Kevin Van Tonder
Director, Cognia
It is becoming more and more frequent that businesses need to review and evaluate specific provisions in a variety of their contractual arrangements – often with speed and decisiveness.
Justin Ridl
Managing Director, Cognia
Whether it is due to a new regulation, change in business environment or even our current global “new normal”, these scenarios can affect the contractual obligations of all parties and may lead to potential legal implications and possible economic losses.
Currently, not all businesses are setup to quickly locate, sort and review contracts. Determining particular contract data points historically has been very time consuming and costly to businesses – particularly at a time where professional legal costs are rising and capacity is often already constrained. In order to act quickly and efficiently, the contractual data needs to be sourced promptly and in a format that executives can easily use to make decisions.
As a result, businesses are looking at how AI can help them understand their contractual terms, contractual data and obligations across their portfolio to assess their exposure at pace across their entire contractual relationship population. A.I. solutions can scan through large numbers of agreements and identify relevant data points quickly, efficiently and accurately.
But here’s the crux of the matter, leaders in contract management need to blend AI with technology (machine) and brain power (human) to streamline the contract review process; namely legal expertise, digital tools, agile project management and change skills:
Legal expertise
Many organisations forget the critical first step is to have the human, legal skills to determine the business use for the data. With this is in place you can build or modify an Out of the box (OOTB) AI model from your chosen AI vendor (RAVN, KIRA etc) to extract the data, and then meaningful analysis can be applied by law professionals to assist a business with further understanding their risks and exposure.
Moreover, they can also then answer any questions as required – blending both legal and commercial applied thinking, delivered in executable business reporting.
Digital tools
What’s key is not just picking the AI tool but the combination of MI/BI analysis tools (eg PowerBI), digital contract repositories and process workflows, as these can all optimise your legal operations and business partnering.
Agile skills
Incorporating a project management layer with a mix of process, people and technology as part of an integrated approach provides you with additional control and support.
For optimal analysis, flexibility is key. Your approach needs to be adaptable to fit the requirements and circumstances as needed and the ability to be used for a variety of agreement types and contractual provisions, all at potentially far lower costs than conventional reviews – either on a fixed fee basis and on a per contract subscription model.
Is there an optimum technology and AI approach for contract management?
We know that one size does not fit all and that every organisation is unique. The advantage of integrating contract management technology with AI is that it can provide you with a tailored set of legal services no matter what your operating model is.
At its most simple, contracts can be categorised and renamed to assist with organisation. You could then build on this to leverage an AI tool, for example RAVN, to identify and extract the data from the contract which can then be reviewed and analysed by legal professionals in your business, or your law company partner, as needed.
At the more sophisticated end, this approach provides you a far wider set of advanced tools that function across the full contract portfolio and support your business as needed. The options can be made bespoke to your specific business need.
Planning upfront can make all the difference
While a review of contracts may be a one-off exercise, it would not be unusual for you to review your contract portfolios periodically for a variety of reasons. Completing reviews in a fragmented and isolated way adds an unnecessary financial and operational burden, as the same work is repeated in each review.
Exploring a use case: contractual clauses due to unforeseen events
To use our “new normal” as an example, contracts often include clauses which provide a legal basis for excusing non-performance due to an unforeseen event that is outside of the parties’ control such as a natural disaster.
The composition of provisions can vary, meaning that such provisions will need to be reviewed and interpreted on a case-by-case basis to confirm and understand, amongst other things:
- Whether the contract includes any relevant provision;
- What events are covered under such provision;
- Whether any restrictions have been agreed between the parties;
- Whether a specific process required in order to invoke the provision, such as a notice; and
- What the outcome of the provision is (eg does it excuse liability for non-performance or does it result in the termination of the contract?)
Having a readily available and robust contractual review process will assist businesses during what can be a stressful situation, where time is of the essence, in understanding their contractual rights where there is non-performance due to an unforeseen natural event.
A growing number of organisations consider a pre-step of critical thinking as essential, where expert advice is leveraged at the start, to ensure all the correct data points are extracted for a far more effective outcome. In addition, organisations often misjudge the time it takes to do the initial processing of data and, unfortunately, there is no shortcut to speed this up if it has not already been done.
Setting up a repository or having a full Contract Lifecycle Management system (CLM) from the start is critical in minimising the lag time to do any contract review at a later stage. Where expert thinking is engaged early on an end-to-end solution basis, irrespective of the complexity, there is a greater opportunity for organisations to maximize the additional details around how to manage their risks in a more appropriate manner or make changes in their processes or contractual terms to improve efficiencies and drive business.
Beyond the initial stages, organisations may, with confidence, submit contracts to the platform for analysis, extract data points and then store them for re-use in a repository – allowing further reviews to be completed more efficiently. These do not necessarily need to be a full review of all terms within a contract; a review can be worked around data which is already held in-house and the A.I. can simply supplement it.
As the data has already been extracted, the focus can quickly be adjusted as required, whether to concentrate on specific provisions or for a broader review of the contract terms. An additional benefit is that the data can also be used to flow into other systems being used in-house, such as CRM or invoicing systems and can also ultimately be built into a contract management system for a future fit sustainable solution.
What does the future hold?
Moving forward, there is no doubt that our world will continue to throw up unforeseen circumstances that organisations will need to navigate by making rapid decisions through assessing and addressing their contractual exposures.
Organisations also need to be able to deal with any longer-term changes or fluctuations in their businesses in order to achieve optimal growth, and the above solutions will ensure this. A modern organisation should be equipped with the capabilities to quickly access necessary information – not only when the unforeseen occurs, but also in order to adapt and change as and when required.
This has never been more important. Fortunately, sophisticated machine capabilities and talented legal experts have never been as accessible to law professionals and business users as they are now.
A use case for integrating the power of human and machine: the LIBOR transition
To use a real-world example, the current LIBOR transitions require institutions to review and amend a vast number of their contracts to update any affected provisions. Rather than manually completing this task, some organisations have used technology tools on a platform to review the full portfolio of contracts to collate the relevant provisions within various agreement types.
From that, legal professionals can analyse and review the extracted data, which consequently allows for an automated document assembly process to occur. From this point, intelligent workflow technology automatically sends the proposed amendments that have been produced directly to the affected clients, reducing the need for any manual intervention or processes.
