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Contract Analysis: What Is It & Why Does It Matter?

A cartoon image representing contract analysis.

Why Is Contract Analysis So Important?

Contracts are a rich source of information on commercial relationships. To realize intended value from such relationships (with suppliers, customers, partners, etc.), you need to know exactly what the terms of the engagement are. This is exactly where contract analysis plays a crucial role

Contract analysis adds value to your business by taking thousands of pages of rich information and turning it into actionable insights. Such intelligence allows you to keep close tabs on contract terms and distill relevant data to look for business trends. Simply put, contract analysis enables informed decision-making and better business all around. That’s also why it is a critical part of the contract management process.

In this article, we will look at traditional contract analysis processes and discuss how next-gen, AI-based advanced contract analytics solutions are empowering organizations with intelligence into their contract portfolios. 

Common Challenges Businesses Face With Traditional Contract Analysis Approaches

Traditional contract analysis programs are highly manual and use rudimentary technology to get the job done. Such approaches are unable to deliver the insights that can actually help you make better business decisions. Let’s review some of the main issues and challenges you need to address to extract maximum value from your contracts.

Reliance on manual processes

Not only are manual, spreadsheet-based contract analysis processes time-consuming and expensive, they’re also susceptible to error. Manual contract reviews don’t offer deep visibility and accurate analytical insights, often leading to increased risk of exposure and costly mistakes. Further, they are difficult to scale without adding an army of human reviewers and increasing overhead costs.

Unstructured data

Contracts are inherently unstructured to begin with because they are authored in natural language and not immediately machine-readable. They typically follow non-standardized structures, formats, and the templates are difficult to read and understand. This makes them difficult to parse automatically. 

Narrow functionality of traditional tools

Traditional contract management solutions only pull out surface-level metadata and ignore important underlying information such as clauses, obligations, service levels and price books. As a result, they are unable to provide adequate visibility and analytical insights.

Siloed teams using different point solutions

Procurement, finance, sales, and legal departments use a wide variety of point solutions for analytics, which causes interoperability issues and negatively affects cost and efficiency. Additionally, when siloed departments work on different platforms, it leaves much room for oversight, miscommunication, and errors.

 

How Can AI-Led Contract Analytics Help Overcome the Issues of Traditional Contract Analysis?

As per Gartner, by 2024, the current amount of manual effort for the contract review process will be reduced by 50% due to adoption of AI-based contract analytics solutions. Contract analysis software allows you to effortlessly extract all relevant data from your contract portfolio for performance insights and risk analytics, empowering your teams to create progressively smarter contracts for better business outcomes. Below are some of the main benefits your business stands to gain from contract analytics:

Complete visibility

Contract analysis enables visibility into your enterprise contract portfolio by digitizing agreements and associated artifacts and storing them in a central repository, which in turn enables users to interrogate contracts for insights. Extracted obligations, service levels, and other key information like milestones, deliverables, and KPIs can be tracked until completion or closure to ensure intended business outcomes are delivered. 

Mitigate risks and liabilities

Using technology to reduce reliance on manual processes makes contract analysis much faster, accurate, and scalable. Through machine learning, AI is able to identify missing and deviating contract clauses, incorrect contract language, and other drafting errors so you can take corrective actions. Such risk analytics and insights help you author bullet-proof contracts.  

Identify opportunities to optimize the authoring process

Contract analysis can be used to mine information from your existing portfolio of contracts as well as past performance data, arming you with intelligence into what clauses, terms, and positions worked well in the past and which didn’t. Such insights give you an edge during future contract negotiations and empower you to craft smarter contracts with embedded risk controls.

Respond better to unforeseen events

When the COVID-19 pandemic first struck, many businesses scrambled to understand exactly how the pandemic would affect their operations. During this trying time, companies had to scan their legacy portfolio to identify contracts where force majeure included pandemics and for visibility into business continuity provisions. Those businesses with robust contract analysis capability in place were able to react much faster to the pandemic than those without.

Make better business decisions 

Good business decisions are always founded on data. Using your contract repository as a source of intelligence will help you contract smarter. For example, if you are unsure about renewing a contract with a vendor, you can leverage their past performance data as a frame of reference. If they don’t check out, don’t continue doing business with them.

 

What Should You Look For in a Contract Analytics Platform for Effective Contract Analysis?

No matter how efficient your operation is, people make mistakes. Even more, outdated practices simply cannot measure up to software and artificial intelligence (AI) when it comes to extracting, tracking, and organizing contract data. 

AI is powering the next-generation of contract analytics solutions that offer unparalleled speed, accuracy, and scale while also providing much deeper contract visibility. Here are some of the features you should look for in AI-powered contract analytics software:

 

  • Instant repository setup: AI-based extraction engines digitize your entire portfolio of legacy contracts and help seamlessly migrate them to a centralized cloud-based repository
  • Granular data extraction for deeper insights: You can go beyond standard, surface-level data extraction. AI allows you to capture deep business and financial insights into clauses, obligations, service levels, rate tables, and more. 
  • Automated risk analysis and scoring: AI takes risk assessment to the next level by automatically identifying missing clauses and clause deviations that differ from preferred enterprise positioning. Further, AI computes a risk score by taking into account both preferred and walkaway positions. 
  • Auto-recommendations during legal review: By automatically recommending correct clause language and terms for the missing or deviating clauses, AI significantly reduces the time contracts spend during the legal team’s review.

 

Advanced Contract Analytics with SirionLabs

SirionLabs is at the forefront of innovation in the contract lifecycle management (CLM) software space. We have taken AI-powered contract analytics a step further by integrating it with self-learning AI that grows more intelligent with use. This unique advantage makes SirionLabs’ technology more robust and scalable. 

SirionOne’s contract analytics capabilities enable automation of how you acquire, analyze, and act on contract intelligence. We break down the contract analysis process into 3 stages, with AI at the heart of each:

 

DiscoverAI

  • Use AI to effortlessly pull in documents from across your IT landscape. 
  • Centralize and consolidate your contract portfolio into an easy-to-use repository

ExtractAI

  • Digitize legacy contracts and organize them for future reference.  
  • Gain 360-degree visibility into contracts and business relationships. 
  • Use AI-driven auto extractions to source granular info, metadata, obligations, clauses, SLs, and pricing tables. 

ActAI

 

SirionOne’s Contract Analytics features can help your organization reimagine how it discovers and operationalizes contract intelligence. For more information, you can download this whitepaper on how AI is the ‘The Next Chapter in Contract Intelligence’ or watch this webinar featuring KPMG. Please contact us today to learn more about how we can help!

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