Establishing an Effective System for Redlining a Contract

Date
January 18, 2023
Category
Date
January 18, 2023
Author
Gary Sangha | Founder & CEO
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The average company loses 9% of its annual revenue to common contracting issues like long negotiation cycles. Larger companies that handle a high volume of contracts can lose up to  15% of their revenue. Establishing a solid redlining process is the first step toward developing more cohesive agreements and accelerating contract finalization.

Although corporate legal departments traditionally have been slow to adopt new technologies, recent advances in machine learning and artificial intelligence are now too sophisticated to ignore. And the stakes have never been higher. With legal departments buckling under the weight of increased workloads and decreased staff, the time for a better redlining system is overdue.

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4 Steps To Establish an Effective System for Redlining a Contract

For most companies, change starts with process—and having the right technology in place to support the process makes all the difference between strategy and execution. For this reason, the five steps to establishing an effective system for redlining begin with selecting the right technology solution. 

1. Choose the right solution. 

The “right solution” is well-equipped to streamline the task of redlining out of the box but also offers advanced customization options to suit the company's needs. 

Here’s what you should be looking for in the best redlining platforms:

  • Easy setup. Lower-end software may require you to upload hundreds—or even thousands—of contracts to gather aggregate data. The best programs for redlining a contract come with proprietary information and advanced learning models requiring as few as a dozen sample contracts uploaded for comparison.
  • Corporate legal playbook support. A corporate legal playbook contains clause libraries, format templates, boilerplate language, and preferred negotiating positions. This strategic asset is the key to consistency in your contracts. With the right software, you can consistently compare new drafts to set standards and enforce them.
  • Artificial intelligence. In the past, contracting tools were glorified spellcheckers or word processors. Today, artificial intelligence allows teams to automate previously manual tasks. AI not only corrects grammar but seeks out errors, omissions, and deviations from the standard. At its most advanced, it can apply “if/then” rules to autocorrect common issues and add contextual guidance for all recommended changes.

2. Give the counterparty adequate review time.

An effective system built for redlining a contract will color code passages in red, yellow, or green to indicate the assessed risk level. While largely “green” contracts may be straightforward passes, red “high risk” sections may require additional time and due diligence from senior counsel, which may even result in a change in position or redrafting to better align with company objectives. 

When contracts are forwarded to the counterparty, the contextual guidance provided by an AI-powered platform helps expedite review, as there is little ambiguity or confusion over why a change is recommended. Cutting back-and-forth inquiries reduces total time-to-execution, though it is still important for human reviewers to consider the recommendations with some scrutiny. 

Rushing contract review and negotiation not only leads to mistakes, but an erosion of trust and an adverse impact on business relationships. Cutting basic redlining time from hours (or days) down to minutes frees up additional time for high-level strategic consideration.   

3. Let AI automation handle the brunt of the work. 

Heavy-handed staff involvement can sometimes throw off a deal. Impartial AI can help reduce suspicions of incompetence, perceptions of bias, and overall mistrust. 

In a nutshell, artificial intelligence can effectively handle the following redlining tasks:

  • Compare drafts to corporate legal playbook standards and proprietary best practices
  • Search documents for errors, omissions, and deviations 
  • Indicate which sections are unique and do not contain boilerplate language
  • Color code passages based on risk to help teams focus their attention
  • Suggest changes and include context-based notes and links to other documents

4. Prepare for the next steps. 

Once the system has completed the initial review, teams should know where to pick up their duties. Assign someone to approve or reject the recommended changes—which is as easy as clicking a button in Google Docs or MS Word. 

Inform personnel when to escalate the contract to senior counsel for a rework. (How much redline is too much?) The use of technology has a demonstrated 70% reduced escalation rate, saving companies considerable time and money. 

All too often, contracts end up sitting in someone’s inbox for days or even weeks. Establish a chain of command that compensates for employees who may be out of the office or taking leave. 

LexCheck's AI-powered legal platform provides an effective system for redlining contracts that is as automated and easy as sending an email. Contact us at sales@lexcheck.com  or download our 7 Steps to Optimize Your Contract Review Process to get started.

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