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Why Is Contract Analysis Important For Your Organization?

, Adaptive Dynamics

Through contract analysis, you might discover solutions to your company’s challenges.

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An analysis is a process of breaking down a complex topic into smaller bits to get a better understanding of it. When we hear the term “contract analysis”, naturally the analysis of a contract comes to mind. But does it refer to the financial analysis of the contract in terms of cost-effectiveness or profitability? Or does it refer to the contractual clauses, risks and obligations contained therein?

Contracts are a treasure trove of meaningful information to any business, as they are the foundation of business. Every transaction, customer, vendor, and possible collaboration is documented and agreed upon within these agreements. Contracts serve as a reading receipt for the internal and external operations of the business. Companies use Contract Lifecycle Management (CLM) software to view data in bulk while observing patterns and initiating required actions. Industry-leading CLM solutions leverage machine learning and artificial intelligence (AI) to reduce the amount of manual effort used to extract value from contract data.

In most organizations, contracts remain overlooked and underutilized despite the valuable information they carry. It is within this data-rich resource, that your organizational risk and profits can be affected. Every organization wants to get more out of data and analytics to help drive more effective decisions to become successful. But naturally, to succeed, the right technology needs to be leveraged. Let’s delve a little more into the data within these contracts and see how that visibility can benefit your organizational objectives.

What goes into contracts has a direct impact on the company’s outcomes

The language of contracts is one of the areas where contract management software has proven to be most successful in addressing issues. As a business, you have an incorrect point of view of your business and potential exposure if your contract language does not represent the actual situation of your business and its mandatory laws and regulations for compliance.

For instance, if contract terms lack clear language, your company may be exposed to undesirable breaches and unanticipated consequences. It’s possible that the legal team took the time to design the exact proper clause for each specific necessity, but that the effort to ensure that these versions are utilized in the correct context for all future contracts was not completed.

A similar problem can arise when it comes to liability protection and termination wording that is limited or missing. Add to this additional risk with contracts, such as exclusive agreements or obligations to disclose information among parties that have not been fully met. These could place the company in legal or regulatory hot water; at the very least, they jeopardize the business relationship’s long-term success. Basic contract management best practices can help navigate this risk and exposure. See our recent Contract Management Best Practices article or the following Business News Daily article for more tips on the fundamentals of contract management.

All of these and many more potential issues are addressed by the use and application of your contract management software, which increases the visibility of all contract data across the organization and ensures the adoption of contract templates and clause libraries. With the basic techniques and best practices in place, contract analysis simplifies the team’s effort to examine and identify contractual risks, and to mitigate those that fall outside of the organization’s criteria.

Look at your entire lifecycle

Before you can effectively assess a contract lifecycle, you must first be able to capture each step of the process. Companies without a defined contract management process or solution are more likely to have a misinterpretation of those steps and the responsibilities that come with them. This makes it difficult to complete timely approvals, take control of renewal dates, and ensure that the correct agreements are terminated. It can lead to a failure to bring in additional performance requirements that address vendor concerns or hold the vendor to higher standards on the procurement side of the business.

An automated CLM tool offers all the workflows associated with initiating, approving, and monitoring these agreements. The result is a reduction in purchasing costs, accelerated sales cycles, and visibility of legal and compliance threats.

How is a contract reviewed?

When it comes to contracts, there are two forms of analysis at work. We’ve already gone through the first one, which is the review of your entire contract lifecycle. The second step is to examine contracts as separate business documents and ensure that both parties interests are adequately represented and protected.  If you’re not a legal professional, this may feel like a daunting task, but again, technology can help bridge some of the gaps. Contract analysis and comparisons against approved clauses and terms are simplified with your CLM solution. If you’re just starting in contract management, the best starting point is a thorough understanding of the contractual terms and procedures used within your organization. You need to have this basic understanding of why certain terms are important for your business before you can solely rely on your CLM solution to help speed up reviews and interventions.

Artificial intelligence leads to real-time operational intelligence

If your CLM utilizes AI (Artificial Intelligence) and other productivity tools, you are better positioned to start realizing the benefits of contractual analysis. AI could quickly calculate contract totals and generate reports for each agreement type, document, and other data required.

Data and text extraction can also be aided by AI, allowing users to upload hundreds, if not thousands, of documents from out-of-date systems. The trained AI uses machine learning to build records that include dates and corporate information, as well as all necessary attachments.

Reviewing contracts, their clauses, and potential risks can be drastically increased with AI engines doing bulk reviews and flagging high-risk contracts or clauses. Each agreement’s clauses are identified and extracted by AI, which then compares them to the company’s clause library. It then applies a risk score to these items and allows for a thorough assessment of the threat of the contract to the company. Imagine having several agreements to review manually and leveraging AI to sift through the bulk and identify them on your behalf.

Although the legal team may have three agreements to analyze, the CLM’s AI has assessed that two of them are low risk. The team can rapidly address these low-rated contracts to keep moving forward, and then return to the more complex contracts when time permits. This realizes tangible business benefits and increases your CLM’s return on investment.

It’s a journey, so get on board

Contract analysis clarifies your contractual position and can significantly reduce your risks and increase your potential revenues. Contract Management Best Practices help you manage the overall process of extracting value from your company’s agreements. A thorough examination of the clauses and terms provides you with a competitive advantage. The ideal next step is to start leveraging what you have in place and look at supplementing the areas where risk has been identified. Leveraging technology gives you the ability to establish and enforce your specific and industry-best practices and processes.

Start your contract analysis program today if you’re ready to get the most out of the data you have in your contracts. You can contact the CLM team at Adaptive for assistance with this and other contract management best practices and processes. You’re only a phone call away from realizing your underlying possible revenue growth.






This Post Has One Comment
  1. […] and make adjustments as needed to maximize its benefits and identify areas for improvement. See our blog on contract analysis and how it can you discover answers to your business […]

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