Using AI as a Contract Risk Assessment Tool
Risk is inherent in any business deal. However, successful companies habitually identify and mitigate potential risks. Strategies for mitigating risk have come and gone over the years, but until now the challenges and pitfalls were difficult to mitigate. Recently, artificial intelligence (AI) emerged as an innovative approach enabling legal teams to overcome common contract negotiation obstacles. Corporate legal departments have begun to streamline standard procedures by leveraging an AI-powered contract risk assessment tool.
How Is Traditional Contract Risk Assessment Performed?
Traditional contract risk assessment can be divided into five steps.
1. Identify potential risks and their severity.
- Which types of contracts have the highest risk exposure? Contacts might include a Master Service Agreement or a Statement of Work. For sellers, Fixed Price contracts might represent the greatest risk, while buyers would find Cost Plus contracts riskier.
- Which parts of the contract present significant risk? A clause can be risky if it features vague wording open to broad interpretation. For service providers, a deadline or promise of delivery may contain the greatest risk; customers, on the other hand, may experience risk in limitation of liability or automatic rollover. Local and federal regulatory compliance represent another area of risk for businesses.
- Are you accounting for uncertainties? Companies must consider how outside forces such as natural disasters, biological hazards, workplace accidents, intentional acts of violence, or supply chain disruptions can affect their ability to deliver as promised. Clauses should be worded with protections in place for unforeseen events.
- Does your contract management process contain risk? Workflows, timeframes, approval requirements, and document storage procedures can contain risk. Legal departments should track data so they can observe contract performance over time.
2. Identify stakeholders who might be harmed.
Engaging and satisfying diverse stakeholders represents a common challenge throughout the contract lifecycle. Multiple parties must come together early to undertake market assessments and tailor contract models to reduce risk while decreasing time spent in negotiations.
3. Evaluate the risks and choose control measures.
Risks can be color coded in “red” to indicate severe risk, “yellow” to represent moderate risk, and “green” for lower risk. This practice helps legal departments prioritize personnel and risk management activities. Ranking factors might include contract sections that:
- Pose significant threat to profits.
- Introduce threats to relationships.
- Lead to government penalties or lawsuits.
- Require new terms at renewal time.
4. Gather and implement findings with a playbook.
Legal departments that develop consistent positions and reference materials can more easily handle the riskiest sections that require frequent negotiations. A company playbook serves as a guide to standardizing contracts and limiting risk. Staff can be trained to reference the playbook when drafting, reviewing, or negotiating any agreement. Departments can establish workflows to implement multiple rounds of approvals. And while low-risk contracts may bypass some of these requirements, high-risk contracts will require the complete process to ensure all hazards are addressed.
5. Review the assessment and update as necessary.
By maintaining a schedule of expiring or renewing clauses, legal departments may stay on top of contractual changes and updates. Some companies update their risk management practices weekly or based on review milestones, while others may assess risk quarterly or annually.
How Is AI a Better Contract Risk Assessment Tool?
AI offers a pragmatic way to analyze risk and automate previously manual processes that could otherwise result in delays and inefficiencies. Consider how an AI contract negotiation platform might intervene to offer a more robust contract risk assessment:
- Prioritize risk: Once staff uploads an agreement to the platform, the AI scans the agreement for risky clauses and outlier provisions. Sections are prioritized into high, medium, and low-risk revision opportunities.
- Standardize all contracts: The AI can compare current terms and provisions to standard positions, as defined in the AI Digital Playbook, to identify discrepancies and provide playbook-compliant suggestions. The AI applies a company playbook, a comparative database of two dozen or more successful contracts, and a repository of proprietary contract models to determine standardization protocols. New employees can use the AI platform as training and for greater peace of mind to ensure they have left no stone unturned in their reviews.
- Automate Assessment: AI enables legal departments to automate their risk assessment protocols. After legal staff submits an agreement to the platform, the AI “reads” the agreement and automatically flags language that exceeds the company’s pre-established guidelines. Attorneys and legal staff can approve low-risk clauses at a glance while dedicating closer review to provisions the AI has designated as “high risk.”
LexCheck’s AI-Powered Contract Risk Assessment Tool
Risk management is crucial to successful business operations—as are productivity and efficiency. LexCheck utilizes advanced AI and Natural Language Processing (NLP) to provide legal departments and procurement teams with an award-winning contract risk assessment tool that accelerates a contract’s path to approval. The platform accurately performs the work of a high-level reviewer to complete a full contract review in just two to three minutes, providing context-based recommendations to aid the team in managing risk and accelerating the contract approval process.
Discover how LexCheck’s AI-powered platform provides corporate legal departments and procurement teams with the most innovative and effective contract risk assessment tool available. Request a demo or contact us at firstname.lastname@example.org for more information.
Gary Sangha | Founder & CEO
Gary Sangha is the Founder and CEO LexCheck. He's a serial entrepreneur and an academic. Gary previously founded Intelligize, a legal technology company that was acquired by LexisNexis. He's affiliated with the University of Pennsylvania and Stanford University and started his career as an attorney at Shearman & Sterling and White & Case.