Contract Automation Defined and 7 Ways to Apply It

Introduction

On average, the typical enterprise spends $6,900 to draft, negotiate, and sign a simple contract. For more complex document creation, costs can reach $21,300 or more. Much of this cost is due to the inefficiency and non-scalability of manual contracting processes.

However, by utilizing contract automation software, companies can drastically reduce associated costs and improve their contract lifecycle management (CLM) process.

In this article, we’ll look closer at the advantages of contract automation and the various application points, plus several bottlenecks and disadvantages associated with traditional management.

What is Contract Automation?

Contract automation focuses on using the power of machine learning (ML) and AI to streamline and automate the contract lifecycle. Key touch points are:

Contract drafting
Contract negotiation and legal review
Approval and signature
Contract storage, interrogation, and analytics
Renewals and expiration tracking
Obligation management

How does contract automation work, and who can benefit?

Contract automation can help enterprise legal teams streamline their workload and build a scalable contracting process. It also helps other business teams (such as procurement, finance, and sales) collaborate on a single platform to create and manage contracts.

Additionally, contract automation focuses on setting up contracting playbooks, business rules, and clause and template libraries to standardize and streamline contracting processes.

Common Pain Points of Manual Contract Management

Modern-day business processes are constantly evolving, and contracting is no exception. And yet, for many organizations, contracting remains a time-consuming, cost-intensive practice, the effects of which are substantial to annual revenue.

The key challenges associated with manual contract processes are:

Effort duplication: Traditional contracting involves multiple touchpoints. As a result, stakeholders find themselves repeating the same tasks over and over again, sometimes across multiple platforms. This leads to version control issues and avoidable errors.
Lack of standardization: Contracts are often authored and managed in silos, which means that each business team creates new drafts using non-standard contract templates and legalese that may be outdated or out of line with current company policies, potentially increasing risk exposure.
Lack of visibility: Manual contracting processes and rudimentary tools don’t offer the level of visibility and insights businesses demand today. Localized data silos such as file servers, ERP, and CRM, which act as storage spaces for contract documents, do not offer search and retrieve capabilities, preventing enterprises from easily locating contracts and quickly reviewing them for information.
Lack of real-time collaboration: External stakeholders can receive erroneous or duplicate drafts without real-time communication. Meanwhile, internally, collaborators are forced to rely on lengthy email chains to direct and facilitate necessary changes.
Missed renewal and renegotiation opportunities: When contracts number in the thousands, manually tracking every renewal and expiration date is impossible. Missed dates lead to business disruption and unfavorable renegotiations.
Inability to track and monitor fulfillment: When faced with the sheer volume of contracts, tracking and ensuring that vendors meet obligations becomes increasingly difficult.

Applications and Key Benefits of Contract Automation

By taking advantage of CLM platforms that help automate the contracting process, contract management teams eliminate dependence on manual oversight. Contract automation software also enables smoother transitions across the lifecycle.

Here we look at some of the applications and benefits of contract automation:

1. Faster, compliant contract authoring with automated contract review

The contract management best practices begin with diligent drafting. This involves multiple rounds of legal review with the counterparty, typically over email.

Manual processes do not have the necessary risk controls to ensure early compliance. This ultimately prolongs the contract negotiation cycle. It also chokes the legal department’s bandwidth and forces them to focus on non-strategic tasks.

CLM platforms offer many solutions to automate the contract review, redlining, and drafting process. Legal teams can define which approved clause and template libraries to store in the CLM tool’s libraries. Teams can draft standard legal documents such as NDAs, MSAs, and even employee contracts with a single click.

Legal teams can then streamline the review phase, limiting the need for individual oversight for every contract. This helps reduce the cycle times for contract generation.

2. Improved collaboration and increased transparency

Communication between stakeholders (internal and external) is vital throughout the contract lifecycle. However, the inherently siloed way of working for teams makes this far from easy.

With contract management software, teams can improve collaboration thanks to real-time updates, fluid document crossover, and integrations with commonly used collaboration tools like MS Word and Outlook. Contract workflow automation helps keep teams in the loop even if contract numbers reach the thousands.

Much like when we collaborate via Google Docs or Microsoft Office, the latest modifications, clause deviations, and drafts are all documented in a complete audit trail, limiting the need for off-platform communications and improving transparency.

The CLM automation platform can function as a single source of truth, with all stakeholders accessing the same data set.

3. Contract digitization and analytics

One of the most significant advantages of document automation tools is digital transformation—aka digitization.

Manual contract management sometimes relies on physical references (i.e., paper copies), so contracts or additional information can be easily misfiled and lost. Extracting and analyzing contract data thus becomes tedious and inefficient, if not impossible.

Companies that digitize their contract portfolio can immediately gain a bird’s-eye view of their agreements across buy- and sell-side relationships.

Using robust contract analysis software, you can quickly harness critical metadata for immediate use. Furthermore, CLM software offers self-learning AI that evolves alongside the data. With every contract, the AI analysis grows faster and more accurate.

4. Streamlined approval and reduced cycle time through configurable workflows

When legal teams manage thousands of agreements, manual approvals will inevitably cause delays. Enterprises can address this issue by using automated contract workflows. A visual workflow editor combined with pre-configured business rule sets can help expedite contract approval.

With this workflow established, AI contract software can auto-approve simple contracts based on predefined thresholds. More complex contracts go through a configurable approval flow where relevant stakeholders can course-correct as needed based on the available information, touch base through real-time collaboration, or approve the contracts.

Along with automated workflows, contract management software supports electronic signature functionality. Signature templates can also pre-define signatories to streamline the approval process further.

5. Secure and centralized access to contract documents and data

Contract management systems serve as centralized repositories to support collaboration and digitization. Companies that adopt CLM software with these functionalities can upload, store, and share contracts between collaborators via secure cloud-based storage.

Enterprises can further secure documents with access management by putting in place rules that ensure only authorized users have access to sensitive contract data (as opposed to wide-scale link-sharing most cloud services offer).

6. Improved fulfillment with deep obligation management

Entreprises require in-depth insight and tracking of obligations and service levels to achieve desired business outcomes.

Manual processes require near-constant surveillance. However, with CLM software, organizations can automate validating obligation fulfillment tracking by comparing raw performance data feeds against contractual commitments.

You can also automate obligation schedules based on the needs of the contract (configured to follow one-time, recurring, or triggered schedules).

Companies can then better realize the value behind their contracts by ensuring all contractual obligations are fulfilled. This also helps reduce value leakage.

7. On-time contract renewal and accurate expiration tracking

The traditional approach to managing contract renewals relies on indirect communication such as email.

When large organizations have thousands of contracts to manage across departments, renewal dates get missed. Even when organizations don’t miss dates and deadlines, there is rarely enough time to prepare and approach renewal events as opportunities to analyze past performance and negotiate better terms.

CLM platforms help businesses overcome this and ensure contract managers stay on top of expiration dates and important milestones. The best software enables teams to set automated alerts, notifications, and reminders for regular compliance and check-ins. At the same time, all relevant stakeholders (including suppliers and vendors) are kept in the loop—improving collaboration overall.

The end result?

Organizations ensure business continuity through timely contract renewals.

Essential Contract Automation Software Features

Any contract automation software that you select should be able to support the entire lifecycle of your contract – from pre-negotiation, to during negotiation, to post-signature. In order to do that and reap the benefits above, these are the top 4 CLM features that are imperative to have:

1. Digitization – This should always be step one to move away from manual processes. We mentioned this above, but full AI digitization capabilities will transform paper documents, PDF files, price tables, and even foreign documents into digital files. Your CLM should let you store and view digitized contracts in a hierarchical, access-controlled, fully auditable repository.

2. Integrations – Your CLM should be able to easily pull in records from other enterprise IT systems such as ERP, CRM, and P2P so you can leverage your contract data in a collaborative way across teams.

3. Dashboards & Reporting – An all-encompassing view of all of your contracts is important for tracking risk and compliance. Insights within these dashboards should be predictive and help you make decisions that will improve the outcome of every deal you make.

4. Generative AI Capabilities – Machine learning and AI are one thing, but generative AI is stepping up to the plate. We’re still in the early days, but start looking for platforms with trained legal-specific data built on multiple Large Language Models (LLMs). Properly trained contract-specific data helps AI with tasks like:

First draft contract authoring
Identifying risks and discrepancies
Legal review and initial redlining
Simplifying difficult contract language

Smarter Contract Management With AI CLM Software

The contracting process is sometimes lengthy and tedious. However, by employing contract automation tools, internal teams can accelerate their contract management processes and achieve better business outcomes.

AI-driven contract automation solutions allow you to scale and enable your organization to streamline all phases of the contracting lifecycle – across contract creation, storage, and ongoing management.

Utilizing cutting-edge technology, companies can heavily automate drafting cycles, extract and digitize crucial metadata, and close deals faster with fluid, timely collaboration.

Request a demo today and begin your journey toward seamless contracting!