Dealing with paper contracts can be tedious and time-consuming — not to mention error-prone. Physical documents are easy to lose and don't allow for an efficient data extraction process. They can’t be easily shared or accessed remotely. However, digital contract management tools can digitize paper contracts so you can work with them in a digital format rather than paper. There are two major technologies behind digital contract management, OCR and AI. This guide will explain both so you can decide which will work best for you.
How OCR Works: Capturing Text from Images
Optical character recognition (OCR) converts different types of documents, such as scanned paper documents, PDF files, or pictures into editable and searchable data. You can take a picture of each page of a contract and OCR lets you edit or search the text of that page on your computer.
OCR software analyzes the structure of the image. It identifies areas with text. Next, the software breaks down each identified text area into lines, words, and individual characters. OCR programs compare each character against a set of pattern images stored in a database. Once it recognizes a character, it converts it into a digital text format, so you can easily manipulate and retrieve the data. OCR is often used to digitize historical documents. It automates data entry and streamlines contract management.
How AI Understands and Interprets Contractual Language
Artificial Intelligence (AI) is a newer contract management technology that interprets contracts with natural language processing (NLP) and machine learning (ML). Its capabilities far exceed older models based on OCR technology. NLP allows computers to understand and generate human language. In contract software, these programs are trained on large datasets of contracts so they can understand the specific vocabulary, structure, and semantics that are used in legal contracts.
In addition to NLP, legal AI software uses machine learning algorithms to identify patterns, key terms, and clauses within contracts. This lets them distinguish between contract elements like obligations, rights, and conditions. Artificial intelligence text recognition can differentiate between an obligation clause and a liability clause by recognizing the context and keywords that occur in each one.
Once the AI understands the text, a machine-learning model can summarize the contract and identify non-compliance issues. It can even suggest modifications based on previous contracts and other legal standards. AI document review makes your legal reviews more efficient and eliminates manual data entry. You can use the insights to negotiate more favorable contracts.
OCR vs AI: Things To Consider
If you’re trying to decide between OCR or AI for intelligent document processing, you should consider the capabilities of each and see how they measure up to what you need. Both technologies can automate and improve document management processes, but AI has more features and is more sophisticated.
Limitations of OCR in Handling Complex Documents
OCR might be a good fit if you don’t handle many contracts or they’re very simple. However, it’s significantly limited when it comes to dealing with complex documents. It struggles to interpret documents with a complex layout, multiple fonts, or mixed media, such as text combined with images or graphs.
Documents with background noise, such as stains or creases, also reduce OCR accuracy. You may have problems with OCR if you need to scan handwritten notes. There’s a lot of variation between people’s handwriting. This lack of standardization causes high error rates, so you’ll need to do a lot of manual review.
Hidden OCR Costs of Manual Corrections and Oversight
Although OCR systems are cheaper upfront, they can be more expensive in the long run. Because they aren’t as accurate, you’ll need to pay employees to perform manual corrections and oversight.
OCR systems can digitize straightforward text, but they often produce errors when processing anything other than clean, standard documents. You’ll need to provide significant human intervention to verify and correct the digitized text, which can be time-consuming and costly.
Paying someone to manually review and correct documents after OCR processing defeats the purpose of having an automatic contract review system. In addition to increasing labor costs, it also slows down the document processing workflow.
Proactive Risk Identification and Mitigation with AI
Another aspect to consider when you’re choosing between AI and OCR is risk management. In contract management, AI can detect potential risks such as unfavorable terms, compliance issues, or unusual clauses that might otherwise go unnoticed.
AI algorithms also learn from historical data, so they can identify patterns and predict possible outcomes based on past contract negotiations and breaches. This predictive power can help you anticipate and address potential contractual risks before they become problematic. AI contract review can flag contracts that don’t adhere to new regulatory requirements or industry standards, so you can make early revisions.
An AI contract check can automatically generate risk reports and suggest mitigation strategies. These contract analytics will speed up your negotiating and decision-making processes. This proactive approach minimizes your legal and financial risks in addition to saving time and resources.
Short-Term Costs vs. Long-Term Gains
OCR models generally involve lower upfront costs, so it can be a good option for businesses that only want to digitize documents quickly. Your initial investment primarily covers software acquisition and basic training. However, because of OCR's limitations with complex documents and the need for frequent manual corrections, you’ll have to account for ongoing expenses, which add to the total cost.
You’ll spend more on AI contract management software in the short term, but you’ll save and benefit more in the long term. Because AI document review can learn and improve over time, the benefits will increase the longer you use the system. This makes AI a more scalable and future-proof investment compared to OCR.
Make the Right Choice With Terzo AI
Your contracts contain critical data that are essential to your business operations. Don’t leave it locked away in a static system. With Terzo’s AI-powered platform, you can uncover hidden insights that can save you money and time. Schedule a demonstration today to learn more.
