What is contract analysis?

What is Contract Analysis

We all know that we are now living firmly in the Digital Age. We all know that the volume of data being created, processed and stored is growing exponentially.

In the corporate sector, companies recognise the value of this data. Businesses with access to large volumes of data – and the ability to analyse it – are increasingly at an advantage over their competitors. Data is key to understanding what is happening in the market. Companies can also extract insights about consumers, so that they can better satisfy customer needs and deliver better products and services.

As companies race each other to get hold of more and more data, they often overlook one of the biggest sources of data that they already have available – their contracts.

Companies invest significant amount of time and resources in drafting, reviewing and negotiating their business contracts. Yet, many then take those contracts and store them away (the modern equivalent of sticking them in the bottom drawer). More often than not, nobody looks at the contract again unless something goes wrong.

This is a wasted opportunity.  

Contracts contain important information about a transaction or a commercial relationship – they are a source of “relationship data”. The contents of all the combined contracts are an important factor when determining the company’s overall risk profile. Contracts can also provide a valuable source of insight on operations, and how the business can be made more efficient and customer friendly.

In this article, we’ll take a look at how contract analysis can be used as the key to unlocking these new and more powerful business insights.

Single contract analysis vs Multiple contract analysis

Single contract analysis

A contract can often be a complex and long document. It may be full of legal jargon and unfamiliar concepts. It can therefore sometimes be difficult to analyse a contract and extract meaningful information.

There are also a lot of different people who might want to analyse and contract, and they might have different reasons why they might want to. Their purpose will determine what type of contract analysis approach that they should take. It will also determine what information is extracted.

Let’s look at some examples of who might want to analyse a contract and why:

  • A business owner or a manager. They may want to know about product pricing, delivery obligations, and other practical details.
  • A lawyer. They may have been asked to advise their client on whether the other party is complying with its obligations, whether the other party’s actions are a breach of the contract, and so on.
  • An auditor. The auditor will be checking contracts to identify any significant liabilities or risks for which a company should be making a financial provision.
  • A regulator.  The contents of a contract might be relevant during a regulatory investigation. For example, local authorities might be investigating a company to see if its contract terms are anti-competitive.
  • The purchaser of a company. In M&A transactions, the buyer will undertake due diligence on key contracts, to understand more about the liabilities affecting a target business.

Each of these professionals has their own reasons for wanting to analyse a contract – and what information they are looking to extract. Where they regularly analyse similar types of contract, the process might include working to a standard checklist or a contract review template. This helps to make sure that nothing gets missed.

Multiple contract analysis

Contract analysis starts to become even more powerful when the analysis can be extended to multiple contracts simultaneously.

An organisation might want to know information about what overall exposure it has to a particular issue. The issue might arise due to a change in the business environment, or as a result of a new strategy being considered.

For example, an organisation might ask:

  • “What proportion of our contracts contain a force majeure clause?” At the start of the Covid-19 pandemic, this became a key issue as companies raced to understand the impact on their supply chains.
  • During an acquisition – “which of the target company’s contracts contain a change of control clause?” This will determine with whom the buyer might have to re-negotiate contracts after the deal closes.
  • “Do any of our contracts still refer to outdated legislation?” This would be useful, for example, when new legislation like the GDPR came into force.

Contracts – a source of strategic business intelligence

So far, we have looked at issues and questions that relate to analysing and extracting information from the contents of the contracts.

Organisations can go further than this and analyse their contracts to improve their strategy, their risk management and their contracting processes.

For example, managers might want to know:

  • “What is the average time spent negotiating a sales contract, from lead through to close?”
  • “What clauses do our customers try to negotiate and amend the most often?”
  • “Are any departments not complying with compliance processes, which might create a risk of fraud?”

By analysing contracts to identify trends in what customers and suppliers are asking for (and willing to accept), a company can also gain powerful insights. These could even give the company a stronger tactical negotiating position. Imagine, for example, the other party wants to delete a clause. It would be very persuasive to have the data to be able to say “well, 93% of our customers have previously accepted this clause – so you should too”.

How technology supports contract analysis

Our ability to analyse contracts – and contract data – is improving as new technologies become more powerful.

For example, a key part of the process, when drafting or reviewing a contract, is to make sure that all the small details are correct. In the most serious cases, even a small error (for example, in the parties, a key date, a financial amount, clause numbering or cross-references) could lead to a disaster later on. In the past, proof-reading was usually undertaken by a paralegal or junior counsel, which was time-consuming, expensive and still prone to human error. Software tools, such as Loio, can now assist with this part of the contract analysis process. It’s an easy way to help reduce risk, while also saving cost and delay.

We now see contracts being stored in online contract management systems. These act as a repository and allow remote access and quick search functionality. These features also allow contract information to be extracted and turned into useful business tools – like reminders when a contract needs to be renewed. 

Machine Learning algorithms are also continuing to improve quickly, making contact analysis software more powerful. The information that was previously locked up in contracts can now be quickly compared, analysed and turned into useful management reports.

The development of these technologies will only accelerate the ability to analyse contracts – allowing useful business intelligence to be extracted and, ultimately, creating the insights that businesses will need to compete in the future of the Digital Age.

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