Analytics for Contract Review: The Contract Cognition Approach

by Doug Kaminski and James Sherer on June 29, 2017

In-House Counsel , Legal & Industry Education

This post was originally published by Corporate Counsel. We thought it provided a unique perspective and useful tips for approaching contract review.

From Data Burden to Tech Indispensability

Contracts are not just a critical part of business operations—they are a key component of business growth and development, and (realistically) the best step forward into the future of an organization. But while contracting processes that support headline-generating, multi-million dollar deals have benefited somewhat from advances in analytics and machine learning, there is a much larger set of deals, valued in the tens to hundreds of thousands of dollars, that presents a process ripe for improvement.

The immediate challenge is one of scale: Smaller deals and agreements can be just as resource-intense and disjointed as the larger ones, but often do not receive the same kind of attention.

But advances in automated methods for contracting that took hold for larger deals are now approaching a point of efficiency and relative cost where they make sense to consider for smaller deals.

These advances—together, think of it as “contract cognition”—can combine resources, benchmarking, and past practices from multiple business divisions, including records, procurement, legal, and operations teams. They may also unearth information from sources of information that are otherwise seen as burdensome: those contracts and related information left in the wild, stored in email inboxes or network drives, in SharePoint repositories, hard drives, or even boxes.

For a contract cognition approach to function best, organizations will benefit from considering otherwise decentralized procurement functions, past merger and acquisition (M&A) activity, and current (and past) IT spend. These items on the checklist point to sources of potential value for an algorithmic approach to analysis, and when they are incorporated into an approach and analyzed in support of the contracting practice, their analysis has the added benefit of increasing compliance and reducing risk.

Critical to this process is an admission that finding this information takes time and is expensive, even when automation joins the toolkit. However, there are two key differences associated with the contract cognition approach.

First, this process is not starting from scratch, as it has been battle-tested on larger deals and represents a benchmarked improvement.

Second, contract cognition is not (just) a compliance function: This will add to the organization’s bottom line, perhaps within the first week of operation, as business development professionals may respond quicker and more accurately in the face of opportunities and requests for proposals.

This is the internal sale: The use of analytics can create efficiencies in every facet of the contracting process, but organizations seeking to implement these improvements should highlight what provides the strongest use case for them. This may focus on the review of inherited contracts post-M&A transaction, streamlining the internal management of contracts to see past customer interaction, or a way to manage organizational representations across similar projects. Regardless, while analytics can provide both hard dollar cost savings and significant risk reduction for an organization, they can also improve the bottom line on the sales side.

This is not science fiction—according to the recent survey conducted by the Coalition of Technology Resources for Lawyers (CTRL), the number of legal departments who said they would be applying analytics to contract review has increased five-fold over last year’s number.

Modern contract cognition offerings are purpose-built for contract management and analysis, allowing relevant organizational stakeholders to leverage these analytical tools as part of an efficient and successful approach.

This build commonly incorporates three primary components as part of the approach: 1) examining or “scouting” data repositories to identify and parse contracts and related information; 2) incorporating identified information into a review platform for easy access and reference for the team; and 3) using analytics tools to examine the identified information in a systematic way—often using cloud-based analytics tools that may have their own associated contract management systems (combining steps one and two).

Simple enough, perhaps, but here are several use cases that further support this contract cognition approach:

Use Case: Existing Portfolio Management for Risk Mitigation

Procurement and legal teams can use a contract cognition approach to derive intelligence from a portfolio of contracts in support of better liabilities management, regulatory compliance, and overall corporate risk. This process would incorporate the extraction of a wide variety of contract data, including length of term, contracting parties, general terms and conditions, auto-renewals, penalties, other commercial terms, and a side-by-side analysis of clauses.

This approach would also place contracts into a central and searchable repository. The centralization of the contracts in support of excerpting relevant contract data and the performance of portfolio analytics is the business development highlight, but procurement and legal teams also have an opportunity to mitigate associated risk for a now-uniformly kept set of information.

Use Case: Litigation

A thousand contracts and supporting documentation (such as emails) might take a team of attorneys several weeks to review, and still would not guarantee a consistent or strategic approach. A contract cognition approach, in contrast, would find opportunities for incorporating mechanical and repeatable processes into the review, where the use of advanced analytics allows the utilization of the same criteria against every document.

This approach gives legal teams a confirmation of what is the “same,” and highlights the differences in order to most efficiently use true expertise to uncover the true story behind a deal gone wrong or determine an accurate picture of contracting with a client. Here, the contract cognition method enables attorneys to assess risk where it actually exists (think differences, not time spent examining identical provisions), reduce costs, and determine a strategy more quickly.

Use Case: M&A

An M&A deal can be one of the biggest decisions an organization makes, but in many instances, key decision-makers must act quickly—in the face of millions and sometimes even billions of unfamiliar data files. Despite the challenges, due diligence is important, and facts and information buried in due diligence documents may bear significantly on the deal process.

A contract cognition approach deployed in M&A is perfectly suited for the due diligence process and accelerated timelines, regardless of deal size. It operates to equip business and legal teams with a clearer understanding of the business and the legal risks associated with the purchase of the organization through that data and the related impact on the value of a transaction.

Contract cognition accelerates the contract review process through an automatic organization of contracts. This organization is based on common themes and automatic extraction of structured data, such as names, locations, and dollar amounts. Visualization within a tool makes it easier to spot important trends and facts that might otherwise go unnoticed.

In addition to transaction-related matters, this approach can assist legal teams in identifying risks in contracts that were not considered material to the transaction and should be integrated into the purchaser’s contract management system after a transaction has closed.

The Price of Light

Arthur Nielsen, founder of the market research company AC Nielsen, used to say that, “[t]he price of light is less than a cost of darkness.”

Fundamentally, a contract cognition approach should increase the effectiveness and efficiency of decision-making and its implementation, while concurrently reducing the risk of failure or loss. The light shines equally on those who make, and those who spend, and also benefits those components of an organization that are not seen as directly supporting the bottom line by improving compliance along with improving sales.

 

James Sherer is a partner in the New York office of BakerHostetler, where he chairs the Information Governance practice team and serves as part of the E-Discovery and Management and Privacy and Data Protection groups. James assists with oversight of discovery and electronically stored information issues for firm clients. James is also tasked with “deep dive” technological and case law-related assignments for omnibus motions and case strategy. James’s work and scholarship focuses on advising on merger & acquisition due diligence; information governance practices and policies for clients; and client corporate structure and business offerings regarding international data privacy requirements.

Doug Kaminski serves as director of major accounts for Relativity. In his 20+ years in the legal industry, Doug has consulted with some of the world’s most highly regulated companies, including many Fortune 100 companies, to help them gain control of their data and tackle their unique challenges surrounding e-discovery and information governance. Prior to joining Relativity, Doug served as senior director of information governance at Huron Consulting Group (now Consilio) and held positions at Symantec, Clearwell Systems, Wolters Kluwer, and LexisNexis Document Solutions.

 

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