Contracting is a common activity, but it is one that few companies do efficiently or effectively. In fact, it has been estimated that inefficient contracting causes firms to lose between 5% to 40% of value on a given deal, depending on circumstances. But recent technological developments like artificial intelligence (AI) are now helping companies overcome many of the challenges to contracting.
The main challenge firms face in contracting arises from the sheer number of contracts they must keep track of; these often lack uniformity and are difficult to organize, manage, and update. Most firms don’t have a database of all the information in their contracts – let alone an efficient way to extract all that data – so there’s no orderly and fast way to, for example, view complex outsourcing agreements or see how a certain clause is worded across different divisions. It requires a lot of manpower to draft, execute, and improve not only the contracts themselves, but also the contracting processes and the transactions these contracts govern.
If, for example, a large tech company finds itself with a huge volume of procurement contracts that all have varying renewal dates and renegotiation terms, it would require hundreds of hours and a team of contract managers to review and track of all this information to ensure that no renewal or opportunity is missed.
AI software, however, can easily extract data and clarify the content of contracts. (It could quickly pull and organize the renewal dates and renegotiation terms from any number of contracts.) It can let companies review contracts more rapidly, organize and locate large amounts of contract data more easily, decrease the potential for contract disputes (and antagonistic contract negotiations), and increase the volume of contracts it is able to negotiate and execute.
In my research, I have seen that many companies use contract management software, and a smaller number of firms – mostly those with a high volume of routinized contracts – use more advanced software with AI capabilities. These firms have generally seen an increase in productivity and efficiency in their contracting.
The use of AI contracting software has the potential to improve how all firms contract – and it will do so in three ways: by changing the tools firms use to contract, influencing the content of contracts, and affecting the processes by which firms contract.