Contract Intelligence

Everything You Should Know About AI Contract Analysis

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, such as contract analysis, in a fraction of the time it would take a person or law firm. 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 the 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, 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 so you can proactively address these concerns 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: By 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, 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 compliance with relevant laws, regulations, and industry standards. This use case is particularly relevant in finance, healthcare, and telecommunications, where non-compliance can result in hefty fines and legal challenges. 

  • 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 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 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 not in line with market rates or terms.

  • Intellectual property and licensing: For organizations dealing with intellectual property (IP) and licensing agreements, AI 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 AI 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: 

  1. Identify your current challenges and decide what you want to achieve with the technology. 

  2. Research and evaluate AI contract analysis tools. Look for solutions that align with your specific needs, including factors such as functionality, integration, and scalability. 

  3. Prepare your contracts and related documents for analysis by organizing and digitizing them, if necessary. 

  4. 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. 

  5. Provide comprehensive training for your legal team, contract managers, sales teams, and any other stakeholders interacting with the system. 

  6. 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. Reach out today to learn how we can help your business optimize operational expenses through the entire contract lifecycle.

More Contract Intelligence posts

Terzo Logo

Speed to value. Get up and running in weeks, not months or years.

Book a Demo