Category Archives: contract management

Sponsored Posts that make you go UGH! (AI Contract MISmanagement!)

Today’s post is brought to you by the letters W, T, and F and inspired by this Spend Matters guest article by Matt Lhoumeau on The Last Contract Lawyer.

According to Matt, the legal profession is experiencing its iPhone moment because your competitors are closing deals in 26 seconds (and I certainly hope not!) using AI that outperforms human lawyers by 10% in accuracy (on what scale?!?). More specifically, he claims AI can complete a contract review in 26 seconds (spoiler: it can’t) while a human takes 92 minutes (on average I assume) and, furthermore, that this will cost you up to $6,900 (and this math makes no sense if the lawyer is only spending 92 minutes; because even top tier lawyers will generally only charge $500 per hour for a contract draft or review, so what’s the other $6,150 for).

Anyway, the most UGH! part of this article is not these false claims, it’s the missing information. Why is this the most UGH!? Because most of the claims the article makes are true, and when you tie all these claims together, if you don’t understand what this technology can’t do, and what risks it brings to the table (which is the missing information I refer to), you’re likely to believe the claims, join the AI religion, go all in on AI-CLM, and fire all your contract review lawyers. (And while I am no more fond of lawyers than the next guy, I am no less fond of them either, especially when they have a critical role to play.)

You see, the right AI engine (not ChatGPT) can:

  • process a contract in an average of 26 seconds or less and perform a (very) large number of contract review tasks during that time
  • cut approval times by 50%, and significantly reduce overall review times (that can easily add up to a calendar year for an organization that needs to review 500 contracts) to a small fraction of the time required (down to a few weeks to a few months)
  • do more accurate pattern recognition than most humans, including “experts”
  • significantly reduce outside counsel spend

And the benefits, when deployed properly, can be as great as the article claims. But this is the key — deployed properly. And there is no discussion of how you do that. The only piece of counter-information in the entire article is a reference to a Stanford Law School research study (that puts AI on Trial) that notes that AI tools using retrieval-augmented generation systems still hallucinate in 1 out of 6 benchmarking queries (but yet somehow outperform human reviewers on standard contracts? really?).

As we wrote earlier this year when we told you Don’t Kill All the Lawyers (and reminded you a couple of months later in our post that said you should embrace Legal tech … backed by lawyers), we’ve reached the point that you should (almost) never use a lawyer to:

  • draft a contract
  • review a contract for standard clauses, terms, and conditions
  • locate the relevant statutes
  • summarize your obligations
  • summarize your incident response options
  • etc.

because a tool can take your templates, standard terms and conditions, RFP, negotiation summary, and draft a better contract that most paralegals; ensure all of your standard terms and conditions are in there or review counter-party paper to ensure the same; review the redline you get (or are planning to give) that and determine which changes are good or indifferent for you; and then run the final contract through a standard agent for risk assessment to identify if the contract contains any known risks and flag anything that needs to be addressed, and do this better than a lawyer.

But what the tool absolutely, positively, can not do is:

  • determine if the mitigations to known risks are sufficient in the particular instance addressed by the contract
  • determine if there are any unique/non-standard risks that need to be addressed (that your existing checklists, templates, and review agents wouldn’t know about or check for)
  • determine if there are any unique requirements for a contract with a supplier in a new jurisdiction that could require special considerations around key clause phrasing or standard risk mitigations
  • have confidence beyond its models

You still need the human review, at least where it counts. And that’s the part you have to understand — and the part the referenced article doesn’t address at all.

If you’re a company doing a Billion dollars in business a year and signing over 10,000 contracts a year, you certainly don’t want to still be doing end-to-end manual reviews as that would be a minimum of 2 million minutes of review time, or the full time attention of almost 20 lawyers. Wasteful and completely unnecessary.

In fact, since you’re doing a Billion dollars or more (and likely 20 times that if your company is a Fortune 100),

  • you probably don’t want to manually review any contract under a threshold (say $100,000) unless it is flagged as a high risk,
  • you probably don’t want to spend more than an hour on a review of any contract under a larger threshold (say one million dollars) unless it is flagged as medium risk,
  • you don’t want lawyers to read the remaining contracts end-to-end reviewing every clause and comparing those clauses against every checklist when it’s only the risks and unique requirements of the contract that require human intelligence

because limiting low value contracts to review only in high risk, low-mid value contracts to review only in mid-risks, and leaving the costly (but valuable) review time to the high-value or potentially high risk contracts will not only cut costs by 60% or more, but increase the value of the manual exercise.

Especially if those contracts are indexed by a natural language system that can allow the lawyer to ask key questions about the clauses that are in there, bring up the clauses she is interested in for a review, identify any processing flags, and apply her unique insights to the domain, jurisdiction, and business risks and ensure the contract accurately addresses all of these or focus her time on the right additions and modifications. For example, she might realize that the contract for on-site support in the nuclear power plant is extremely risky and the company’s across-the-board liability insurance requirement of 5 million is just not enough, realize that the AI safety requirements are not enforceable in the US and instead insist that the agreement be shifted to the Irish sub-entity and that jurisdiction apply, and so on. A check-the-box system won’t catch these things (as it can only look for risks it knows of and check boxes that have been identified), and neither will an open LLM (where you have no idea of the quality of the training, how much it is hallucinating, or, even worse, deliberately lying to you).

You still need a lawyer. Because, while it is an iPhone moment, it’s only an iPhone moment for lawyers who, if you aren’t using the tech, will be using the tech to help them focus on what’s important on the review stack and what isn’t. Because if the worst case is that you might lose an average of 10K to 50K here and there on every 100th contract in exchange for saving 10 Million on legal contract reviews and related matters (10 lawyers from outside council at an average of one million a year), that’s likely a worst case loss of a 2M loss in exchange for a 5X savings of 10M. And you know you won’t have many large losses because you’ll be able to focus legal review on the contracts that matter in dollar value or risk rating, not the contracts that don’t. And, all of a sudden, a close legal review of key contracts becomes a luxury you CAN afford!

CLM is Dead! Long Live CLM!

Last month THE PROPHET ran a RIP post for CLM over on LinkedIn where he heralded the demise of CLM.

Which is coming fast and furious for CLM 1.0 and CLM 2.0 because, as we’ve said before, most current CLM solutions are nothing more than a glorified document repository / barebones CMS with a bit of linguistic rebranding, a few customized meta-data fields, maybe a bit of versioning support, and if you’re super lucky, some integrated e-Signature support.

As for the prophet’s suggestions, most of them won’t happen.

CLM absorbed into I2O?

Considering most I2O (Intake to Orchestrate) players still haven’t absorbed a fleshed out working Source to Pay model … not likely.

CLM goes vertical?

The whole point of CLM is horizontal — to get a grip on all of your contracts, not just a subset of them!

Agentic Solutions?

I like my contracts the way I like my maps: ACCURATE!

The best “AI” can do is enhance the productivity you get from a (very) small legal team … it CAN NOT replace it!

GPOs?

Standard terms around pricing DOES NOT satisfy geographic requirements which vary on levels of regulation, compliance, etc.

Clause based?

Ask Icertis and especially Exari how well that worked out for them …

Every other suggestion

Maybe … but all of this is trickier than THE PROPHET lets on!

The reason that CLM doesn’t work, as we noted above, is that the majority of “CLM” solutions on the market are NOT CLM at all. They are glorified repositories with some authoring and e-Signature support … not at all what an organization needs.

An organization needs “lifecycle” management. That’s a heck of a lot more than just drafting, redlining, signing, and sticking in a repository. That’s because contract “lifecycle” management really starts when the contract is signed (whereas most platforms seem to think it ends when the contract is signed).

It’s about automatically extracting the obligations, indexing them, assigning them, tracking them, and making sure they get done.

It’s about extracting the milestones and deliverables, as well as those obligations, and wrapping them in a project plan, assigning the resources, assigning the supervisory chain, tracking them, making sure they get done, and making sure all requirements are met.

It’s about extracting the SKUS, price tables, rate cards, and pushing them into the Procurement systems to allow those systems to perform the right m-way matches and make sure nothing is paid out that wasn’t agreed to. It’s about pulling in the paid invoices for tracking purposes and allowing the contract/relationship managers to track total contract fulfillment.

It’s about ensuring that the right parties are notified when a contract is coming up for renewal, have all the information necessary to make the decision on termination, renegotiation, or allow an evergreen renewal.

And about a whole lot more where VALUE is concerned. Just check out what The Maverick has to say over on Spend Matters.

Why Aren’t You Realizing the Full Value of Your Sourcing Efforts?

It’s been a well known statistic going back all the way to 2009 that at least 30% (and often 40%) of identified value in a sourcing event is never realized when Mickey North Rizza of AMR Research (acquired by Gartner in 2010 in an acquisition game of the 64,000,000 pyramid) published her classic 3-part series on Reaching Sourcing Excellence with Part 1 titled How to Keep 30 Cents of Every Dollar Spent. The reality is that while many leading organizations adopted strategic sourcing quickly during its first heyday in the mid-2000s, often before Procurement, because of the huge savings opportunities that were identified with good reverse auction platforms (in markets where supply exceeded demand) and good sourcing optimization (regardless of market conditions), as sourcing optimization identified an average savings of 12% consistently (compared to reverse auctions which saw significant drops every time they were applied to the same category), most of these leaders who identified savings of 10% or more never saw half of the identified savings. This is because savings requires more than just identification and a signature on a contract, it requires execution!

Execution that, at a minimum, requires:

  • making sure you order on the contract
  • … on time to receive delivery on time using the preferred shipping method
  • making sure you receive defect-free goods that meet the spec before paying for them
  • making sure the amount you are billed is the amount as per the contract
  • … and that you are not billed for expediting fees or surcharges you DID NOT agree to
  • making sure you pay on time (to avoid penalties)
  • … and only ever pay for any good or service once (using an m-way match)
  • making sure you terminate or renegotiate before an evergreen renewal
  • … and that you have verified the supplier has all the certifications and insurances in place before placing an order or renewing the contract
  • … etc.

It comes back to the concept of the perfect order which must be

  • on time,
  • complete,
  • damage free,
  • correctly documented,
  • correctly billed, and
  • adherent to all contract terms

This is not easy to do unless you

  • have a good procurement system
  • have a (carrier that has a) good WIMS (Warehousing and Inventory Management) system

and, the part that most people miss,

  • have a good contract lifecycle management system that manages the contract execution post signing

And when you look at the majority of contract management systems, they tend to fall into three categories:

  • a glorified e-filing cabinet / document repository where you can store your contracts and search their metadata (and literally no better than what a high school student with Microsoft Access and minimal coding skills could build 20 years ago)
  • a contract creation system that will allow you to quickly draft contracts using:
    • contract templates, from your, or their, legal department, tagged by region and category they can be used for,
    • clause libraries and templates, possibly with multiple version support based on territories and categories, or, today
    • Gen-AI drafting of templates through specification of category, region, requirements, and risks that must be covered as well as e-versions of all previously signed contracts in the category, region, business requirement, or risk categories (which then need to be mildly to moderately edited by a Legal expert)
  • a signatory platform with negotiation support (version control, dynamic redlining, audit trails, etc.)

Which is all fine and dandy, and well implemented can make your Legal team and Sourcing teams considerably more productive during the negotiation process, but does diddly squat when it comes time to actually helping you manage the contract execution. Now, you might think that you can do that in the Supplier Management system, because you’re ultimately managing a supplier, or the Risk Management system, because you’re ultimately managing a risk, and you can, to a point, and specifically the point at which those systems allow you to define contract tasks, but none of these are set up to let you holistically manage a contract — contract 360 if you will. This is especially the situation if you have a master contract with a number of sub-contracts, and those sub-contracts have sub-contracts as well. This will be the case if you are buying off of a contract tied to a GPO master contract, a holding company master contract (if your company is part of a group of companies), or in construction / engineering / shipbuilding industries where your main supplier will need to subcontract to a number of smaller suppliers for custom parts or services and your organization needs to manage that for regulatory or risk reasons.

In other words, the only contract lifecycle management solution that is truly valuable to Procurement is the solution that allows the contract to be managed from post signature to termination, helping the organization ensure all of the obligations are met and rights are received.

You Should Embrace Legal Tech … Backed By Lawyers!

Don’t Kill ALL the Lawyers was our plea earlier this year because, sometimes, yes, sometimes, you do need a good lawyer in Procurement — just not as often as you think. No matter how much you think you can do (and you can do more than you think), you will still need them for

  • (final) contract reviews
  • significant clause interpretations
  • identification of statutes, regulations, and legal decisions you may be subject to
  • review financial and legal reports before submission
  • advisory on incident response plans and alternatives

Basically, while LLM powered Legal Tech can do a reasonably good job of

  • assembling a contract based on mandatory clauses, required terms and conditions, templates, and past similar contracts (which you can then touch up to your liking)
  • identifying clause types
  • identifying statutes, regulations, and legal decisions you might be subject to
  • identifying whether or not key sections are present in a report before submission
  • identify potential incident response plans across libraries

As the tech is NOT intelligent, it cannot

  • identify whether a contract meets your goals, only if it contains clauses that you have identified
  • tell you how a clause is likely to be interpreted by a court, as there is always some ambiguity in a clause, and opposing council might be intent on shoving as much ambiguity in there as possible to increase the chance a ruling goes in their client’s favour if something goes wrong
  • identify how likely you are to be subject to a new statute, regulation, or legal decision where it is a matter of interpretation
  • determine if the report is financially accurate or makes sufficient disclosures to satisfy the letter and the spirit of the regulatory requirement
  • determine the potential legal ramifications of a response

that requires an intelligent HUMAN lawyer!

But as we previously indicated, you can do a lot with some intelligence and tech. And you can do even more if you use Legal Tech backed by real lawyers with Human Intelligence (HI!).

For example, if you power your contract creation with a clause library vetted by real lawyers with annotations as to categories, geographies, and regulations the clause is for / satisfies, the contract creation tool can do a better job, leave you less to edit, and allow a faster review.

If you compare a contract to a clause library with comments and annotations on plain English meanings, best practices, and red flags that was developed and annotated by lawyers with Human Intelligence (HI!), you will have instant insight into what you need to negotiate, watch out for, and counter with. You will only need to involve legal for standard clauses if it is really vague or you need a heavy hand.

If your Legal team identifies which statutes, regulations, or recent decisions could affect your organization, how, and when, and tags the geographies, categories, parties, etc. that could be subject, you will instantly have that information when considering an award and then when drafting/reviewing a contract.

So yes, you should embrace Legal Tech to keep your Procurement timelines down (as well as external counsel fees), but only if it is backed and augmented by lawyers with Human Intelligence (HI!).

Don’t Kill ALL the Lawyers …

… but certainly think about how (much) and when you use them in Procurement and your organization as a whole.

Earlier this month, THE PROPHET asked a very important question regarding Lawyers, Contracts, Procurement, and Tech in 6 parts, which essentially boils down to:

When will advanced tech, especially the tech we have today, replace lawyers for most in-house and even on-retainer Legal services?
To which the doctor replied: Why hasn’t it already?

Right now we have legal-tech so good that you should NEVER use a lawyer to:

Write a contract.
In fact, if you have any contract writing skills at all, even without ANY tech whatsoever, odds are high in your favour that you will write a better contract without a lawyer, especially in tech and supply chain when you know your business, the risks, and the key agreements and protections you need in place and, frankly, the lawyer doesn’t.I can’t count the number of times I’ve been told this is a great contract and there’s nothing wrong with it as we paid XK (where X, depending on the contract type, starts at 5, 10, or even 15), when the contract is in fact mediocre at best, full of holes, and sometimes even worse than the contract the firm was using. But sunk cost fallacy takes full effect, and a slipshod effort by the paralegal, quickly reviewed by the counsel to make sure there is nothing glaringly wrong, and put before you with a big price tag becomes the greatest contract ever written.

And yes, a lawyer will know to look for the presence of key standard clauses that should be in every business contract and contract from your business but, guess what, so will any contract creation / analytics product on the market.

And yes, a lawyer can tell you the potential risks associated from veering away from a standard contract, standard terms & conditions, and standard mitigations, but, guess what, so will any contract creation / analytics product on the market.

There’s very little contract-related value a lawyer can offer that modern tech can’t do, especially in the hands of a tech-savvy contract manager who understands the purpose of a contract and writes the contract in plain English.

Locate the relevant statutes (laws), decisions, and regulations that affect your business.
There aren’t many valid uses for Gen-AI, but large document search and summarization is one valid use, and a use that usually works remarkably well (with a very low failure rate compared to other tasks wrongfully put to these LLMs). No need to pay thousands in hourly billables to dig up what these tools can dig up in minutes and you can review in hours.
Summarize your Financial and Legal (Reporting) Obligations with respect to all statutes and regulations that apply to you.
Again, this is one of the few valid uses for Gen-AI that works quite well as it’s just another type of document set summarization. So why pay a legal team dozens or hundreds of hours when you can get a highly accurate summary for next to nothing in comparison?
Summarize known incident response options, and known benefits/risks of each.
Again, this is one of the few valid uses for Gen-AI that works quite well as it’s just another form of document summarization. And while this won’t necessarily be 100% complete, or give you specific insight to your situation, it helps you get a handle on where you might start.

The reality is that you only need a lawyer to:

Do a final contract review.
To make sure you didn’t screw up a clause, miss a core enterprise requirement they have committed to memory, or address an upcoming risk or issue they happen to know about that you don’t. Considering this is all they really do anyway when you ask them to write a contract (as they are either sloughing it off to the paralegal or just pulling one from the file that is close to what they think you need and just making a few edits), just pay them for what they do that they are good at.
Review the list of statutes, regulations, and legal decisions you believe you are subject to.
Their in-depth knowledge of the law means that a good lawyer who practices in the relevant area will quickly be able to tell you whether or not each statute, regulation, and/or legal decision is relevant to you, key points you shouldn’t miss, and whether there are any statutes, regulations, and/or legal decisions they believe you should also be aware of because they are, or may be, relevant.
Review the financial and legal reporting you plan to do and advise you on completeness, correctness, and accuracy.
They know the law, and how to keep you in line with it.
Advise you on your incident response plan and best alternative options.
Again, these are legal experts who focus on mitigating risks and arguing for a living, unlike dumb algorithms which can just summarize which they are given. This is, or should be, the true value of your legal counsel and when you should really be paying the high hourly fees.

As to THE PROPHET‘s question as to:

When will it happen?
The answer is who knows?

Considering that good contract creation applications have been around for almost fifteen (15) years, where all you had to do was define clauses and variants by geography or category, standard templates by category, etc. and then rules for special situations, and it would assemble a custom template for you in minutes, the base technology should have been common a decade (10 years) ago. Now we have Gen-AI thrown into the mix which can analyze your contract repository, pre-populate your standard clauses and build starting templates, and then customize those based on the buy specifics, you can get a decent draft in minutes with very little manual effort.

We’ve had good semantic document summarization for well over a decade, and Gen-AI has taken that to a new level, most CLM vendors are integrating it, it’s easy to use, can be trained to be highly accurate for this task, and not expensive.

We’ve had good contract analytic solutions for about a decade, which can analyze all sorts of performance metrics, risk metrics, associated costs, and so on.

But yet these solutions have rarely been adopted, when they could save an organization a lot of money, help the organization get their risks under control, help the organization better manage their spend, and help the organization understand its supply chain.

This shouldn’t be surprising given that year after year, as per our recent myth-busting 2025 2015 trends, companies say they want strategic value but only focus on cost-cutting, but don’t even do that right. Only two technologies have been proven to support year-over-year cost reductions of 10% or more (adjusted for inflation), and those are

  1. (advanced) spend analysis
    (not the dinky projects some companies outsource to Big X who use second rate third party tools for poor results)
  2. (strategic sourcing decision) optimization

And how many companies have truly adopted these technologies AND use them in house? Our guess is less than 20% in the first case and we know it’s less than 10% in the second case. It’s like we said in our recent rant on You Don’t Need Gen-AI to Revolutionize Procurement and Supply Chain Management — Classic Analytics, Optimization, and Machine Learning that You Have Been Ignoring for Two Decades Will Do Just Fine!