How AI is Revolutionizing Contract Management

When ChatGPT-3 leaped onto the scene in late 2022, technology pundits quickly declared the death of modern work as we know it. By the middle of 2023, online forums were complaining about its outputs. As it turns out, inaccurate answers are a foregone conclusion when the entire internet is your training material.

AI will continue to advance, although as businesses take a more sober look at artificial intelligence use cases, it’s becoming clearer where this technology will take us. Employers and employees can agree on one thing: any busy work that can be outsourced to AI is a positive good.

Enter contract management. No one wants to waste productive hours combing through documents for termination dates, renewals, and contract provisions with third-party contractors.

Take banks, for instance. Many have thousands of third-party vendors, and they must evaluate the risk profile of each one. Banking is a heavily regulated industry – any hours devoted to solving compliance and risk issues instead of looking up dates in vendor contracts is a move in the right direction.

Let’s jump into how businesses might deploy AI for more streamlined contract management.

Optical Character Recognition (OCR): An Old Technology Reimagined

Optical Character Recognition has been around since the 1970s. It scans documents, including contracts, and picks out certain characters. OCR can identify words such as “renewal” but doesn’t know what to do with them.

Businesses have used this technology for years to shave time off contract management. OCR points you in the right direction but doesn’t serve up the specific contract provision you want on a silver platter.

OCR still leaves a lot of busy work.

Vectorization helps move the process forward. Vectorization uncovers the relationship between words. It tries to discover intent by transforming words into something a computer algorithm understands. Search engines use vectorization. If someone types “Adidas” into Google, the search engine will likely pull up Adidas shoes, but it might include brands such as Nike and Puma.

Why?

Because it recognizes the vector “Adidas” as being related to shoes.

Large language models (LLMs), which is what most people mean when they discuss AI, represent a colossal leap forward because they can have a “conversation” with the user. Let’s say, for instance, that you weren’t looking for shoes when you entered “Adidas” into a search engine.

You can continually refine your search, but this takes time. You can explain that you wanted to search for the Greek god Adidas to an LLM, which – if it has been trained with the correct materials – will promptly inform you that there is no Greek God Adidas. You must have been thinking of the goddess Nike.

Expertise is Necessary to AI Contract Management

Legal contracts differ from construction contracts. The former tends to be more specialized and contains numerous and complex clauses and provisions. As companies build LLMs that handle contract management, they must rely on human expertise (the training material inputs) to generate the correct outputs.

When inputs rely on human expertise, an AI contract management system has the following benefits:

Review and Analysis: Quickly analyze key clauses, obligations, service-level expectations, and provisions.

Risk Assessment: Evaluate contracts for potential risks by assessing terms and conditions against known risk factors.

Data Extraction and Management: Extract essential dates, financial information, and other critical data.

Compliance Management: Ensure compliance with industry-specific regulations and internal compliance policies.

Workflow Automation: Send contracts to the correct departments for review.

By utilizing AI contract management as a part of a vendor risk management software, businesses can streamline internal processes, reduce busy work, minimize errors, and boost their ROI.