Artificial Intelligence in Contract Management: Should Your Enterprise Jump on the Bandwagon?

While using Twitter or Linkedin, you probably have seen the online ads touting artificial intelligence (AI) as the next big thing in contracting.  As with any industry buzzword, contract managers may feel pressured to try out AI. But is your enterprise really ready for AI to handle in-house legal work? Let’s review key considerations about implementing AI in contract management.

What is AI in Contract Management?

First of all, the definition of AI varies between the company and the person you’re speaking to. This is why understanding your expectation of what the technology really is and how that definition is going to deliver results that you can really use are key.

There are two stages of AI in contract management. The first one is delivering prescriptive analytics that help guide you in decision-making. For example, comparing side-by-side the clauses of a drafted contract against those of a previously executed contract. AI software would parse through the two documents and determine differences. The second stage is predictive analytics in which the AI system applies specific contract management rules to make decisions (also known as “machine learning”), such as whether or not to include a clause in a contract.

The current state of AI in contract management is that the majority of companies are offering services in prescriptive analytics only.  The claim that robots will be reviewing your contracts is still several years away for now.

Who is Trying AI in Contract Management?

Two companies that are dipping their toes with contract AI are Microsoft and Cisco. In May 2017, Tami Baddeley, operations lead, legal operations and contracting at Microsoft, has revealed that her team implemented a six-month pilot project that leveraged AI to analyze the contracts of its top 21 strategic partners. On the other hand, Cisco is currently working on a two-stage pilot program covering the application of AI to nondisclosure agreements.

From these two projects, several takeaways became clear. First is understanding that large organizations are only testing AI in contract management processes in which the necessary level of machine intelligence is low. For example, Baddeley points out that Microsoft is currently using bots to retrieve the answers to questions posed by contract managers. Second, both reps from Cisco and Microsoft stated that implementing predictive analytics in contract management is a very expensive process with a payoff several years down the line. Both companies are aware that one-time projects won’t provide the necessary time for adequate machine learning to take place. Third, Baddeley points that security is major priorities for companies of any size, forcing implementers to ask, “How secure is the information that we are giving access to and that we are gaining access to?”

In summary, at this point, only large organizations have the necessary budget to implement AI in contract management and are doing so with a small sample of contracts or limited range of contact management processes.

Is Your Organization Ready for AI Contracting?

Before your organization can seriously start thinking about AI contracting, it needs to start using contract management software. For example, Contract Logix surveyed 264 U.S. individuals who are responsible for the creation, editing, and/or management of contracts at business services companies. None of these 264 individuals were using CLM software at the time of the survey. In the manufacturing industry, Contract Logix surveyed 550 individuals responsible for contract management processes who also were not using a CLM solution.

The reality is that if you don’t have the basics down, including data centralization, contract visibility, and library of standardized language, you can’t possibly be ready for using AI for contract management.

Additionally, Baddeley points out that to truly realize the cost-savings of AI contracting, companies need to be comfortable with storing their data on the cloud. The labor intensiveness of making a move to the cloud for a large enterprise adds additional costs to the implementation of AI. While virtualization of data can deliver cost savings and make some processes more agile, the company needs to already have the mindset to make a move to the cloud.

Takeaway

AI contracting is far from being a magic bullet to aid in-house legal work. Due to the necessary time for machine learning and cost of pilot projects, large corporations are only applying AI to isolated projects with a small scale. Since the majority of vendors are offering the first stage of AI contracting, predictive analytics, any organization considering implementing this technology should adjust its expectations on the deliverables.

However, this trend highlights the need for enterprises to implement a CLM solution. As a new generation of contract management systems is being developed, companies have an even bigger need to transition from paper-based or uncoordinated manual contract management systems.

  • To find more about how your peers at manufacturing companies handle contract management, download the full report “Contract Management at Manufacturing Companies: Roles, Tools, Challenges, & Obstacles”.
  • To find more about how your peers at business services companies handle contract management, download the full report “Contract Management in the Business Services Industry: Roles, Tools, Challenges, & Obstacles”.

Image Credit:  Geralt