How AI is Changing the World of Contract Creation and Management
- Contract Management
Artificial intelligence remains at the forefront of many procurement conversations. The largest value of AI comes from enhancing current processes and optimizing internal operations. AI also drives better decision-making by supplementing human knowledge, aggregating data, and making intelligent predictions. We see these value drivers at every stage of the procurement cycle, but perhaps most strongly in contract management.
Whether you’re creating, managing, or renewing contracts, AI can help make these key values a reality.
Creation and Authoring
It’s no secret that computers can read faster than humans. This couldn’t be more useful than when dealing with large documents like complex contracts. Computers can sift through thousands of documents in seconds, but the true power of AI is its ability to recognize patterns in those documents and, more than anything, understand the context they exist in.
Writing contracts can be a gruelingly manual process. Even with an efficient contract management solution that includes document templates, each contract will need to be individually adjusted based on a supplier’s needs. AI can go beyond simple templating and actually author entire contracts for you, incorporating necessary clauses based on the rest of the agreement details from the RFP and supplier profile. This clause authoring can account for seemingly minor data that a human might overlook or ignore, including supplier size, performance history, agreement length, and more.
AI also steps in to help when supplier details are provided in emails, scanned documents, PDFs, or even paper forms. Optical character recognition can convert various documents to text, scanning them for key data points like costs, quantities, and quality metrics. It can then incorporate those directly into contracts, only ever alerting a human if it flags an error or discrepancy. More importantly, the system can actually learn from any corrections or modifications to be able to better interpret similar documents in the future.
These efficiency increases are exactly what we mean when discussing the value of enhancing current processes. The old methods of having employees comb through every supplier document in order to write a reliable contract are outdated and can be dramatically improved thanks to machine learning and artificial intelligence. One company working with JAGGAER saved time equating to over 1.5 full-time employees, allowing them to instead dedicate that human power to more strategic efforts and push the organization forward.
Mitigating Potential Risk
Whether you’re sourcing new suppliers, making purchases, or writing new contracts, managing risk is vital, especially in the current tumultuous markets. Artificial intelligence in contract creation can help minimize your potential exposure without sacrificing opportunity, simply by covering potential areas you may not have previously considered.
The biggest way that AI does this is by analyzing the language of your contracts and responding to it. This includes recommending new language or clauses based on the context of the rest of the document, as well as the history of similar contracts, performance against those contracts, and past supplier issues or delays by similar vendors in related categories. All of this information is analyzed and considered, and the system can make decisions about which clauses are necessary to protect your organization.
Importantly, an AI contracts tool that is part of a larger procure to pay suite can integrate deeply with Supplier Management to incorporate supplier history. That includes previous violations, late deliveries, failure to comply with discounts, or other complications. Integration is a clear best practice for contract management, not only because it reduces duplicate information but because it empowers AI systems with clear, reliable data.
This is where the value of better decision-making becomes a reality. The platform can digest more information about your suppliers and contracts than humans possibly could. It then provides your team with recommendations to minimize your risk more than you could on your own. This drives tangible bottom-line results, with an average of 3-18% risk reduction for those who adopt an AI-driven contract analysis tool.
Smart Approval Routing
Streamlining approvals is a crucial step to simplifying the contracts process. Gathering the appropriate signatures from legal, procurement, finance, and more can be quite a process without the appropriate management technology. This is especially true if there are variations in your contracts that require additional approvals, for example, if the contract is longer than usual or reaches a certain dollar value threshold. AI can use contextual clues to identify which that require approvals from different team members and automatically add those approval steps right into workflow. Additionally, the system can learn from past approval routing to identify where extra steps are needed and integrate them seamlessly.
Management and Renewals
Managing existing contracts, and especially the renewal process, can be just as challenging.
Proactive notifications – any basic contract management system will tell you when your renewal cycle is coming up, update contract status from active to expired, etc. That doesn’t require AI. But AI goes a step further to create recommended steps during the renewal process. This might mean simply signing a renewal and entering the document into approval flow, or it could mean adjusting requirements, costs, penalties, or other clauses.
As discussed, connecting contract management to supplier management opens up a world of possibilities for AI due to the availability of data. Throughout the lifecycle, and especially at renewal, the system can analyze a given supplier’s performance against contract. From there, it can make recommendations on whether or not to renew the contract, as well as other more reliable suppliers to shift that business to. The system can then propose different scenarios at renewal time for the team to evaluate. All told, this digital analysis can generate 30-50% time savings per contract, meaning that your team is freed up to do more strategic work, identifying new key suppliers and opportunities.
A constant struggle for procurement teams is to make sure that members across the organization are buying goods on contract and getting the prices that the contracts team worked so hard to negotiate. Many eProcurement platforms can help track spend against contracts, and some can even identify items by SKU to redirect users through the appropriate catalogs and gain savings. However, AI can take this a step further by recognizing different types of similar items and offering on-contract replacements instead. When ordering from a catalog or processing a purchase requisition, an AI system can automatically check if there are framework contracts available for ordered items, and can learn purchasing patterns to identify similar, but not identical items. The result is significant bottom-line savings and even more buying power when renegotiating contracts.
The Way of the Future
Artificial intelligence in contract management is certainly changing the way procurement teams operate. But the change will only continue to accelerate as AI becomes more and more powerful. It’s important to stay apprised of the latest technology and how it can help boost your business.