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AI-powered contract analysis

29 Feb 2024

How sophisticated innovation is delivering efficiencies for modern in-house legal departments 

 

Contracts: Essential yet inefficient

Verba volant, scripta manent! You don’t need to be good at Latin to understand that contracts are essential to an organisation’s success (it means “spoken words fly away, written words remain,” in case you were wondering). For lawyers and their organisations, contracts are critically important, as is the effort that goes into creating and reviewing them. However, contracting is rarely done efficiently or effectively. According to research by EY and the Harvard Law School Center, more than half of business development leaders (57%) say contracting inefficiencies have led to slower revenue at their organisations, and 50% say they have caused them to miss out on business. 

In-house legal departments handle huge numbers of contracts at any given time, all of which have obligations to monitor and risks to mitigate. Some are as simple as a standard non-disclosure agreement; others are excruciatingly complex and lengthy. Some organisations still operate outdated, hard-copy contract management systems consisting of little more than filing cabinets and ineffective labelling. Even for organisations that operate modern filing systems—usually little more than a hierarchy of folders on a local or shared drive and a spreadsheet to record them—keeping track of these documents and the terms therein is difficult to say the least. Lawyers and business leaders can’t use these static data repositories for anything more complex than basic queries. Identifying key risks and opportunities, obligations and rights in your contracts is crucially important, yet meaningful extraction, analysis, and review of contract terms and associated data is near-impossible. 

 

Half of business development leaders say contracting inefficiencies have caused them to miss out on business.  

Source: EY/Harvard Law School Center survey on the Legal Profession  

 

Contract review is critical, but time-consuming, costly, and tedious work. It requires the unique combination of legal expertise and the ability to interpret legal language that only lawyers possess. But reviewing many, often similar, contracts as part of a large transaction can be mind-numbing. Paragraphs written differently may mean the same thing. But similarly written paragraphs with a single word change can flip the meaning. Keeping it all straight is a challenge. But the review isn’t the end goal. Your business leaders want you to interpret and explain what these contracts mean to them. That means translating legal language into business language and assessing risk—a largely subjective task. This kind of interpretation is precisely why the world needs lawyers and requires a significant amount of human expertise. 

Shifting demands

For many in-house legal teams, having to do more with less is hardly a novel experience. The pressure for GCs, legal operations personnel, and others within law departments to demonstrate their value to the business has been ever-present in recent years, just as new challenges are emerging, and old ones remain pressing.  

According to the Thomson Reuters 2023 State of Corporate Law Departments (SCLD) report, 65% of in-house legal departments are experiencing increasing matter volumes, while 59% are dealing with flat if not decreasing budgets. Department leaders continue to have to move quickly to protect the financial viability of their business models. Controlling costs remains a top priority, and combining quality and value is coming to the fore.  

At the same time, another key finding is that protecting the business is rising up the agenda for in-house legal teams – who are often seen as the ‘guardians’ of an enterprise. Spending on regulatory compliance and disputes and litigation are forecast to be the top areas where legal spend will increase. Of course, it is the role of in-house counsel to mitigate such risks and the most common way to stay ahead in a fast-changing regulatory landscape and prevent disputes is that critical, time-consuming, and risk-laden task: contract review. Scanning contracts quickly and methodically and surfacing potential regulatory or contractual compliance issues in a timely manner is vital if businesses are to stay on the front foot over time. 

36%
of law departments predicted an increase in regulatory spend 

32%
of law departments predicted an increase in spend on disputes and litigation 

Source: Thomson Reuters 2023 State of Corporate Law Departments report 

Data, expertise, and technology

As one legal department leader from a UK real estate company put it, the legal team’s main mission is: “Streamlining simple processes, providing more specialist advice, and increasing oversight within the business.” And that often relies on technology to automate manual tasks, smooth out workflows and deliver data analytics on which the organisation’s leaders can base their decision-making. 

With this in mind, contract management and review solutions are gaining in importance. When it comes to managing contracts, more than three quarters (76%) of those surveyed in Thomson Reuters’ latest Legal Department Operations (LDO) Index 2023 say they are already using contract management software solutions, with a further 14% looking to procure such solutions in the next 12 months. There’s further to go, however, to convince them to deploy contract AI for analysis, risk assessment, or due diligence. However, it’s encouraging to see that three in ten (31%) are already using it, and almost a quarter (24%) are planning to procure it soon. 

Of course, technology is constantly improving, and artificial intelligence and machine learning capabilities are the next huge transformative leaps in creativity and innovation. AI is already integrated into our daily lives. The technology in our smart phones can predict where we might be going and prompt us to see what the traffic is like on the best available route. Virtual agents or chat bots routinely ask us how they may help as we browse and shop online. Algorithms and predictive computing present us with the best possible personalised search results. In a work setting, more and more legal professionals are seeing the potential in transformative AI-powered technologies that help them automate routine tasks, collaborate more effectively, and more efficiently manage their workflows. AI-powered technology gives lawyers more time to focus on strategic client work rather than repetitive, low-value tasks. 

AI uses fast, iterative processing and algorithms to analyse and see patterns and features in vast amounts of data. Important AI subfields include machine learning, in which computer systems learn and adapt based on the data they are exposed to, and natural language processing, which enables computers to understand, translate, and respond to human language. 

The most powerful legal technology innovations use at least some artificial intelligence. Where technology 1.0 simply digitised manual tasks, tools informed by machine learning take best practices learned from other peoples’ trial and error and seamlessly apply them to what you’re working on. Today’s more intuitive, user-friendly tools aspire to support a lawyer’s workflow rather than forcing new processes or ways of thinking. And when you do update your process or way of thinking, the tools can support you rather than needing to be swapped out or reinvented. 

As we have seen already, contract review and analysis fall neatly into the category of time-consuming, tedious work that is ripe for a smart, innovative automation solution. AI-powered contract analysis solutions can easily highlight and extract data and clarify the content of contracts. Should you wish to see renewal dates and renegotiations terms from any number of contracts, or perhaps check on particular obligations or whether a mutual right to break the contract exists, an automated tool can do in minutes what might take you hours or even longer. Such solutions enable legal teams to review contracts more rapidly, organise and locate large amounts of contract data more easily, decrease the potential for contract disputes, and allows lawyers to focus on delivering value to their organisation.  

For AI-powered legal technology to deliver the best results for in-house legal departments, they require three crucial, interlinked ingredients: 

Data is key because it is often the input and the output of the process. Data is necessary to train machine-learning algorithms and so for any legal technology solution to be worthwhile, it requires large quantities of content that is current, accurate, comprehensive, and enhanced. 

Expertise is crucial because it ensures AI tools are solving the right problems and capturing the nuances of the domain in a way that we can understand and analyse. Subject matter experts drive the generation of training data and validate the performance of machine-learning algorithms and play a critical role in error analysis. They help computer scientists and engineers understand the domain as well as the data attributes responsible for errors, so they can be corrected. 

Technology drives AI solution design and development, which typically requires robust, complex solution architectures that can work at scale. This is how AI scientists combine expertise in AI tools and technologies, analytical and problem-solving skills, and a solid understanding of the target domains. 

AI-driven contract analysis can be built around specific legal domains, for example, real estate, sales, intellectual property, or employment. Such solutions can be “pre-trained” with expert information and equipped to learn from the contracts and documents it is subsequently exposed to. 

Ingest  Define & Extract  Review & Analyse  Report 
Convert documents into machine-readable formats and classify the documents.  Access and customise the review task lists for automatic fact and concept extraction.  Navigate, edit, and annotate the machine-generated results and compare documents, comment, and flag issues or risks.  Review results and onward workflow in contract management platform, and create reports and visualisations. 

 

Such tools ingest documents, classify them, and identify key information such as parties, dates, deal value, language, jurisdiction, and governing law. They can then automatically retrieve defined terms and definitions within the contract and answer review queries and specific questions. Some tools create data visualisations for a large set of contracts, display clauses side-by-side for easy comparison, compare contracts to company or industry standard documents, and efficiently identify non-standard terms, deviations, and risks. 

Every keystroke counts

By reviewing and extracting information from large volumes of contracts and tracking similar information across documents, AI-driven tools relieve lawyers of unrelenting administrative work. They are freed to spend more time assessing and mitigating risk, identifying opportunities, and delivering essential insights to their companies and clients. Increasingly, legal teams will train their AI systems with content from their own repositories of contracts and legal documents to create more precise, bespoke outcomes. 

Adopting an AI-powered contract review and analysis solution enables you to go beyond the typical extraction of facts and clauses from legal agreements to easily answer the specific questions you need answered—in easy-to-read reports. The benefits to your legal team are clear: 

  • Increase efficiency, reduce risk, and accelerate the document review process for transaction due diligence, compliance review, and contract investigation. 
  • Analyse and compare documents in bulk as well as single document review. 
  • Reduce time pressure to deliver detailed high-volume reviews to meet transaction deadlines. 
  • Gain market and competitor insights from the data universe of your past deals. 
  • Instantly identify deviations, even when working with multiple formats of agreements/contracts. 
  • View extracted information in full contract context. 
  • Reduce human error by first-round identification of deviation and risk areas. 
  • Collect and update common issues, key facts, and contract language into an internal knowledge bank for future transactions. 

For busy lawyers, every keystroke counts. A contract analysis and review solution frees up your time, saves you money, and empowers you to focus on legal tasks that deliver greater value to your organisation. 

Innovation, not revolution

While AI and machine learning technology itself is immensely powerful, it isn’t revolutionising legal practice to the point of eliminating the value of lawyers, it’s simply helping to make the job easier by reducing time spent on labour-intensive—but not necessarily intellect-intensive—tasks. 

Contract review software is best suited for triage and fact extraction from legal contracts at volume. It eases the burden of keeping track of similar pieces of information across documents – something human brains aren’t very good at, but at which computers excel. We might call this the administrative work of contract review. 

The real value lawyers offer their clients is the human interpretation and analysis that turns legal language into valuable business insight. If machine learning can take on more of this “administrative” work, it frees lawyers up to focus on the valuable human work clients care about. This might mean faster reviews or higher possible volume, but it will certainly mean happier clients. 

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HighQ is a solution for secure document exchange and team collaboration. Used by some of the world’s leading law firms, investment banks, and corporations, HighQ enables enterprise-grade document management with the best corporate social tools. Securely exchange critical business information and collaborate with colleagues, customers, and partners in one unified space. 

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