Table of Contents
For businesses, contract management is a critical component. As a business owner, you might be under pressure to enhance overall business efficiency, minimize risks, and stay compliant when entering into contracts. But what if your contract system can accomplish more than control the timing of deliverables? Imagine it as identifying threats, pointing out negotiation concerns, and keeping regulatory measures in check throughout the process. That is where the effectiveness of AI-powered predictive analytics comes into the picture.
Global studies prove that generative AI could contribute between $2.6 trillion and $4.4 trillion every year in 63 applications, augmenting the value of artificial intelligence by 15 to 40 percent. A clear player in this change is contract management. With predictive analytics, businesses are now making better decisions than before, identifying issues that are likely to develop in the future, and even changing how contracts are handled.
Common Drawbacks of Legacy Contract Management Approaches
The modern business environment is characterized by one key factor – continuous change. Uncertainties in the market environment, dynamic regulatory environment, innovations and new technologies, and changing socio-economic factors are reinventing the business environment for firms.
In simple terms, this translates into stricter control – missed regulatory change or market trend can prove disastrous in non-compliance, time-consuming, and unenforceable provisions. Although planning the contracts to adapt to future needs is of utmost importance, the traditional approaches do not facilitate such a process. Here’s why:
-
Manual Exertion and Use of Defective Processes
The conventional processes of contract management involve handwritten contracts, which cannot meet the demand for growth. Today, as businesses grow and legal frameworks change, handling numerous contracts is challenging. Contract updates, monitoring the term expiration dates, and checking whether they meet the new law requirements are also cumbersome tasks.
-
Broken Contract Hives
Contracts in email inboxes, files, and folders, or even in different departments’ record-keeping or management systems, create an immense problem. Where there is no centralized storage for easy accessibility, businesses can’t achieve a 360-degree view of obligations and risks. Limited visibility into contracts at any given time makes compliance tracking, risk profiling, and editing contract clauses highly disruptive.
-
Less Scope of Analytics and Insights
Traditional methods are not always satisfactory in the case of analytics. Without the analytical element, contract management teams are flying blind regarding their contracts’ performance and risks. This lack of transparency in contract data means teams cannot proactively enhance contracts and use them to their full benefit for business. It also makes it virtually impossible to prove a return on investment or explain certain actions to main stakeholders.
A Comprehensive Understanding of Predictive Analytics powered by AI
Predictive analytics use past observations to learn patterns, definitions, and subsequent forecasting of future occurrences. Some of these advanced capabilities of AI revolutionize contract management services by using machine learning techniques that analyze previous contracts and determine the features that define them.
Comparing patterns related to current market conditions and regulatory changes, predictive analytics provides organizations with an understanding of the possible risks, their performance, and the consequences of certain contractual choices.
Let’s take an example of the manufacturing industry, which is involved in negotiating a contract for items that are critical to the business, such as semiconductors or steel. AI-driven predictive analytics can:
- Use its transaction history of similar supply agreements to predict price fluctuations, delivery delays, and quality concerns.
- Assess the financial strength of the suppliers and their past records to warn the organization of the risks of failure to comply or default.
- Determine other related compliance standards that could have affected the outcome of previous contracts and note changes in laws that might affect future contracts.
- Recommend specific clauses for inclusion in a given contract that decrease the probability of delay or cost overruns while delivering the product at reasonable prices.
- Contract management professionals can deploy AI-powered predictive analytics to engender sound contracts that will protect their organizations from emerging threats and earn higher revenues in response to changing market factors.
How AI Fosters Resilient Contracting Strategies
According to Sterling Miller, CEO and Senior Counsel for Hilgers Graben PLLC, “Artificial Intelligence just may well be the final frontier in terms of how legal services are utilized and provided. As in-house counsel, don’t run away from it and don’t ignore it. Rather, embrace it as, ultimately, it will allow you to do thing things lawyers love to do: thinking, analyzing, and counseling, while leaving the “grunt” work to the computer.”
Let’s understand the best practices of predictive analytics powered by AI in contract management:
-
Risk identification and risk management
AI is best suited to identify a broad range of market factors related to contract terms, supplier performance over time, and new regulations. It can always identify risk elements that a human being might not see. This includes the possibility of a bad clause or ambiguous language. With these issues in mind, legal teams are better equipped to handle risks at formation or develop protective measures to protect the agreement.
-
Compliance Monitoring
Businesses that span across different jurisdictions, compliance is always a challenge. AI makes it easy in this case because it monitors the level of compliance with contract performance standards. It can send notifications for any variation, suspect novelty or upcoming due dates, reducing risks associated with legal actions, while offering added security to the contracting process.
-
The Use of Data in Negotiations
AI enables negotiators to analyze key data and trends concerning previous negotiations and the market state. Insights from previous deals, historical win/loss records, and industry-average contract wins can improve a business’s negotiation approaches. It is designed to blend assertiveness with cooperative goals, thus improving contracts’ likelihood of sealing the deal.
-
Contract Renewal Prediction
AI helps predict the chances of contract renewal depending on customer satisfaction. It analyzes party behavior about the availability of products and services in the market. Knowing renewal’s early sign or churn indicators allows organizations to reach out to customers, address issues, and manage the renewal offer appropriately. It always keeps revenue streams constant and reduces churn effects on business.
-
Performance Tracking
AI is concerned with the capability of real-time contract monitoring of contract performance in terms of outcomes and SLAs. To increase operational efficiency, organizations can determine where operations are performing well and where they are likely to face constraints. Further, businesses can take proactive measures to fix problems early.
Bottom Line
Artificial Intelligence is innovative in helping leadership and strategic planning. What used to be strictly tactical has turned into strategic with the aim of optimizing operations, creating value, generating revenues, decreasing costs, mitigating risks, and/ or ensuring compliance. This change is driven by AI.
One of the major drivers of this change is contract intelligence, which embraces interpretive analytics to help businesses. Using AI in contract management, the organization can fully utilize the available data and, therefore, effectively reach its long-term potential.
Disclaimer: For more interesting articles visit Business Times.
