Contracts are a critical component of business operations. A survey by Cottrill Research showed that contracts can govern up to 80% of a company’s affairs.
Few organizations would argue against the importance of contracts. Yet, studies show that companies often come up short in their attempts of achieving the full value of many of the deals they negotiate. For instance, one study by KPMG observed that companies are losing up to 40% of the value of their deals. The top reason for this, according to the study, can be pinpointed as inefficient contracting i.e. human limitations.
On the other hand, artificial intelligence (AI) has been seen to not only decrease human errors but also enhance what they can do. This is why contract negotiating training experts say that AI technology could help organizations cut their losses, and capture the maximum value from their business agreements. This article shares a few ways that AI can help bring valuable insights into how documents are negotiated.
For most organizations, the contract process can take up a large amount of time and energy to complete. Research by Aberdeen and Forrester found that the average approval cycle takes around three and a half weeks. Document revisions can also eat up a lot of time. Contract management professionals surveyed by DocuSign say that agreements typically go through three to four revisions before final approval.
Using AI, companies can automate how contract documents are created using features like templates. Research by Goldman Sachs observes that automation could save companies 1- 4 man-weeks. AI technology can also streamline the reviews, approvals, and redlining phases.
Improving how documents are analyzed, reviewed, and approved could potentially reduce the negotiation cycle by half, the Goldman Sachs report found. The time saved also has cost benefits. The same report illustrated how companies can cut their processing costs by 10%.
Most, if not all, business training experts agree that information determines power in contract negotiations. However, there is a limit to how much information the human brain can grasp at one time. Limits also apply to how much people can recall. A study conducted by psychologists at the University of Oregon found that an average person can only process, at most, four separate thoughts at any particular moment.
AI, on the other hand, can quickly and accurately analyze large amounts of data. Plus, the data can be varied and can even be examined and reviewed simultaneously. Better yet, using machine learning and cognitive technology, AI can pinpoint and interpret even the most subtle patterns.
What’s more, AI technology can learn and actively evolve with time. Having the right and most up-to-date data at your fingertips can aid negotiators in making optimal, high-profit decisions.
Optimize contract renegotiations
Today’s modern companies are easily flooded with hundreds to thousands of contracts depending on their size and industry. According to World Commerce & Contracting, the average Fortune 1000 company has between 20,000 to 40,000 active contracts at any given time.
Keeping track of various renewal dates can be a horrific nightmare for companies with a high volume of agreements. What’s more, overlooking contract renewal dates can be costly. For one, it means missed opportunities to renegotiate better terms. A study by the International Association for Contract and Commercial Management (IACCM) found that companies can lose almost 10% annually due to poor contract management.
AI can support companies in proactively monitoring their contracts. Timely renewals allow companies to renegotiate from a position of strength. Besides dates, AI can also monitor performance over the life of the agreement. Performance analytics data can help organizations determine whether a renewal is in their best interest. Reviewing how contracts performed can also help root out issues. For example, contracts failing to hit their goals could be a sign that additional staff training may be needed.
Help evaluate and mitigate risk
When you’re trying to close a deal, speed may help you get to a “yes” fast. However, there’s a downside to stepping on the gas pedal. Rushing can increase the risk of mistakes being made. Errors made during contract negotiations can have serious implications that may not reveal themselves until it’s too late.
Contract preparation and training classes could help cut down on some errors. However, even the most diligent people make mistakes. Additionally, as contracts increase in length and complexity, mistakes caused by human error are more likely to occur.
People tend to make more mistakes when tackling tasks they perceive as boring and repetitive. AI can expertly and accurately deal with mind-numbing tasks. Also, as contracts get drawn, AI can routinely scan them to identify any outdated clauses. Documents can also be checked to ensure they are compliant with legal and industry standards.
AI has and continues to reshape how companies do business. Eighty-four percent of C-suite executives believe they must embrace AI to meet growth targets, reports Accenture. Are we at the point where AI can handle contract negotiations from start to finish? Not quite. However, AI has proven strikingly adept at handling key contract processes. For example, trolling documents for errors and doing so in a fraction of the time a human would. So, its use may be worth investigating further.