Introduction Contract analytics – a valuable source of information for business decision making that is rarely leveraged
In our last contribution to Going Digital (“AI-supported processing of large numbers of documents”: LINK) we provided an overview of the wide range of technologically supported legal services dealing with so far unknown amounts of data and documents. In the following, we will deep dive into the field of tech-enabled rapid contract analytics.
Source of information: In many companies, contracts contain a huge, rarely leveraged source of information. Rigorous and systematic contract analytics may provide valuable insights on business dynamics, risks and opportunities.
Focus area M&A and insolvency proceedings: Especially in M&A and insolvency proceedings, fast insights are the key for decision making with significant economic consequences in most instances. Contracts as sources of information are only seldomly leveraged to their full potential.
Rarely leveraged: Identifying and extracting information out of contract sets containing several thousand documents with dozens of pages each, is a complex task. Within one particular category of contracts there can be a variety of general terms combinations caused by numerous changes over the years. These circumstances make contract analytics a complex task. Due to this complexity, it is performed only on a few occasions, leaving great sources of insights unleveraged.
Challenges of the traditional approach: Insufficient speed
Too time consuming and too costly: The traditional approach of analyzing contracts – either only top 10 contracts and a lot of ambiguity or large teams of lawyers, analyzing contracts one by one, results summarized in a detailed, however complex legal document – was often not sufficient or simply too costly to adequately serve M&A or insolvency proceedings purposes under time pressure.
In the absence of adequate solutions, time-critical decisions had to be made on estimates and gut feel – with the risk of expensive mistakes.
Challenge 1: Lack of sufficient databases. Huge sets of contracts are often not collected in comprehensive databases, in many cases, they are still paper only in huge archives. Hence, just “getting started” with tasks can be tricky.
Challenge 2: The information available is not the information required. Even if contracts are digitally accessible and key information are stored in comprehensive data bases, the specific insights needed urgently are not included.
Challenge 3: No methods and tools to tackle the vast amounts. Identifying and targeting extraction of key information, out of sets of several thousand contracts, with dozens of pages each, is a complex task without specialization and powerful tools.
New opportunities: Rapid contract analytics based on tech and process specialists
Short cut via Rapid Contract Analytics: The latest developments in legal tech and expert service providers offer new opportunities of targeted contract analytics to enable informed decision making. The solutions do not replace the traditional approach, but they provide a more fit-to-purpose offering.
- Opportunity 1: Analytics designed to purpose. In many decision-making processes, the “80/20”-approach is good enough for the fundamental choices. However, decision makers need to be aware of and accept uncertainty. As they do, they can design error margins and levels of tolerance with their service providers and access information at the level they need.
- Opportunity 2: Acceleration. Results, sufficient to inform the decisions at stake can be generated in tailored analytics approaches in no time. Analytics by definition enables (subject matter) expert teams to exclude most of the contract’s content and fully focus on the few passages of interest. Hence, the results are generated as fast as possible.
- Opportunity 3: The right mix of technology and legal process experts. Exclusion of excess information or identification of relevant elements is the tricky part. Experience and a thorough understanding of all solution elements are of the essence. Firstly, legal knowledge is the basis to really understand information required and to break down the approach. Secondly, process excellence is central to designing the process steps of a short cut to relevant information. Thirdly, legal tech knowledge is essential to design a process with maximum tech support for best quality and speed.
Examples of deployment
We would like to illustrate the capabilities of our Rapid Contract Analytics approach by presenting two deployment examples, one from the area of insolvency – defining remaining duration periods – and one from the area of M&A – analysing contracts for value-rating in due diligence.
Example 1: Duration periods
The team had to analyze roughly 10,000 contracts with regards to remaining duration periods. The contracts were delivered in digital and paper form, in different languages and with numerous combinations of main contract elements and amending terms and conditions. Overall, contract elements from the past 15 years were to be considered, with some elements in machine letters, some – decisive – elements in handwriting. The team digitized, cleared and structured the documents. They isolated the core elements and defined a complex but “MECE” (mutually exclusive, collectively exhaustive) legal logic. This logic was translated into a tech-enabled process with AI-enabled e-Discovery tools as a backbone. After these thorough preparations of roughly one week, the rest was merely execution and could be finished within three more weeks. At the end, the team could tell for 96% of the contracts the exact term for every contract as well as the possibility of contract transfer. This was more than enough to perform accurate scenario analyses and make informed decisions.
Example 2 – Change of control clauses and contract values in M&A situations
In a “standard” M&A buy-side situation, the team needed to gather fundamental information on the target. Contractual terms, fees and extraordinary termination threats, i.e. change of control clauses (CoC), were value-building factors which affected both, bid price and future strategy.
The team was asked to analyse more than 20,000 commercial contracts and documents with regards to fee volumes and duration periods to run a DCF-calculation on the contract portfolio. In addition, the risk of CoC-clauses had to be considered – hence, respective clauses had to be identified. The team defined patterns and standards by sample analyses before translating the finding into an e-Discovery approach. Consequently, results were incorporated in a DCF model taking the CoC-risk into consideration.
Tech-enabled rapid contract analytics change the landscape of various legal fields drastically by providing accurate, fast and comprehensive insights that inform decision making to a so far unknown level of detail.
Rapid Contract Analytics works under two fundamental conditions:
- One: Everyone using rapid contract analytics needs to accept its purpose – to inform decision making and provide direction. It is not an exhaustive legal analysis.
- Two: The speed comes through a thorough and most often demanding preparation based on pattern recognition, legal analyses and tailor fit process design, combining manual expert work and technology.
With the right expertise and technology, legal practitioners in companies, law firms, investment banks, private equity firms and similar organizations can enhance their decision-making quality significantly, reducing risk and maximizing added value.