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What is Contract Negotiation? Definition and How AI is Helping Contract Negotiation Evolve

A group of business people going through a contract negotiation.

What is Contract Negotiation?

The negotiation phase of contracting focuses on how two parties – usually a buyer and a seller – work together to settle on the terms of an agreement that are favorable to both. 

Terms embedded within a contract can define service level agreements, delivery schedules, warranties, conditions, and even innominate terms and the attributing damages of a breach, including termination. During contracting, both parties also negotiate the exact language of the terms as defined by contract clauses.

Naturally, this calls for meticulous coordination on all sides.

Legal, as well as other business teams on both sides, require an effective contract negotiation strategy to not only handle logistics—but also to craft a contract that strengthens the company’s overall position.

However, without a technology-led contract management framework, the entire process may be subject to inefficiencies and risk. 

Through this article, we’ll explore the gaps within a traditional contract negotiation process and how AI-powered contract management tools can help in-house legal teams secure successful business deals. 

Traditional Problems with Contract Negotiation 

Although many basic business practices today are automated, the routine elements of contract negotiation (as with most aspects of contract management) are often done via manual processes. However, at the scale of a large enterprise, driving negotiations manually puts unmanageable strain on the capacity of legal teams.

As a result, the traditional contract negotiation process must be reimagined to make it highly scalable, risk-aware, and geared towards mitigating any possible negative impact on the bottom line

But what are some of the most common issues associated with traditional approaches for negotiating contracts?

Legacy tools and human error

Businesses often rely on spreadsheets, emails, and paper copies as key elements to manage contract negotiations. These basic tools often prove inadequate for the process. For high-risk sectors such as financial, government, and healthcare sectors, we must be aware of and mitigate the far-reaching effects—and costs—of simple clerical errors.

Due to the limitations of legacy tools, this holds true for contract negotiation as well, during which clerical errors such as a missed clause or a small deviation in clause language could cause significant downstream issues.

Protracted negotiation cycles

When enterprises solely rely on email to track information spread across multiple silos, excessive back-and-forth is to be expected. Teams will spend more time clarifying miscommunications than on resolving priority issues, prolonging the negotiation cycle. 

In addition, negotiations are sometimes time-sensitive and a missed deadline could disrupt operations. 

Lack of centralization

In addition to scheduling issues, manual processes often lack a centralized repository containing the necessary documentation. Total transparency is therefore unattainable. Internal teams cannot preserve an auditable communication trail, nor can they expect accuracy when information is solely funneled through multiple data silos. 

Ineffective risk discovery due to lack of standardized contracting playbooks

Negotiations are logistically challenging. No amount of negotiation training can prepare teams for complications if no standards are in place to guide proceedings. Without standardization, teams are unable to:

  • Compare drafts.
  • Evaluate predefined risk positions.
  • Understand if a clause suggested by a counterparty is in line with the company’s preferred position.
  • Prevent unfavorable outcomes wherever possible.

Risks associated with missing clauses can also be overlooked. Relying solely on the contract negotiation skills of contract managers is not optimal; there is a need for technology to be leveraged.

AI-powered CLM Platforms Are Taking Contract Negotiation to the Next Level

In today’s world, manual contract negotiation processes may not be enough to negotiate satisfactory contracts. To truly create stronger agreements that ensure better business outcomes, enterprises must embrace intelligent, AI-driven contract lifecycle management software. This can also help maintain stronger counterparty partnerships, a true win-win.

Here’s how an AI-powered CLM software can support and streamline the contract negotiation process:

Legal review automation and collaborative redlining

Given that over 1 billion people use Microsoft Office products, it makes sense to essentially integrate a CLM offering and its underlying AI capabilities with the MS Office suite to streamline the contract review and redlining phase.

Next-gen CLMs like SirionOne offer comprehensive integrations with Microsoft Word, Outlook, and Teams to accelerate negotiation cycles. This is critical so that enterprise teams can edit and review contract drafts in real-time and drive the negotiation process more efficiently within a familiar software environment. 

An AI-powered CLM platform can also scan documents at scale and assist in legal review by highlighting changes made to a draft in a matter of minutes. This in turn will enable human reviewers – who would otherwise spend hours or days comparing versions – to focus on more strategic goals.

Effective risk discovery through automated comparison with a company-approved contracting playbook

With an AI-led CLM in place, the contract negotiation process can be standardized to align with the company playbook and reduce risk exposure. During the initial drafting phase, users can leverage pre-approved templates and clauses to ensure a contract’s language is compliant with company-preferred positions from the get-go.

In addition, the systems’ AI can autonomously highlight missing clauses or clause deviations in third-party drafts and offer prescriptive clause suggestions to ensure effective risk control in negotiated agreements.

For routine contracts (such as those drafted during the renewal phase), the CLM’s AI can leverage historic contract data to make recommendations, which can be used to create stronger, smarter contracts that offer better business outcomes. 

Digital repositories for centralized storage 

Historically, contracts were poorly managed. Duplicate, incomplete, and erroneous copies were lost in lengthy email chains or in filing cabinets, leading to version control issues. Considerable time and money were spent on aggregating and compiling contract data, and more often than not, some contracts would end up slipping through the cracks of a large portfolio.

By utilizing a centralized, cloud-based repository, companies gain a secure and sustainable method of storing digitized contracts. The repository also acts as a single source of truth for all contracting data including related documents, comments, and communication from the negotiation phase.

Configurable workflows to simplify collaboration 

As mentioned earlier, negotiating a contract requires close collaboration between multiple internal stakeholders as well as the counterparty. With so many hand-offs, it is easy for a step to be skipped by mistake, leading to oversight.

A CLM platform streamlines and automates this process using configurable workflows. Once a contract is ready to be approved, it can be cascaded down this workflow from reviewer to reviewer, while offering complete visibility into where and with whom the responsibility for approval lies at the moment.

The workflow can be configured with business rules to enable threshold-based auto-approvals for simple contracts such as NDAs. Meanwhile, more complex contracts can utilize conditional workflows for approval on a case-by-case basis, further streamlining the negotiation process.  

Deep analytical insights based on past contracting data 

Accurate contract data on past deals is vital to developing strong negotiation tactics, presenting appealing counteroffers, and finding the best alternatives to unfavorable contract terms. To help businesses achieve this, CLM software provides actionable insights based on past performance trends

Guided by AI-powered analytics, retrospective contract data can be analyzed to discover insights and trends that can help gain an edge during business negotiations. Teams with CLM tools can then utilize these insights to modify clauses in new contracts. 

AI-driven Contract Negotiation with SirionOne

Be it a procurement or sales contract, a unilateral agreement, or an employment contract, contract negotiation is oftentimes so complex that traditional, manual processes are simply inadequate.

To both secure and streamline a successful negotiation, businesses require intuitive, next-gen CLM systems. With SirionOne’s CLM software, business leaders can leverage AI to develop smarter strategies and gain an edge in negotiations.

Further, SirionOne’s AI-powered contract negotiation functionalities such as automated risk discovery and scoring, advanced analytics, and integrations with widely used productivity tools, businesses can shorten negotiation cycles and achieve better contracting outcomes.

Reach out to SirionLabs and request a demo to learn more.

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