Although companies have been using optical character recognition (OCR) technology for contract management since the early 2000s, the U.S. Post Office invented and adopted it decades before. With such a long history, it’s no wonder people think of OCR as the leading technology for converting physical documents to digital files. However, when it comes to the contract management process, using basic OCR instead of artificial intelligence (AI) is analogous to using a rotary phone instead of a smartphone.
OCR vs AI: Which Is Better at Contract Analysis?
OCR converts documents — both printed and digital — into digital files you can search and edit. If someone takes a picture of a form with their phone, you can use OCR to turn it into a file you can fill out with personal information.
OCR can quickly extract text from documents, which is a feature businesses use to manage large stacks of paperwork. However, OCR requires a lot of programming and defined rules to work. It doesn’t understand the context or meaning of the extracted text. It simply transcribes the text for further processing.
AI, on the other hand, uses techniques such as machine learning algorithms and natural language processing (NLP) to understand and analyze the content of contracts. AI contract analysis software can identify clauses, detect anomalies, and provide insights into contractual obligations and conditions.
With this level of understanding, you can use AI contract review for tasks such as risk assessment and compliance checking. Predictive analytics can also identify issues with contract performance and potential legal risks.
AI contract analysis is clearly a better choice for businesses that are making informed decisions based on data. While OCR text recognition performs its single function well, it doesn’t have the diversity and range of features that artificial intelligence contract review does.
The Unmatched Advantages of AI Contract Analysis
To survive in today’s competitive business environment, leaders must seize every advantage they can to reduce costs and increase revenue while building trust with customers and other stakeholders. Artificial intelligence contract analysis helps you do this with the following features.
Advanced Text Recognition
Traditional OCR compares text to a stored database of characters to match them. In contrast, AI-powered analysis of contracts uses machine learning algorithms for accuracy and efficiency.
AI can interpret various fonts, styles, and formats — including hand-written characters — even in poorly scanned documents using advanced text recognition. It can handle complex layouts and mixed-language documents, which is beyond the abilities of most OCR software.
This high level of precision reduces errors and saves time by limiting the need for human oversight in contract analysis. AI systems continuously learn and improve with each document they process, so they become more effective over time.
Semantic Analysis and Natural Language Understanding
Once it extracts and converts the text, AI uses natural language processing for semantic analysis. The program can understand the meaning and context of the text. It can distinguish different types of clauses, obligations, and rights.
AI contract analysis provides much more functionality by identifying synonyms and context-specific meanings. These capabilities allow it to find implied terms that OCR data extraction might overlook. With this human-like understanding, AI can categorize and tag contract elements of your contract for easier navigation and review.
AI provides a more effective contract analysis capable of interpreting nuanced legal language so you won’t miss any relevant details because you didn’t use the exact phrasing. This depth of understanding is the foundation of contractual data analysis that you can use to make data-driven decisions and improve future contracts and operational efficiency.
Automated Contract Review
AI systems can rapidly review contracts by extracting relevant information and highlighting discrepancies or missing elements much faster than even the sharpest legal mind. Automation significantly reduces the time and effort it takes to review contracts compared to manual reviews.
You can also cross-reference contracts with predefined templates or standard clauses to enforce consistency and compliance with company policies. AI-powered tools can generate summaries and reports so stakeholders can understand contract details without needing a legal background or meticulously reading the entire document. Your legal teams will be able to handle larger volumes of contracts faster and more reliably.
Contract Risk Assessment and Regulatory Compliance Checks
Contractual risks are a danger for all businesses. Risk assessment is another valuable feature of AI contract review systems that basic OCR lacks. AI programs can identify potential risks by comparing contract terms against known risk factors and industry benchmarks. It can flag ambiguous language, unfavorable terms, and non-compliant clauses and put together a comprehensive risk profile for each contract.
Your systems can stay updated with the latest regulatory changes, so you can rest assured your contracts meet current compliance standards. Taking a proactive approach helps you avoid legal issues and penalties. With AI contract analysis software continuously monitoring and analyzing contracts for compliance risks, stakeholders can quickly be alerted to changes that may affect your contract's validity.
Where OCR Technology Falls Short
While OCR technology was revolutionary in its day, it has significant limitations for contract analysis. One of the primary shortcomings is its inability to understand context or meaning.
Without being able to interpret or analyze the content, OCR can’t understand the significance of the contracts or provide any meaningful insights into your contracts. You can’t use OCR data extraction for any sort of meaningful analysis on its own.
OCR technology also performs poorly with some fonts, non-standard layouts, and poor-quality scans. Handwritten text and documents that include more than one language are also challenging for OCR. These issues can cause errors that companies must manually correct before they can use the results.
OCR can extract text but can’t perform analysis, so it’s useless in cases where you need actionable insights based on your data. Contracts are a treasure trove of hidden data businesses can use to decrease operational expenses and increase profit. However, with OCR, you’ll miss out on the more comprehensive analysis of trends and patterns, as well as predictive analytics that can help you mitigate your risk exposure.
Leverage Artificial Intelligence To Make Strategic Decisions
Terzo created the first AI-powered contract analysis platform for business and legal teams. We provide the world’s most innovative companies with access to the hidden data in their contracts so they can use it to make strategic business plans. Contact us today to discover how we can get you the data you need to make your job easier.
