Artificial intelligence (AI) is changing how companies do business. As one of the most transformative technologies in recent history, AI can perform tedious and time-consuming tasks, like contract analysis, in a fraction of the time it would take a person or law firm to complete them. AI tools can also uncover hidden insights that are buried in your contracts.
What Is AI Contract Analysis?
AI contract review uses artificial intelligence to review, interpret, and manage contracts more efficiently and effectively than traditional manual methods. Using AI technologies such as natural language processing (NLP), machine learning (ML), and data analytics, AI tools can help you understand, analyze, and extract critical data and insights from contracts. This innovative approach accelerates the contract review process, improves accuracy, reduces risks, and provides valuable insights that support strategic decision-making.
How AI Contract Analysis Works
Technologies such as ML and NLP allow computer programs to import data from contracts, extract meaning, and generate analysis based on the text. Here’s a brief overview of the process:
Data Input and Preparation
The first stage is inputting contract documents into the AI system in a machine-readable format. For non-text-based documents, optical character recognition (OCR) technology can convert images into text through a contract reader.
Text Preprocessing and Normalization
Once the text is extracted, the program cleans and prepares the data for analysis. This step could include correcting OCR errors, removing irrelevant information, and standardizing the language or format of the contracts.
Natural Language Processing and Machine Learning
NLP techniques enable the AI to "understand" the content of the contracts in a way that mimics human comprehension. The program sorts the text to identify its structure and meaning, recognize entities, and understand relationships. Machine learning algorithms—particularly those based on deep learning—are trained on large datasets of contracts to identify patterns, clauses, and key terms specific to contractual agreements.
Extraction and Analysis
With the contract's content understood, the AI extracts important information and analyzes it according to predefined criteria. It can identify contract parties, effective dates, termination clauses, payment terms, liabilities, and more.
Insight Generation and Reporting
The final step of AI contract management is generating actionable insights from that data. These reports highlight significant findings, such as risks, obligations, and opportunities for negotiation. You’ll come away with a solid foundation for contract management systems, negotiation, and compliance efforts.
Benefits of AI Contract Analysis
When you have a large volume of contracts to manage, keeping on top of obligations, payments, and deadlines can be difficult. AI-based contract analysis software helps by providing the following benefits:
Increased productivity: Traditional contract review processes often require hours of repetitive tasks, such as reviewing and note-taking. AI automates these processes, allowing for the rapid review and analysis of contracts.
Improved accuracy and consistency: Human review of contracts can be prone to errors due to fatigue, oversight, or inconsistent interpretation. Contract review software provides consistent and accurate analysis across all contracts.
Better risk management: A contract review tool can automatically flag clauses in the contracting process that may pose legal or financial risks, allowing you to address these concerns proactively before they escalate.
Lower costs: Automating the contract review process reduces labor hours needed for manual contract examination. Identifying risks and errors early can also prevent costly legal disputes and compliance issues.
Strategic decision-making: Through automation and analyzing contract data, AI can identify trends, patterns, and benchmarks that can be leveraged in negotiations to secure more favorable terms. You can gain insights into supplier performance, customer relationships, market trends, potential risks, and more.
Use Cases of AI Contract Analysis
Improved operational efficiency, contract risk management, and strategic decision-making from AI contract analysis can benefit almost all businesses and contract types. Some of the most common use cases of AI for contracts include the following:
Legal compliance: AI for contract review can automatically review contracts to verify regulatory compliance with relevant laws, regulations, and industry standards. This use case is particularly relevant in finance, healthcare, and telecommunications, where non-compliance during external or internal audits can result in hefty fines and legal risks.
Procurement and supply chain management: You can easily make sure your supplier contracts are optimized for cost savings and efficiency. AI programs can analyze terms and conditions across multiple supplier contracts to identify opportunities for renegotiation, define favorable payment terms, and highlight areas where you can achieve economies of scale.
Mergers and acquisitions: During M&A activities, hundreds, if not thousands, of contracts need to be reviewed to understand the liabilities, obligations, and risks that may be transferred upon acquisition. AI-powered contract analysis can quickly sift through vast volumes of contracts, identifying key clauses that might impact the valuation or integration process, such as change-of-control clauses, non-compete agreements, and exclusivity clauses.
Real estate management: Managing leases and property agreements involves tracking a multitude of terms and conditions, including lease durations, renewal options, and maintenance obligations. AI-powered contract analysis can automatically extract and handle these details, enabling real estate professionals to manage their portfolios more effectively. It can also identify opportunities for renegotiation or highlight contracts that do not align with market rates or terms.
Intellectual property and licensing: For organizations dealing with intellectual property (IP) and licensing agreements, AI-powered contract analysis can identify and flag unauthorized IP use and ensure licensing agreements are favorable and compliant with relevant laws.
How To Begin Implementing AI Contract Analysis in Your Organization
Successfully implementing compliance monitoring software in your contract process requires you to carefully plan and consider your organizational needs and the type of AI technology that’s best for you. Here’s a step-by-step guide:
Identify your company’s current challenges and decide what you want to achieve with the technology.
Research and evaluate AI contract analysis tools. Look for solutions that align with your specific needs, including factors such as functionality, integration, and scalability.
Prepare your contracts and related documents for analysis by organizing and digitizing them on a user-friendly interface.
Start with a pilot project by selecting a specific segment of your contract portfolio or a particular department as a test case. You can evaluate the tool's effectiveness, identify any issues or areas for improvement, and adjust your processes accordingly.
Provide comprehensive compliance training for legal professionals, lawyers, accounting teams, contract managers, sales teams, and any other stakeholders interacting with the system at your company.
Implement the AI contract analysis software throughout your organization and monitor its performance closely, considering how well it meets your established objectives and where it may fall short. Continuously iterate on your processes and the tool's configuration to increase its effectiveness.
Get Started With Contract Analysis
Poor contract management could cost you up to 10% of your annual revenue. Terzo AI is the best contract analysis software because it was designed for both business and legal teams. We combine AI with human expertise for exceptional data quality and risk monitoring. Contact us to learn how we can help your business optimize operational expenses through the entire contract lifecycle.
Frequently Asked Questions
How can AI analyze a contract?
Leveraging natural language processing (NLP) capabilities, AI systems can interpret the text of a contract, recognize patterns, and draw meaningful insights from the document. Manual contract review can be very time-consuming and labor-intensive, whereas AI-powered contract analysis tools can quickly scan through numerous contracts to identify discrepancies, risks, or critical terms. Additionally, AI can help improve the accuracy of contract analysis by minimizing human error and providing a more standardized approach to reviewing contracts. Learn about AI contract analysis solutions here.
How do you mitigate risk for contracts?
When it comes to managing contract risk, it’s important to outline the responsibilities and obligations of both parties in detail, leaving no room for ambiguity. Additionally, including clauses that address potential contingencies or unforeseen events can provide a level of protection in case the contract needs to be altered or terminated prematurely.
Lastly, AI contract risk management software can significantly reduce the manual effort and human error associated with contract management. AI can quickly analyze and interpret large volumes of contracts to pinpoint potential risks and provide better visibility. Explore our AI solutions to find out more about risk management.
What is the best way to monitor regulatory compliance for contracts?
Understanding the best way to monitor compliance for contracts is crucial to ensure organizational effectiveness and risk mitigation. One of the most innovative and efficient solutions in recent years is the use of AI contract software like Terzo. This technology leverages artificial intelligence and machine learning algorithms to instantly automate the process of monitoring and enforcing regulatory compliance with contractual obligations.
AI compliance software analyzes contract terms and conditions with a high level of accuracy, flagging any potential non-compliance issues in real-time. This proactive approach to compliance workflow allows organizations to address compliance issues promptly, minimizing the risk of legal disputes or financial penalties.
