Part 8: Implementing AI for Contract Management

We now turn our attention to a practical application that can deliver immediate value to your organisation: AI-powered contract management. I have spoken about this in detail in my article The Future of Contract Management: Harnessing the Power of AI & Cloud Technology so here we will explore how the AI capabilities we've been developing can add value to one of the most time-consuming and critical business processes.

Before we dive in, a reminder: implementing AI solutions requires a team of skilled professionals. While this guide provides an overview of the process and its benefits, the actual implementation should be carried out by experts in AI, data science, and legal technology.

1. The Challenge of Contract Management

Contract management is increasingly complex. Legal teams can often be overwhelmed by the sheer volume of contracts they need to review, negotiate, and monitor. This leads to several challenges:

• Time constraints leading to rushed reviews
• Inconsistencies in contract interpretation across the organisation
• Difficulty in tracking obligations and deadlines
• Increased risk of non-compliance or missed opportunities

Traditional contract management processes are often manual, time-consuming, and prone to human error. This is where AI can make a significant difference.

2. How AI Transforms Contract Management

AI has the potential to revolutionise contract management by automating many aspects of the process with key benefits such as:

• Speed: AI can review contracts in a fraction of the time it takes a human.
• Accuracy: AI doesn't get tired or distracted, maintaining consistency across thousands of documents.
• Scalability: As your contract volume grows, AI can easily handle the increased workload.
• Insights: AI can extract valuable data and trends from your contract portfolio.

3. Setting Up AI-Powered Contract Review

a) Prepare your contract database:

• Digitise all contracts if they aren't already in electronic format.
• Organise contracts into a structured database.
• Ensure data quality and consistency.

b) Choose and fine-tune the right AI model:

• Select a pre-trained language model suitable for legal text analysis.
• Fine-tune the model using your organisation's specific contract data.
• Continuously refine the model based on feedback and performance.

c) Integrate AI with existing systems:

• Connect the AI system with your current contract management software.
• Ensure smooth data flow between systems.
• Set up user-friendly interfaces for legal teams to interact with the AI.

4. Key Features of AI Contract Management

• Automated contract classification and sorting
• Clause identification and extraction
• Risk assessment and flagging
• Compliance checking against internal policies and regulations

These features allow your legal team to focus on high-value tasks while the AI handles routine analysis and flagging of potential issues.

5. Implementing Automated Compliance Checks

• Define clear compliance criteria based on your organisation's policies and relevant regulations.
• Train the AI to recognize non-standard or risky clauses.
• Establish workflows for human review of flagged issues.

This system acts as a safety net, ensuring that no contract slips through without meeting your compliance standards.

6. Creating Systems for Contract Analytics and Insights

Note: Your own in-house AI can do more than just review contracts; it can provide valuable business intelligence;

• Extract key terms and conditions across your contract portfolio.
• Analyse trends in contract negotiations and terms.
• Predict potential risks or opportunities based on contract data.

These insights can inform strategic decisions and improve your negotiation positions.

7. Change Management and User Adoption

Implementing AI in contract management represents a significant change. How does one ensure success?

• Provide comprehensive training for legal teams and other stakeholders.
• Clearly communicate the benefits of the AI system.
• Start with pilot projects to demonstrate value and gather feedback.
• Emphasise that AI is a tool to enhance, not replace, human expertise.

8. Measuring Success and ROI

Justifying your investment in AI for contract management requires a comprehensive approach to tracking and analysing key performance indicators (KPIs). Here's an expanded look at how to measure success and calculate ROI:

1. Time Efficiency:

• Track the average time spent on contract review before and after AI implementation.
• Measure the reduction in turnaround time for contract approvals.
• Calculate the number of contracts processed per employee per day/week.

2. Accuracy and Compliance:

• Monitor the reduction in compliance violations or missed contract obligations.
• Track the number of errors caught by the AI solution that were previously missed by manual review.
• Measure the decrease in contract disputes resulting from misinterpretation or oversight.

3. Cost Savings:

• Calculate direct cost savings from improved contract terms identified by AI.
• Estimate risk mitigation savings by quantifying potential losses avoided through better compliance.
• Measure reduction in legal outsourcing costs for routine contract review.

4. Resource Allocation:

• Analyse the shift in how legal team members spend their time (e.g., more strategic work vs. routine review).
• Calculate the cost savings or value added from this reallocation of human resources.

5. Contract Performance:

• Track improvements in contract renewal rates.
• Measure increases in favourable contract terms achieved through AI-driven insights.
• Monitor reductions in contract value leakage.

6. User Adoption and Satisfaction:

• Survey team members on their satisfaction with the AI system.
• Monitor usage rates of the AI tools across different departments.
• Track the number and nature of support requests related to the AI system.

7. Business Impact:

• Measure the reduction in contract cycle times and its impact on business agility.
• Analyse the correlation between AI-driven contract management and overall business performance metrics.

8. Long-term Value Creation:

• Assess the value of insights generated from contract analytics.
• Measure the impact of these insights on strategic decision-making.

To effectively calculate ROI:

1. Establish a clear baseline of performance metrics before AI implementation.

2. Set specific, measurable goals for improvement in each area.

3. Regularly collect and analyse data on all relevant KPIs.

4. Calculate both tangible (e.g., cost savings) and intangible (e.g., risk reduction) benefits.

5. Compare the total benefits against the total cost of AI implementation and ongoing operation.

Regular tracking and reporting of these metrics will not only justify the initial investment but also guide ongoing refinement and expansion of your AI contract management system.

9. Ethical Considerations and Best Practices

• Ensure data privacy and security, especially given the sensitive nature of contracts.
• Maintain transparency in how the AI makes decisions.
• Regularly audit and refine the AI models to prevent bias and ensure accuracy.

10. Future Directions in AI Contract Management

• Integration of blockchain technology for smart contracts
• Advanced natural language processing for more nuanced contract analysis
• AI-assisted contract drafting and negotiation

Implementing AI in contract management represents a significant step forward in leveraging your in-house AI capabilities. By automating routine tasks, providing valuable insights, and enhancing compliance, AI can transform your contract management process from a bottleneck into a strategic asset.

With the right approach, AI-powered contract management can provide a substantial competitive advantage, allowing your legal team to work more efficiently and strategically.

In my next instalment, we'll explore how to expand your AI capabilities across other departments, creating a truly AI-driven organisation. Stay tuned as we continue to unlock the full potential of your in-house AI infrastructure.

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Disclaimer:

This article is part of an educational series designed to provide general insights and understanding about AI technologies and their potential applications in business. While we strive to offer accurate and up-to-date information, the field of AI is rapidly evolving, and specific implementations can be complex.

The content presented here is for informational purposes only and should not be considered as professional advice. If you're considering implementing AI solutions in your business, we strongly recommend seeking the support and guidance of qualified AI professionals, data scientists, security experts, and legal advisors. They can provide tailored advice based on your specific business needs, ensure proper implementation, and help address critical aspects such as data security, legal compliance, and ethical considerations.

Remember that working with AI and large language models involves handling potentially sensitive data and making important strategic decisions. Always consult with appropriate legal, IT, and business advisors before making any significant changes to your business processes or systems.

Your journey into AI is exciting, proceed with careful planning and expert guidance to maximise benefits while minimising risks.