5 Best Practices to Leverage Generative AI in CLM

AI is everywhere, and ChatGPT has become a part of our lives. The sudden intake of this transformative technology in almost every industry is undeniable. The same almost applies to the legal landscape.  

Imagine a world where contract drafting is no longer a laborious process but an automated one. Where an AI system can draft a contract tailored to your specific needs in a fraction of the time it would take a human. Imagine a scenario where analyzing contracts is not a manual, error-prone task but an automated process that identifies potential risks and unfavorable terms before they become problems.   

From our recent experience at global industry conferences and our conversations with customers, artificial intelligence, and particularly generative AI, has been the buzzword. However, according to a survey by Thomson Reuters, 82% believe generative AI can be readily applied to legal work, and 51% believe generative AI should be applied to legal work.   

If this indicates how legal professionals perceive generative AI, there are mixed reactions. On the one hand, AI in contract management has received the ‘thumbs up’ across most Legal, Procurement, and Sales teams in enterprise businesses. However, 62% of legal professionals have raised apprehensions about using ChatGPT and generative AI for their high-stakes work.  

Generative AI in LegalTech can never be run on autopilot mode. Nevertheless, it is still a pivotal tool for legal professionals – albeit with human oversight. Our experiences do suggest that AI has produced significant outcomes when applied wisely.  

Generative AI is a transformative technology reshaping how organizations do business with contracts. In this article, we'll look at how generative AI is streamlining every stage of the contract lifecycle - from creation to analysis to negotiation - and why it's time your organization took notice.   

Potential Risks of GAI in Contract Management 

Organizations embracing AI-driven solutions to streamline their contract lifecycle must be aware of the potential risks. These potential risks cut across data security and accuracy issues to legal compliance and ethical considerations. Understanding these potential pitfalls is paramount in adapting the power of Generative AI while safeguarding against its downsides. Let's explore these risks in more detail.  

Quality & Accuracy 

The accuracy of AI models heavily relies on the quality of the data they are trained on and the complexity of the language and context they must comprehend. If the training data is incomplete, biased, or outdated, it can lead to inaccuracies or errors in contract generation and analysis.  

Contracts are laden with legal jargon, which can be intricate and subject to regulation changes. AI might only sometimes keep up with the latest legal developments, potentially leading to outdated or non-compliant contract clauses.  

Data Privacy & Security 

Contract-related information often includes confidential details about businesses, individuals, and financial arrangements. This data is vulnerable to breaches, cyberattacks, or unauthorized access, potentially resulting in severe consequences, including legal and financial liabilities. Moreover, strict data privacy regulations, such as GDPR and HIPAA, impose rigorous requirements on data protection, making compliance paramount.  

Legal Compliance 

Contracts often have unique, industry-specific clauses and conditions. Generative AI may need help understanding these nuances, leading to errors and non-compliance in context-specific agreements. While Generative AI can assist in legal compliance, it can also introduce risks if the AI-generated contracts do not align with ever-changing legal regulations and standards. Legal professionals must still oversee and validate AI-generated contracts.  

Use Cases of GAI in CLM  

As AI is now omnipresent, the onus is on CLM providers to develop best-in-class LLMs (large language models) to drive value across cross-functional teams in enterprise businesses. With the latest advancements in contract intelligence, generative AI opens several avenues for Legal, Sales, and Procurement teams while monitoring risk and compliance.  

On that note, let’s explore how organizations can leverage generative AI in contract management.  

Sales & Procurement Teams 

Contract Drafting 

Generative AI automates the initial drafting of contracts by generating comprehensive contract templates based on predefined criteria. This accelerates the contract creation process. Contract language and formatting remain consistent across various agreements, reducing the likelihood of human error as the system generates contracts based on learned patterns. 

Contract Summarization 

Reviewing lengthy contracts to extract critical information can be a painstaking process. Generative AI can summarize contracts within seconds, highlighting essential terms, conditions, and obligations, helping legal teams save valuable time.  

For instance, if you receive a 50-page vendor contract, Generative AI can generate a concise summary that includes crucial payment terms, delivery schedules, and termination clauses, allowing you to quickly grasp the contract's essence.  

Contract Negotiations 

Generative AI has the potential to streamline the negotiation process. By analyzing past negotiations and outcomes, AI can suggest effective negotiating strategies, offer alternative clauses, or predict how the other party reacts. The result could be faster resolutions and more favorable contract terms, improving the efficiency and effectiveness of contract negotiations.   

Pre-defined Questions 

Let's say you're managing a portfolio of supplier contracts. With Generative AI, you can set up predefined questions to extract data about pricing changes, contract renewal dates, and performance metrics. This automated process saves time and ensures you stay informed about your supplier relationships.  

Legal Teams 

Risk Scoring 

Generative AI can assist in building risk models that consider various contract attributes and their potential impact on the organization. These models assign numerical values or scores to different risk factors, helping organizations quantitatively assess and compare contract risks. For example, a contract with a high-risk score might involve substantial financial penalties in case of a breach.  

Ultimately, organizations will see incredible value from an automated risk assessment tool, helping organizations make more informed decisions about their contracts and be one step ahead of the game. The tool could help mitigate potential risks before they become problematic by alerting the organization to potential pitfalls in a contract, such as unfavorable terms or clauses. 

Contract Review 

Generative AI automates the review process, quickly identifying key terms, clauses, and potential issues, reducing the time and effort required for manual review. With human oversight, legal teams can ensure contract compliance with legal standards and regulations.  

Best Practices of GAI in CLM 

1. Use Case First, AI Second 

Start by identifying clear use cases for Generative AI within contract management. Understand the pain points or tasks where AI can make the most significant impact. For instance, you might use AI to automate routine contract drafting, simplify contract analysis and automate insights, or streamline contract negotiation. Once you've identified the use cases, you can choose an AI-powered CLM solution that aligns with your organization's strategic goals.  

2. Leverage Gen AI for Low-Risk Contract-Related Activities 

Begin by applying Generative AI to low-risk contract-related activities. Use AI to handle repetitive, standardized contract tasks with minimal legal or financial consequences. This minimizes risk exposure, allowing your teams to gain experience and confidence in AI-driven processes. 

3. Use Gen AI Across the Enterprise for an Integrated Approach 

Promote cross-functional collaboration between Legal, Sales, and Procurement teams. Implement Generative AI systems that cater to the diverse needs of each department but maintain a consistent framework for contract management. This integrated approach ensures that teams are on the same page, fostering better communication and collaboration. 

4. Make the Best Use of Training Data Models 

Ensure that the training data used for your AI models is highly relevant. Use comprehensive and up-to-date datasets that represent a wide range of contract types and industries. Periodically update the training data to reflect changes in laws, regulations, and industry standards. This will help the AI make more accurate predictions and generate contextually relevant contracts. 

5. Don’t replace human expertise with Gen AI 

Implement a human oversight system to review AI-generated content. Legal professionals, Sales, and Procurement specialists should validate contracts to ensure legal compliance and quality. This not only helps mitigate the risks associated with AI but also maintains a necessary human touch, especially in areas that involve nuanced interpretation of contract clauses or critical decisions. 

Improve Contract TAT with Gen AI   

The scope of Generative AI in contract management is promising with its ability to learn from large amounts of data, create real-world content, and automate insights for businesses to make data-driven decisions. These new-age features make generative AI a “must-have” technology for cross-functional teams to expedite contract execution.  

Managing contracts efficiently and effectively is more critical than ever in a business landscape that's becoming more complex and competitive. The power of generative AI to automate and optimize the contract lifecycle management process represents a game-changing solution for organizations seeking to improve their operational efficiency and risk management capabilities.  

Adopting generative AI technologies streamlines contract creation, analysis, and negotiation processes and frees up valuable resources, allowing your teams to focus on strategic initiatives that drive your business forward. It also reduces the risk of human error and helps identify potential contractual risks before they become significant problems.  

As a leading Contract Lifecycle Management platform provider, we are dedicated to helping our customers embrace the power of generative AI for their contract management needs. 

Discover how SimpliContract’s generative AI features can help your business.