The contract revolution
A decade ago, clients requiring contract drafting, negotiation, and review had essentially two options. Send it to a traditional law firm for manual processing or handle it manually in-house. Today, the contract revolution means clients have many more choices — what is the contract revolution?
Many questions exist about why an industry, such as the legal sector, that focuses on managing risk has historically lagged embracing technology to improve manual contract management processes. Other business infrastructure functions, such as financial services, were early adopters of reengineering, continuous improvement, and technology to automate and innovate repetitive manual and error-prone activities, specifically for improving processes, mitigating risk, and creating efficiencies at scale. But the legal sector has often been perceived as more risk-averse to these tools and technology, seemingly more comfortable with manual processes in which risk is inherent.
Research suggests that suboptimal contract terms and conditions combined with a lack of effective contract management can siphon off as much as 9% of annual revenue in large organizations.
To answer these questions, we need to focus on the evolution of the contract management landscape.
The computer revolution
During the computer revolution in the 1970s, contract management was viewed as the domain of legal experts, with little process automation. The development of word processing tools such as Lotus Notes, Microsoft Word, and Word Perfect in the early 80s and 90s began moving the dial on automation. These solutions provided a much-needed platform for contract creation and centralized document storage. Contract lifecycle processes were further enhanced by introducing commercial email solutions, which improved communication and connectivity between internal and external legal functions.
Despite adopting these early solutions, progress pre-2008 in automating contract lifecycle processes has been slow and anchored in skepticism about whether the industry could automate specialized and complex legal processes. A combination of a cultural lack of relevant skill sets, risk-averse attitudes, and a business model built on billable hours are some of the possible reasons for the historical inertia and skepticism. Disrupting the status quo is always challenging.
Contract complexity has been a significant historical barrier, and lawyers have often taken a proprietary stance around collaborating with other organizations in solving multifaceted problems, such as the lack of contract standardization.
Collaborating across boundaries has been vital in removing fundamental barriers. The 2008 financial crisis and subsequent regulatory reform catalyzed collaboration, standardization, and changes for the legal industry and technology. In many instances, contract and data standardization, on which automation has a deep dependency, has been driven through cross-industry collaboration, often through independent trade associations. The legal sector has addressed issues that no firm could tackle individually by genuinely collaborating.
Developments post-financial crisis – the contract revolution
2019 saw enormous growth in terms of significant technological developments in the legal sector, albeit through a somewhat fragmented ecosystem of solutions.
More recently, there has been an increased appetite by an industry historically slow to automate, to undertake a more comprehensive and strategic contract process reengineering and digitization program. The sector appears to be more motivated to leverage the disruption seen in other infrastructure functions and sectors in transforming how they do business. However, there is still some skepticism – why?
The introduction of the electronic discovery reference model in 2006 was fundamental in providing a foundation for legal data extraction. New technologies such as artificial intelligence (AI) improve contract reviews’ completeness, efficiency, and quality. AI-driven contract analytics can extract key clauses quickly, at scale. It can deeply analyze the clause to identify and guide its specifics. Such advanced analytics allows users to cover more topics, provides more detail, and ultimately delivers better data-driven answers.
Such sophisticated technology appears to have driven a perception that the legal function needs to be AI experts or rely solely on development teams for changes. The initial setup of the technology is critical, with the quality of the AI making all the difference in terms of how dependable and actionable the results it produces are. Typically, legal experts build the initial AI models, training and refining the AI through an exceptions-based process, utilizing machine learning tools to maximize automation and significantly reduce volume for review. A user-driven configuration allows the legal function to maintain the AI rules easily.
The extraordinary circumstances of the pandemic are squeezing margins, driving demand for tools that help reduce risk. Clients need due diligence undertaken at scale and speed with a high degree of accuracy. All of which requires more significant innovation and an end-to-end solution for contract analytics and lifecycle management.
A combination of trends and pull factors accelerate this cultural and contract revolution. The legal sector has new expectations, driven by push factors such as cost pressures, regulatory overload, and risk. But there is now more recognition of the need to better leverage technology in a landscape that is becoming increasingly more competitive. A new breed of legal service providers is providing disruptive innovation, which is the catalyst for helping to change how legal contract work is getting done. Through partnerships with technology companies, legal service providers can create an expansive ecosystem of curated tools. They leverage their legal, technology, and process improvement expertise to bridge the gap between legal, technology, and implementation, making it easier to tailor and implement solutions. The range, breadth, and depth of tools and expertise now offered by such providers are unprecedented and have radically extended the solutions and choices available to the legal sector.
The contract landscape in 2021 augments the industry with a strong foundation of standardized technology, combining the power of human legal expertise, more robust data, deep insights (through AI-driven analytics), and a more holistic focus on the end-to-end digitalization of the contract lifecycle. The strong collaboration of the legal sector, clients, trade associations, and legal service providers will be the catalyst for removing the last manual pillar of “doing business”.
In part two of the contract revolution, we explore the challenges in implementing a strategic contract process reengineering and digitalization program, understanding the short, medium, and long-term goals. We will be focusing on the basics to build a foundation that will enable lasting change.
 McKinsey & Company study: https://www.mckinsey.com/business-functions/operations/our-insights/contracting-for-performance-unlocking-additional-value