tasks involved in contract management. For example, such as data entry and document sorting.

Data entry

For data entry, from a technology standpoint, AI-powered contract management solutions can typically use optical character recognition (OCR) to extract data from physical or digital documents, reducing the need for manual data entry. This can save significant time and reduce the risk of errors associated with manual data entry.

Sort & classify documents

AI can also be used to automatically sort and classify documents, such as contracts and invoices, based on their content. This can help organizations to better organize the documents and once again push to improve the efficiency of their contract management processes further.

Renew & terminate contracts

In addition, AI can be used to automate contract renewals and terminations, reducing the need for manual human intervention. For instance, AI can be used to automatically generate renewal notices and termination letters based on contract data and predefined rules.

Identify risks & opportunities

By utilizing ML algorithms, AI can identify potential risks and opportunities, and flag them for contract managers to review. This helps can help organizations identify potential issues before they become major problems.

Predict contract & supplier performance

Predictive analysis is another area where AI can be useful in contract management. By analyzing data from previous contracts and supplier performance, AI can help organizations predict which suppliers are likely to perform well and which contracts are likely to be successful. This may be a great help for Category managers. Finding the right resource to perform the job is often more important than time and pricetag for the deliverable. 

Imagine the impact this brings to large organizations with thousands of suppliers. This is becoming increasingly important for large organizations having thousands of suppliers in their portfolio.

We need to use AI to augment, rather than replace, their human workforce.

What is the Future of AI in Contract Management?

Despite some limitations and potential risks of AI in contract management, the future of this technology looks bright and will become a golden standard for the ones that wish to gain a competitive advantage. As AI becomes more mature and affordable, organizations will become more familiar with its application. Subsequently, as more organizations recognize the potential of AI for managing contracts and related processes, the demand for AI-powered contract management solutions is likely to increase.

Market predictions

This assumption is also backed by several reports looking into this domain. According to a report by MarketsandMarkets, the global contract management software market is expected to grow from $1.5 billion in 2020 to $4.6 billion by 2025, with AI-powered contract management solutions driving much of this growth.

As Rasto Koval notes, "The future of contract management is inevitably AI-powered. AI will not only drive unbeatable benefits but will also become the game-changing factor for introducing CLM solutions into most organizations."

This article is part of our Transforming contract management with AI series. Check out more articles on our Blog.

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