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14.05.2024 | KPMG Law Insights

How legal departments can use AI in contract management

The use of artificial intelligence enables legal departments to automate manual processes in contract management. This increases efficiency over the entire lifecycle of a contract and allows those involved to focus on more strategic and risky tasks instead of repetitive activities such as creating and reviewing standard contracts.

Data analytics significantly reduce contract management costs

Analytics applications are particularly interesting for contract management. These can precisely analyze and extract relevant data points, clauses and key terms.

While the human-based analysis is almost 92 percent accurate, the AI-based contract interpretation and summary for sharing with affected stakeholders has an accuracy of 98 percent. According to estimates by a major market research company, companies can reduce their manual contract management costs by over 50 percent through intelligent contract analysis.

Contract management offers many use cases for AI

AI can create advantages in contract management not only in contract analysis, but also in many other areas:

Contract analysis and extraction

  • AI analyzes contracts, extracts relevant data points and speeds up the review process.
  • Natural Language Processing (NLP) enables the precise identification of key information, even if the actual wording differs from the specifications, as the AI “understands” the content of the query.

Risk mitigation and identification

  • AI algorithms evaluate contracts for potential risks and identify problematic clauses.
  • This enables proactive risk mitigation and compliance, as well as targeted review and approval workflows.

Pre-contract review and due diligence

  • Automatic detection of inconsistencies, errors and non-standard clauses (also possible as a self-service without involving the legal department)
  • Acceleration of contract reviews and identification of specific provisions in due diligence processes

Automation of contract lifecycle management

  • Automation of contract initiation, approval workflows and monitoring
  • Proactive contract extension and renewal through AI trigger

Intelligent search and retrieval

  • Fast and accurate contract queries thanks to AI-based search functions
  • Simplified search for specific clauses or contracts in extensive archives

AI-supported contract audits

  • Automated, regular reviews of contracts to ensure compliance with internal guidelines and external regulations
  • Detection and reporting of deviations or potential problem areas

Challenges and legal stumbling blocks during implementation

The implementation of artificial intelligence in contract management offers many advantages, but also brings with it legal challenges. The following considerations are particularly important:

Data quality and integration

One of the most significant challenges is to ensure the quality and consistency of the data when transferring it to an AI-supported contract management system. Many companies have extensive contract archives, but these are often stored in different formats and systems. These archives must first be cleaned up to enable integration into a standardized contract management system.

Data protection

The processing of personal data by AI requires strict compliance with the General Data Protection Regulation (GDPR). Careful examination and adaptation of the AI systems is necessary to ensure compliance.

Contract law

The accuracy of AI in contract interpretation is crucial to avoid legal misinterpretations. Regular reviews by legal experts are essential to ensure the legal validity of contracts generated or analyzed by AI.

Security

Given the sensitivity of the processed data, the security of AI systems must meet the highest standards. This includes measures to prevent data leaks and unauthorized access.

 

In the coming years, AI in contract management is expected to bring significant efficiency gains and risk reductions by automating routine tasks and speeding up contract review. This enables legal teams to concentrate on strategic tasks. However, despite the benefits, challenges and legal requirements must be carefully addressed to ensure the efficiency and legal compliance of AI systems. Careful implementation and regular reviews are crucial to guarantee technological progress and legal certainty. AI can thus become a key element for efficient and secure contract management in the modern business world.

 

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