What is contract analysis and why it matters

Finding solutions to business problems through contract analysis

How to analyze a contract

Everyone wants more data and analytics to help drive smarter decisions. To achieve this end, many companies have become increasingly creative to get the information that they are after. Still, one of the most data-rich resources in your organization may be overlooked: contracts.

As the bedrock of business, contracts are a goldmine of information. Capturing every transaction, customer, vendor and all potential partnerships—contracts are a read-receipt of what is happening in the business. Contract lifecycle management (CLM) software can help companies view this data in aggregate and recognize important patterns. They can also leverage artificial intelligence (AI) and machine learning to reduce the amount of manual work needed to create value from contract data.

What goes into contracts determines what comes out in the business

Some of the areas where contract management software has proven most effective in resolving problems relates to the language in the contracts themselves. If your contract language does not reflect the current state of your company or current laws and regulations, then you have an inaccurate view of your business state.

For example, if contract clauses lack specific language, this could expose your business to unwanted breaches and unforeseen outcomes. It’s possible that the legal team has taken the time to draft the exact right clause to suit each precise need but the work may not have been done to ensure that these versions are used in their correct context for all future contracts.

This same issue can extend to protection around liabilities, and limited or missing language on terminations. Another area of exposure relates to contracts that are conflicting—agreements that are exclusive or require disclosure among parties that have not been fully met. These put the organization in regulatory or legal trouble; at a minimum they are a threat to the on-going success of that business relationship.

Contract management software addresses all of these concerns by increasing visibility of all contract data across the organization and ensuring that contract templates and clause libraries are in use. Users can easily run contract analysis reports to assess threats and determine which contracts fall outside the bounds of the organization’s requirements.

Analysis of the contract lifecycle reveals problems and offers fixes

Before you can accurately analyze a contract lifecycle, you need a way of capturing every step of that lifecycle. Without a contract management solution, companies are prone to have a misconception of those steps and the responsibilities associated with them. This leads to challenges in executing to timely approvals, ownership of renewal dates and ensuring that the right agreements are discontinued. On the procurement side of the house, it can result in failing to build in new performance requirements that would address vendor concerns or hold the vendor to better standards.

A CLM offers tools that automate all of the workflows associated with initiating, approving, and monitoring. The result is a reduction in purchasing cost, accelerated sales cycles, and visibility of legal and compliance threats.

Artificial intelligence leads to real-time operating intelligence

Once you have an accurate picture of your processes from a CLM, the real fun begins. The system’s AI obtains totals and can report out on each agreement, document, and other data. If your solution offers the right integration, Alexa, and other voice assistants, can assist in the process. For example, you could say: “Alexa, search for what agreements are due for renewal next month.” Without having to conduct a manual count, the user has the data-based analytics that they need in minutes.

AI can also assist with data and text extraction, allowing users to upload hundreds, even thousands, of documents from older, expiring systems. The trained AI leverages machine learning to create records including dates, company details, and it ascribes all the relevant attachments to the record.

Going back to the earlier concern around inconsistency in contract clauses, AI can help by automatically assigning a risk score. AI identifies and extracts the clauses from each agreement and compares them to the company’s clause library. It completes an analysis of the threat the contract has to the organization. Perhaps the legal team has three agreements stacked up for review but the CLM’s AI has determined that two of them have a low risk score. The team can address these low-rated ones quickly, and keep moving, and then circle back on the more complex contract when the time allows.

Before the AI, how do you conduct a contract review?

There are two types of analysis in play when it comes to contracts. The first we have already discussed in depth, as it relates to contract lifecycle management (CLM) software. The second is analyzing contracts as stand-alone business documents and making sure that both parties’ interests are properly represented and protected. The truth is that a good CLM will support you in this form of analysis as well, it will remove the manual steps of ensuring that all the proper terms and information are included. However, if you are just beginning your business, it is a good exercise to understand the fundamental elements of a contract before you start deferring to your software to do the work for you.

In general, it is best to engage the services of a trained legal professional to review any binding contract. Particularly if there are any contract terms or clauses that are unfamiliar or which cause you hesitation. While it used to require a law firm, now you can engage these services easily through certified direct providers, often at a reasonable hourly rate.

What are the three stages of a contract?

You will often hear mention of the three stages of a contract. The first stage is the pre-award or the preparation when each party comes together to develop and discuss the offer and/or services and, ideally, find some sort of common ground. Next is the ‘award’ or the authoring of the contract which many think of as the negotiation stage but also includes the approval and finalizing of the contract. Followed by the post-award where the contract is fulfilled and eventually closed out.

All of these stages are captured in a CLM and the more robust the features of that solution the better the user experience and the benefits to operations.

What are the four elements of a contract?

The first element is an “offer”, which does not need to contain all the details but must contain all the critical information that a legal professional would ask you—enough to move discussions to the next step. The next element is an “acceptance.” This is a final and unqualified acceptance of the offer. The next element is an “intention to create a legal relationship.” The final element is a ‘consideration” which is usually represented by an exchange of money.

Once again, all of the important components here are seemingly straightforward; however, if one stage or element is overlooked or mishandled, it puts the transaction, possibly the organization, at great risk. This is where the benefits of a CLM can help companies leverage analytics to stay on top of current operations and pin-point problems as they arise.