If you’re like most business owners, you’re likely collecting contract data without putting it to good use. Learning to analyze and leverage this data leads to improved contract processes, growth opportunities, and lowered legal risk. Poorly designed contracts put your company at risk of liability, and manually approved contracts increase the chances that someone has overlooked a mistake somewhere in the contract lifecycle. Contract analysis tools that use artificial intelligence (AI) to deliver strategic insights can transform the entire contract management process.
What is contract analysis?
Contract analysis software lets you look at your enterprise’s contracts in detail and gather actionable insights to improve workflows and reduce risk. Analytics make your contracts searchable, helps you predict benefits and risks, and secures your texts without requiring extensive manual review.
Every business wants to grow and improve, and most realize that gathering data is one of the best ways to do so. Contract analysis tools use your existing contracts to provide insights on:
- Incentives
- Indemnifications
- Clauses
- Liabilities
- Policies
By analyzing previous contracts and extracting the relevant information, you optimize existing contract data. Rather than sticking your contracts in your repository and never looking at them again until it’s time to renew, you can use them and the insights they yield to design better contracts going forward.
Combining contract analytics with financial data also lets you track real performance against the contract’s stated terms.
How contract analysis works
Contract analytics rely on AI and natural language processing (NLP) to turn documents into searchable text data. A contract lifecycle management (CLM) platform scans your existing contract archive and maps each one to a template using NLP. Then, it can compare the text in the contract you’re currently working on to these templates to identify language issues.
Language issues occur when your contract language differs from that of existing contracts and it presents a liability. The CLM reveals inconsistent terms and definitions across contracts and can even alert you when a term is broken or a contract expires.
Contract analytics software also makes key terms searchable, so you can look for certain details across your contract repository. The AI and NLP processes the software uses lets you spot possibilities of risk before they happen.
The role of AI in contract analysis
AI and machine learning form the basis of contract analysis. Processes like NLP and optical character recognition make documents searchable, then machine learning algorithms extract and analyze contract metadata.
What is contract metadata? It’s the terms, dates, clauses, warranties, and other data points of your contracts. Once that metadata becomes searchable across all of your contracts and legal documents, you can quickly and easily find insights to help you strengthen future contracts.
What do contract analytics measure?
You should understand the kind of data you’ll have access to so you can reap the full benefits of contract analysis. Before diving in, determine which questions to ask to get actionable information from your contracts.
For instance, you might want to know how many contracts you have with one company, or which contracts expire in the next 60 days. It would be useful to know how many contracts you’ve executed in the last week, month, or quarter as well. To check on the status of your contracts, you may also wish to know which contracts are currently in negotiation but were created more than one month ago.
By providing you with the relevant metadata, contract analytics helps you answer these questions and obtain additional insights. Let’s take a closer look at what contract analysis measures, and how you can leverage this information for improved contracts in the future.
Contacting parties
Who the contract is with is one of the most obvious yet overlooked pieces of information in contract analytics. The name of the company, its contact information, and business address are vital, so you can keep track of how many agreements you have in place with this entity.
Dates
Analytics can provide you with a visual representation of a contract’s timeline, including starting and ending dates. You can evaluate a contract with a glance at the timeline and decide whether you should look into it for renewal or not.
Renewal terms
In addition to visualizing the timeline of a contract, you need to know how the contract renews. With contract analytics software, simple indicators will let you know if an agreement renews automatically or if one of the parties must take action on it. Your company can save resources by preventing auto-renewal on a contract with services you no longer need or avoid problems because you forgot to remind the other party about renewing a contract.
Warranties
Easy access to the contract’s warranty will save time and resources on contract review, so either party can fix something when it goes wrong.
Termination
Finding how to terminate a contract and an agreement’s end date are likely the two data points you’ll search for the most. Analytics can quickly and easily show you if a contract can be terminated for convenience, so you don’t have to spend as much time on contract review.
Performance-based incentive opportunities
By cross-referencing performance-based incentives in your contracts with your company’s financial data, you can find opportunities for discounts or rebates. You can also track these incentives and make them easier to identify in the future.
Inconsistencies
A large corporation that uses manual contract management is sure to have inconsistencies in terms, including pricing. Analytics with CLM software catches these differences, so you can ensure the same prices for the same products and services.
Supplier data
Contract management and analytics can help you automate supplier validation, speeding up the contracting process.
Combined financial data
Contracts and legal documents state how an agreement should be carried out, but they don’t reflect if the parties actually followed those terms. To see how closely your company stuck to a contract, compare contract data against your financial data. You’ll notice any off-contract buying, which can inflate costs and lead to contract violations.
The benefits of contract analysis
The biggest benefit of using contract analysis tools to analyze your agreements is gaining valuable insights that help you improve your process and your business overall. But what specific insights can you gain, and what concrete benefits does contract analysis have for your business?
Opportunities to cross-sell
Cross-selling allows you to offer complementary products or services to your customers, based on their past behavior. Contract analytics helps you identify openings for cross-selling more easily, potentially increasing revenue and helping you expand your business. With contract analytics, you can track the agreements you make with your customers or another company and better understand which of your supplemental products or services can meet their needs as well.
Prevent revenue leakage
When the difference between the value expected from a contract and the value realized is large enough, your company loses money in the long term. Poor-quality contracts are one of the top causes of revenue leakage, due to scope creep, missing key clauses, and performance issues. CLM software and contract analytics help you identify contracts that caused leakage and rectify those mistakes for future agreements.
Identify growth potential
Contract analysis can identify growth opportunities. Is it possible to scale up the services you’re offering to one of your clients, based on last year’s performance? Solid analytics will help you answer that question and others, so you can work on expanding your offerings.
Improve contract process
Contract analytics lend insights that can improve the contracting process itself. You can identify the contracts that took a long time getting through negotiation, and figure out why. You can see which contracts had problematic terms and eliminate those for future agreements. All these insights will help speed up and streamline your contract cycle times.
Mitigate risks
Managing risk is always a top concern and analyzing your contracts helps reduce it. Analytics show deviations from standard language or procedures, helping you predict problems before they happen. Contract analysis AI can also alert you to off-contract purchasing as it happens, and not after the fact.
Organization-wide agility
Every company wants to be able to react quickly to new challenges. Manual contracting prevents this flexibility, however. CLM software helps you anticipate changes that could affect your existing agreements and prepare for them. Having that much contract data at your disposal makes every department more agile because it lets you conclude agreements more quickly.
Using analytics to optimize your contract process
Contract analysis helps you reduce risk, prevent revenue leakage, improve your contracting process, and identify growth opportunities by providing you with actionable insights from your contract data. A manual contract process not only slows your business down but also potentially costs you thousands of dollars per year in missed opportunities and unnoticed off-contract buying.
Ironclad is not a law firm, and this post does not constitute or contain legal advice. To evaluate the accuracy, sufficiency, or reliability of the ideas and guidance reflected here, or the applicability of these materials to your business, you should consult with a licensed attorney. Use of and access to any of the resources contained within Ironclad’s site do not create an attorney-client relationship between the user and Ironclad.
- What is contract analysis?
- How contract analysis works
- The role of AI in contract analysis
- What do contract analytics measure?
- The benefits of contract analysis
- Using analytics to optimize your contract process
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