Contract Analysis: What It Is and Why Innovation Matters

By definition, contract analysis refers to tracking information within a legal document. Contracts are assessed for commonalities, including boilerplate provisions or errors, which may require updating. Contract analysis is a vital part of running a successful business as it lays the groundwork for relationships, fits within the regulatory framework of the industry, drives daily activities, and provides protocols for resolving disputes.

Once a contract has been signed, it is often filed away until something goes wrong. A more proactive approach to contract analysis is possible with the right processes in place. Artificial intelligence (AI) technology presents the next frontier of efficiency for businesses looking to stay ahead of the curve in their contract lifecycles. 

This article explores the essence of contract analysis—why it is important, how it has traditionally been conducted, and what innovations are new in the process.

Why Is Contract Analysis Useful?

Businesses undertake contract analysis to discover errors, omissions, and negotiating positions that may be costing them money or putting the company at risk of future financial losses. The need for analysis may be prompted by an unaddressed fringe case, a dispute, or a change in the legal or regulatory regime they operate in. Or company leadership may wish to adapt a proactive approach to ramp up protection from liability and loss.

Through contract analysts, legal departments can discover common issues within a contract or across a portfolio, including:

• Ambiguous language
  
  
• Lack of insight into core contract terms
  
  
• Miscommunication or overextension of responsibilities
  
  
• Missed opportunities to renegotiate more advantageous terms
  
  
• Unrealistic deadlines or termination dates

No matter what type of breach occurs, the company could end up defending itself in court and be held liable for economic damages stemming from the breach (not to mention legal fees).

How Do You Read and Analyze a Contract?

Contract analysis may be handled by a junior associate, contract manager, procurement specialist, in-house lawyer, or an outsourced team of attorneys. It typically requires multiple sets of eyes to ensure no detail is overlooked. Contract analysts can earn anywhere from up to over $300,000 a year, depending on education, experience, skillset, and specialization.

What Are the 3 Stages of Contract Analysis?

Contract analysts are most commonly involved with the processes after an agreement is signed, as these earlier stages of analysis are more like review stages. 

• Pre-Execution: The contract request comes in, and the agreement is created. After an internal review is completed, the contract is sent to the counterparty for review and negotiation.

• Execution: Once all parties sign the contract, it is then finalized and sent to stakeholders.

• Post-Execution: The company archives the contract, notes important dates, and reviews renewal or termination opportunities as they arise. Contracts are analyzed, routinely and as needed, to solve business challenges and improve the company’s bottom-line efficiency.

Limitations of Traditional Manual Contract Analysis

Traditionally, contract analysis requires several legal professionals working together to review an agreement. This painstaking manual process can take entire weeks to thoroughly complete for a single contract. Much of this time is wasted searching for physical hard copies of a document or digging through an internal database for the right folder and then comparing two contracts side-by-side. 

Contract Analysis Using Artificial Intelligence

Modern contract analysis using AI can perform early stage analysis to seek out areas of risk by assessing vast quantities of data across the entire company portfolio, extract the most important parts, and provide suggestions for improvement based on company playbook standards. Humans still play a key role in the oversight process, but they do not have to dedicate hours to tedious and routine contract review. Instead, they can focus on strategic issues and contract escalations. 

How AI Automates and Innovates Contract Analysis

Modern AI solutions greatly accelerate the process of contract analysis while ensuring 100% compliance with a company’s standard negotiation positions. 

Here’s how:

• A legal playbook is created: The company creates and/or uploads an AI Digital Playbook containing standard language, clause libraries, templates, rules for review, and preferred negotiating positions. 
  
  
• A contract is reviewed in minutes: A contract is opened and scanned by the AI to search for errors, ambiguities, discrepancies, and important dates. While this work would take a junior associate days to finish, the AI returns a fully redlined, reviewed, and contextually annotated version in minutes.  
  
  
• Updates and corrections are made: Corrections can be completed with a click. And when the digital playbook is updated, the company can quickly see which contracts in their portfolio are affected by those changes and update the terms and conditions accordingly.
  
  
• Tracking and automation is built in: As important deadlines are extracted and tracked, the entire contracting process becomes more visible. Auto-reminders are sent to appropriate personnel so renewal opportunities and routine analysis are never missed. By inputting “if/then” rules, attorneys can train the system to automatically make intelligent corrections, saving countless hours of work and obviating the risk of human error.