AI Contract Review for Procurement and Purchasing: Automatically Detecting Contract Risks with Natural Language Processing

In the world of business, contracts are crucial for defining the terms of agreements between parties.
However, reviewing these contracts can be time-consuming and prone to human error.
This is especially true in procurement and purchasing, where multiple contracts need to be analyzed simultaneously.
This is where Artificial Intelligence (AI) can make a monumental difference.

AI methods, particularly Natural Language Processing (NLP), can automate contract reviews, ensuring that potential risks are identified swiftly and accurately.
This not only saves time but also enhances the overall efficiency of procurement and purchasing teams.
Let’s delve deeper into how AI can revolutionize contract reviews.

Understanding Natural Language Processing (NLP)

Natural Language Processing (NLP) is a subset of AI that focuses on the interaction between computers and humans through natural language.
In layman’s terms, it means teaching computers to understand, interpret, and respond to human language in a meaningful way.
NLP makes it possible for machines to read, decipher, and summarize human language.

When applied to contract review, NLP algorithms can quickly scan and analyze vast amounts of text contained in contracts.
They can flag questionable clauses, highlight deviations from standard terms, and even suggest alternative language for consideration.

Benefits of AI in Contract Review

There are several benefits to using AI and NLP for contract reviews in procurement and purchasing.

Speed and Efficiency

Humans must read through every line of a contract to spot potential risks.
With AI, this process is expedited considerably.
AI can analyze thousands of pages in minutes, pinpointing crucial elements more quickly than any human ever could.

Accuracy

Human error is unavoidable, especially when reviewing complex and lengthy contracts.
In contrast, AI systems can maintain a high degree of accuracy while scanning for risks, inconsistencies, and other red flags.
Once trained, these systems continue to improve over time, becoming increasingly accurate.

Consistency

AI ensures that each contract is reviewed using the same set of criteria.
This eliminates the inconsistency that can arise from human reviewers who might interpret terms differently.
With AI, every contract undergoes the same rigorous examination.

Risk Management

One of the primary reasons for contract review is to identify risks.
AI, with its sophisticated algorithms, can flag potential risks that might be missed by human reviewers.
It can also prioritize these risks based on predefined criteria, enabling procurement teams to address the most critical issues first.

Cost Savings

By reducing the time spent on manual reviews, companies can save significantly on labor costs.
Moreover, early detection of potentially costly contract risks can prevent financial losses in the future.

How AI Detects Contract Risks

AI systems, particularly those using NLP, are trained to detect risks within contracts through several methods.

Keyword Identification

AI systems can be programmed to detect specific keywords or phrases commonly associated with risk, such as “penalty,” “termination,” or “liability.”
Whenever these words appear in a contract, the AI flags them for further review.

Contextual Analysis

Beyond simple keyword detection, AI systems can understand the context of entire sentences or paragraphs.
They can detect when a seemingly benign clause might pose a risk based on its context within the contract.
This involves understanding the nuances of human language, which NLP excels at.

Comparative Analysis

AI can compare new contracts against a database of previous contracts, identifying deviations from standard terms and conditions.
Unusual terms are flagged for further scrutiny, making it easier to detect outliers that may pose a risk.

Cross-Referencing Data

AI can cross-reference data from multiple sources to identify discrepancies within contracts.
For example, if a contract contains payment terms that differ from company policies, the AI system can flag this inconsistency.

Real-World Applications in Procurement

Several sectors within procurement and purchasing benefit immensely from AI-driven contract reviews.

Supplier Contracts

Procurement teams regularly deal with supplier contracts.
AI can review these contracts to ensure they adhere to company policies and regulatory requirements.
It can also identify clauses that may expose the company to financial or legal risks.

Service Agreements

Service agreements often contain complex terms and conditions.
AI systems can quickly analyze these agreements to ensure they align with the company’s expectations and legal standards.

Lease Agreements

For businesses that lease properties or equipment, lease agreements need thorough review.
AI can identify clauses related to penalties, maintenance responsibilities, and renewal terms, ensuring there are no hidden surprises.

Future of AI in Contract Review

The future of AI in contract review is bright, with continuous advancements in technology.

Integrations with Other Systems

In the future, AI systems will likely be integrated with other procurement and enterprise resource planning (ERP) systems.
This will create a seamless process for contract creation, review, and approval, enhancing overall efficiency.

Customization and Adaptability

AI systems will become increasingly customizable, allowing companies to fine-tune algorithms based on their specific needs and industry standards.
As a result, AI-driven contract reviews will become more adaptable to various business requirements.

Enhanced AI Capabilities

As AI technology continues to advance, we can expect even more sophisticated risk detection abilities.
Future AI systems might integrate voice recognition, enabling reviews of verbal agreements and negotiations as well.

Conclusion

AI, especially NLP, is transforming the way businesses handle contract reviews in procurement and purchasing.
By automating the review process, AI brings remarkable speed, accuracy, consistency, and cost savings.
With continuous advancements on the horizon, the future of AI in contract review looks more promising than ever, making it an indispensable tool for procurement professionals.
As businesses strive to mitigate risks and improve efficiency, embracing AI for contract reviews is no longer a luxury but a necessity.