The Why and How of Contract Analysis

Sept 22nd, 2023

Your company has contracts.

That means you have data about contracts.

It also means you need a way to distinguish between good and bad contracts, as well as a method for determining what makes a contract good or bad.

This article guides you through contract analysis, detailing its purpose, when it happens, benefits, steps, and the optimal tool for the job: Contract Logix.

Key Takeaways:

  • Contract analysis is not a discrete stage of the contract’s lifecycle, but rather an ongoing activity you should pursue throughout your entire contract.
  • It can save you time and money while enhancing risk mitigation and regulatory compliance.
  • For successful contract analysis, define your business problem, collect data, gather insights, and finally take action based on your insights.

🤔Psst! Need help choosing the right KPIs for successful contract management?
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What is Contract Analysis?

Contract analysis is a component of contract management that deals with tracking, understanding, and recording insights about your organization’s contract data.

While it’s a part of contract management, it extends beyond analysis to include tasks like drafting and executing contracts. 

When Does Contract Analysis Happen?

Unlike more discrete tasks like drafting or destroying a contract, contract analysis happens throughout the contract’s entire lifecycle.

For example, during the drafting stage, it helps ensure your contract aligns with your goals, legal requirements, and organizational policies. In the execution and monitoring phases, it tracks performance and compliance, identifying contracts that either provide value as intended or become dead weight within your organization.

Contract analysis is not a stage of the contract management process that you complete once and then forget about. It’s a continuous process that you can perform at any or all stages of your contract lifecycle.

Benefits of Contract Analysis

Data could be your most valuable asset. Yet, many data-rich organizations miss opportunities to leverage that data because they don’t understand the benefits of contract analysis.

Mitigating Contract Risk

A good contract can strengthen your business relationships, optimize your profits, and unify your team. In contrast, a bad contract can be costly, confusing, and even cause significant legal issues for your organization. While the difference in impact is stark, bad contracts can be difficult to detect, blending in with their profitable counterparts.

Contract analysis aims to identify and mitigate these risks by measuring contract health, sniffing out inconsistencies before they cause larger issues, and identifying trends that could be difficult or impossible to spot without formal analysis.

Regulatory Compliance

To conduct business, organizations must comply with a growing list of regulations like HIPAA, GDPR, PCI-DSS, CCPA, and FCLA.

Contract analysis can help you track deadlines, monitor deliverables, and mitigate compliance risks.

GPDR, HIPAA, and CCPA are just a few of the regulations that businesses must comply with.
Image Source: https://www.vanta.com/resources/is-all-compliance-regulatory-compliance

Increased Efficiency

In addition to mitigating risks and regulatory compliance, contract analysis can improve your organization’s operational efficiency. It can track KPIs, helping you identify which contracts are profitable and which are not.

By identifying your most effective contracts, you can identify what qualities make them effective–whether that be a clause, a vendor, or a deadline. Know what works for your company so you can replicate successful contracts.

4 Steps of Contract Analysis

Understanding contracts is crucial for business success. Here are four steps to guide you through the process of contract analysis effectively.

1. Define the Business Problem

It’s tempting to dive in and see where the data takes you, but without first identifying the business problem you’re trying to solve, you risk bringing a subconscious bias into your analysis.

The first step of contract analysis is to identify the questions you’re trying to answer. Defining your business problem helps guide your analysis and sets you up for success.

2. Collect Data

Once you’ve identified the business problem you hope your contract data can solve, the next step is to collect the data itself.

Contract management software centralizes this data, simplifying the process. If you are not using such software, you’ll need to manually gather, clean, and organize the data. This involves ensuring consistent naming conventions, organizing data into tables, and putting data in a meaningful order. 

Contract management software can automate much of this, saving time and improving your efficiency.

Data cleaning involves removing unhelpful observations, fixing structural errors, managing outliers, and handling missing data.
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mage Source: https://www.geeksforgeeks.org/data-cleansing-introduction/

3. Develop Insights

After defining your business problem and collecting data, the “meat and potatoes” of contract analysis lies in developing insights.

In this stage, use your processed data from step two to address your original business problem. Brainstorm hypotheses and then test them. 

For example, if you are concerned about high HIPAA compliance risk, you could hypothesize that contracts with fewer enforcement provisions pose greater risks, whereas contracts with more enforcement provisions carry fewer risks. To test this hypothesis, compare contracts with different enforcement provisions and observe correlations between enforcement and compliance.

While it’s a good practice to use hypotheses to determine what data points are relevant to the business problem, you should never discard relevant data because it doesn’t support your hypothesis.

4. Take Action

After the theoretical work of identifying your business problem, collecting data, and developing insights, it’s time to apply them to the real world. In this final step, identify courses of action based on the outcome of your contract analysis and start implementing them. 

Congratulations! You’ve successfully performed contract analysis and may already observe benefits like mitigating risk, regulatory compliance, and increased efficiency.

Get the Most Out of Your Contract Management

As previously mentioned, having the right tools for the job makes all the difference. To harness the full power of your contract data, Contract Logix’s contract management software helps businesses stay organized, productive, compliant, and efficient.

While Contract Logix can’t run your business for you, it simplifies, automates, and manages your contract analysis with easy warehousing and a centralized repository.

Try a free demo of Contract Logix today!

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