People tend to think of optical character recognition (OCR) as a product of the digital age since it converts text into machine-readable code — a feature that has made it invaluable in contract management. However, OCR dates back to the early 20th century when Emanuel Goldberg created a machine that could convert characters to code people could send by telegraph.
In its early days, OCR could only recognize one font at a time. Its abilities gradually expanded until the early 2000s, when it could identify most fonts and characters, and businesses started using it widely. However, while OCR is still useful in some situations, many companies are transitioning to artificial intelligence (AI) solutions for more effective contract management.
How Does OCR Software Work?
OCR software converts different types of documents, such as scanned paper documents, PDFs, or images captured by a digital camera, into editable and searchable data. The first step is for the software to capture the image. If necessary, the OCR then improves the image quality to make it easy to identify the characters.
From here, there are two main processes used in OCR text recognition. The first is pattern matching, where the software compares each character against a database of stored patterns and matches them character by character. The other is feature extraction, where the software breaks down each character into its basic elements, such as lines and loops. It compares these features to its stored database to match each character.
Once it identifies the characters, the software converts the text into a digital file and post-processes it to refine it further. At this point, you can edit, search, and change the text as needed.
Common OCR Limitations in Contract Management
Even though OCR has been extremely useful for decades, it has several issues that limit its functionality as contract lifecycle management software.
Inaccurate Data Extraction
Modern businesses rely on data to make informed decisions. In many cases, this data is buried in contract clauses. Because OCR relies on stored databases for text recognition, it often struggles with complex document layouts and different font styles. You can end up with incorrect data extraction, where software misreads characters or entire sections of text. These errors can cause significant issues in contract management, such as incorrect terms, dates, or parties, which can set you up for bad outcomes.
Lack of Contextual Understanding
Basic OCR technology doesn’t understand the context in which the text appears. Even when it can accurately extract text, it can’t grasp the nuances and meanings behind it. You’ll find it almost impossible to identify specific contract clauses based on their purpose, particularly if they use ambiguous language. With only standardized language to rely on, you may end up overlooking critical details.
Poor Performance With Handwritten Text
While most modern contracts are printed or digitized, it’s not unusual for them to include handwritten documents or elements, such as notes. Most OCR systems perform poorly with handwriting, which isn’t standardized and can be challenging to read. If you’re using OCR on handwritten characters, you’ll need to factor in time for manual correction, which will reduce your productivity and efficiency.
Limited Integration With Advanced Analytics
You rely on your business intelligence tools to turn your raw data into actionable insights. Basic OCR contract management systems don’t integrate well with advanced analytics platforms, so they can’t provide data insights and trends from your contract documents. Without seamless integration, you’re missing out on comprehensive data analysis, business risk assessment, and strategic planning based on the data in your contracts.
How Artificial Intelligence Enhances Document Analysis
Artificial intelligence (AI) provides a much more efficient and effective solution to contract management than basic OCR with the following features:
Advanced Pattern Recognition. AI-based data recognition software can recognize complex patterns in data. It’s more accurate at extracting text and data from different documents, even those with complex formats and layouts. Because machine-learning algorithms adapt to new data, they become more precise and useful over time. While OCR data extraction relies on a limited set of preprogrammed fronts, experts train AI on massive datasets of fonts and handwriting samples. With a deeper well to draw from, AI can get better results for both printed and handwritten text.
Contextual Understanding. Natural language processing (NLP) is a type of AI that allows contract management software to understand language similarly to a human. Using NLP, a contract management system can comprehend contract terms, key phrases, and entities. It can also identify relationships, distinguish different types of information, and understand their relevance. So, you aren’t limited to searching for clauses based on specific terms — a process that can be ineffective due to ambiguous language or human error.
Automated Data Extraction and Classification. An AI contract management solution can automatically extract and classify specific data points and store them in your contract repository. This automation drastically speeds up data extraction and allows you to deal with multiple contracts quickly. AI solutions can also learn new types of documents and data fields and improve results over time. Continuous learning and improvement is a hallmark of successful companies, and AI supports it while reducing manual effort. Your software can feed your extracted data automatically into business analytics tools to help you take advantage of real-time insights and trend analysis. You can then use contract data to drive strategic decision-making in contract execution and other business functions.
Automated Contract Workflow. Because AI contract management extends beyond simple character recognition, your entire contract management process is more efficient. The system can automatically route documents based on their content and next steps. Your legal teams can collaborate better on contract drafting, revising, and execution, and important contracts won’t be stuck in someone’s inbox waiting for approval.
Upgrade To a World-Class Contract Management Software System
Ineffective contract management can cost you a lot of time and money. Your legal departments and other teams can waste resources and manual work on outdated practices that fail to deliver the results the modern world requires. Without the right insights to predict patterns and drive decisions, you could fall behind in a highly competitive modern market.
Terzo is the AI-powered contract management platform that can help you switch from these inefficient, outdated practices to streamlined contract creation and management. The platform uses AI technology to extract, analyze, and visualize your contract data, delivering much-needed insights to optimize productivity and reduce costs and risks.
Reach out to one of our experts today to discover how Terzo can enhance your document management.
