Contracts are a company’s lifeblood. Delays in contract signings have a direct impact on revenue. The bottleneck of productivity: legal departments. Volatile market conditions, complex business relationships and legal frameworks increase their workload. One solution to up efficiency and reduce costs is legal tech and automated contract review.

We provide an overview of which software can effectively support which contract management processes, how users can ensure high quality in contract review tools, and how legal departments can improve their future readiness.

Golden 20s? Challenges in Contract Management

On average, companies lose more than 9% in sales due to slow contract management processes . This is the conclusion of a study by the World Commerce and Contracting association. The economic impact of slow contract processes varies, depending on industry and company size . But anyone who works in  legal will be able to confirm: Contract management is time-consuming as it involves a lot of manual effort.

According to an EY study, the workload will increase by an average of 25% in the coming years without any increase in staffing. That’s why investments in technology will skyrocket and demand is already increasing. While 70% of companies have developed a technology strategy for their contract management, 99% lack the data and technological foundation to implement effective change.

Solution Building Block: Legal Tech

Legal Tech is a buzzword that’s never missing from any discussion about more efficient processes in legal departments.

What is Legal Tech?

Legal Tech refers to all digital applications specifically designed to speed up legal activities, improve the effectiveness of legal support, and make it easier for people to access legal services.

The spectrum of legal tech is wide, ranging from simple rule-based applications such as document management systems for law firms to legal tech AI, i.e. tools that automate work processes using artificial intelligence.

In contract management, legal tech can be used in all phases of the contract lifecycle, from contract review to document archiving.

The 5 Phases of the Contract Life Cycle

Which lifecycle phases a contract goes through varies depending on the type of contract. Individual phases can be skipped and the order of the phases might change. In principle, however, five phases can be identified in contract management, with numerous opportunities for digital support.

1. Initiation

In this phase, companies decide that a contract needs to be concluded, for example because a product is being sold or a business partnership is being entered into.

By using document automation applications, lawyers can access standardized contract templates that speed up drafting. Other digital solutions offer add-ins for text editors so users can search legal databases directly from the contract document.

2. Negotiation

In this phase, the terms of the contract are negotiated, including price, deliverables and liability. Employees review contract drafts and templates.

Cloud-based software solutions can simplify the process by allowing the various parties to leave change requests and comments on paragraphs directly in the document.

3. Conclusion

The contract is signed and both parties exchange the necessary documents and records.

Digital signature applications eliminate the need for on-site appointments and reduce waiting time which is unavoidable when sending documents by mail. Thanks to encryption and certification, digital signatures are often even more secure than handwritten signatures on paper (reversal of the burden of proof).

4. Implementation & Monitoring

The terms of the contract come into force and the services are provided. Companies monitor implementation and compliance with the contract. If necessary, they agree on changes and adjustments to the contract.

Document Management Systems (DMS) serve as a central repository for contracts and simplify management, for example, through tagging and notification of deadlines. Contract analysis tools make it possible to extract data from contracts and identify opportunities for business development via comprehensive evaluations.

5. Termination

The contract is terminated or reaches the end of its term. Contract documents are archived in accordance with applicable law.

Legally compliant archiving is a function of DMS. Documents are removed from the operational system to optimize processing power and are stored securely and searchably in cost-efficient archive systems.

Legal Tech Use Case: Automated Contract Review

While digital solutions have long been available for managing and archiving legal documents, researching sources and creating contract templates, the actual review of contracts has hardly been accelerated. The comparison of old and new contracts, the compliance check with internal regulations, requires the expertise of lawyers. Automated contract review promises to open the bottleneck of productivity.

Benefits of automated contract review

• Massive acceleration of contract review
• Fewer errors due to lack of focus
• Consistent review quality
• Review by departmental staff possible

The market for automated contract review is growing. To assess the quality of the applications, it is necessary to understand the different ways in which the tools work. This is because the performance of classic automated contract review differs significantly from the capabilities of AI-based tools.

How does classic automated contract review work?

Without going into the workings of individual tools, classic automated contract review works according to the following principle:

The contract is entered into the system, either as a text document or a scan of a paper document.

The system works on the basis of defined rules or algorithms and thus searches the contract for specific clauses or language patterns.

The system then performs pre-defined actions, including marking matches or mismatches or generating a report. If a free-text search is offered, the software only finds content if there is a 100% word match.

Since the classic automated contract check is based on fixed rules/algorithms, it is prone to errors. As soon as contract sections are worded differently than defined, discrepancies or matches are not detected. The support provided by such tools can prepare the review by a lawyer in simple contract cases, but in many cases it increases the risk of errors.

How well does contract review AI?

Unlike classic contract review tools, AI-based applications work with self-learning algorithms.

Users provide feedback to the software where it has misrecognized text passages. Over time, the contract review AI gets better and better in its results. The drawback: training takes a lot of time and is expensive. Pre-trained artificial intelligence works in a similar way. If companies already have a large number of contracts in the way they will be audited in the future, the AI can be pre-trained. This reduces the training effort for companies, but it’s costly and in most cases there is not a large enough dataset to perform reliable training. In addition, this type of AI is prone to errors, as new wording or contract components that were not included in the training are not recognized.

The alternative is artificial intelligence that understands texts on the meaning level. These semantic algorithms do not need to be trained. They read documents similarly to humans and can recognize discrepancies and matches even in text sections that are worded completely differently.

An example of a contract review AI of this category is semantha®. The application offers high review accuracy because it understands texts at the level of meaning. Thus, it’s possible to compare different phrasings without training. At the same time, it minimizes the risk of errors by consistently following a human-in-the-loop approach: Legal professionals and artificial intelligence work hand in hand and  combine the strengths of humans and machines.

More info on semantha for contract review

The future of (automated) contract review

Legal tech is about to fundamentally transform the way legal departments work. Investment in contract management tools will increase significantly in the coming years. Out of sheer necessity.

While automation is already commonplace in other areas of business, the automation of legal processes is only starting to take off. With the rapid progress in artificial intelligence, it is now more and more possible to outsource demanding tasks to AI, tasks that previously required human judgment.

Among lawyers, this evolution is viewed quite critically. And understandably so. However, the concern about becoming replaceable and losing jobs to AI is holding back the digital transformation of legal departments.

Instead of viewing AI as competition, lawyers should see the smart tools for what they are: Tools whose value depends on how they are used. It’s true, the technology will change how lawyers work, but it’s also true that these tools will increasingly become a necessity for achieving competitive efficiency.

What are the use cases for AI in your legal department?
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This is an article written by Moritz Maier at thingsTHINKING.