More and more companies are offering contract review software systems. This post gives more details what these systems do and why there are more of them. First, it explains what’s wrong with the status quo way contracts are reviewed, then covers what contract review software does and why it’s worthwhile. It is Part II of our “Contract Review Software Buyer’s Guide”. The introduction to the series is here.
Traditional, Software-Free Contract Review And What’s Wrong With It
Currently, most contract review is done by non-tech-enhanced people. These reviewers are often lawyers but sometimes other experienced individuals. Junior people typically take the first crack at reviewing contracts. They read agreements looking for set information (e.g., in an M&A transaction, what happens on assignment and change of control under a target company’s agreements; in a contract management database population exercise, items the company chooses to track, such as agreement term, insurance provisions, and much more) and put their findings into summary charts. These summary charts take different forms, including organized lists of verbatim clauses, summarized provisions, and answers to questions. More senior people (e.g., mid-level associates at large law firms) often then spot-check first level review results. Most people I know who have supervised contract review can share stories of the missed provisions they have found in the course of this work. (And, no doubt, many of those stories involve finding misses at inconvenient times.) In the case of due diligence contract review, results are sometimes further refined into high-level summaries, descriptive reports, and disclosure schedules.
The status quo contract review process is (1) slow and costly, (2) prone to human error, and (3) generates initial results that are not as useful as they might be.
What Contract Review Software Systems Do
Contract review software exists to help users (1) review contracts faster and more accurately and/or (2) better organize the process and results.
Early contract review systems typically featured questionnaires that prompted users to input values on specific contractual issues (e.g., title is __________; agreement is: assignable/assignable with notice or consent/not-assignable), collected responses into queryable databases (e.g., show all agreements that are not assignable), and tracked reviewer progress. Several of these efforts were homegrown at top law firms to help with legal due diligence. In fact, in the course of telling people about our technology enhanced contract review system, I have come across five such diligence-database efforts, as well as one company currently offering a product like this.
Nearly all contemporary contract review systems include features that automatically locate user-specified information in contracts and put findings into summary charts. They may also include interface features to help users refine or organize results. Our system, for example, automatically reads contracts for user-specified provisions (e.g., change of control, assignment, term), puts its findings into summary charts, and includes workflow tools to help users refine results. Our competitors generally offer variations on this.
Why Contract Review Software Systems Are Worth Building
- People already spend a lot of time reviewing contracts for the same things over and over again. Change of control. Assignment. Indemnity. Term. Insurance coverage requirements. And much more. I did and supervised this work in the form of due diligence contract review in my previous career as a top-firm M&A lawyer. And companies (or experts retained by them like legal process outsourcers) do this work all the time as part of populating contract management systems. Non-tech-enabled contract review is slow, error-prone, and does not generate as useful results as it might.
- There should be even more contract review done than there now is, especially on the contract management side. Most companies would benefit from contract management databases that break out details of all their contracts in a searchable way. And relatively few companies have them. These databases enable greater access to information across a business. And can help mitigate risks. For example, a properly set up contract management database can tell a company when their contracts expire, what renewal provisions are in them, what their indemnification or assignment rules are, and much more. There are lots of alternatives for contract management databases, ranging from spreadsheets, to nicely designed offerings from companies who see opportunity in this area, to systems from business software giants like IBM and SAP. Selecting a contract management database is only half the battle: a database is useless without data in it. While many contract management systems offer drafting tools that will auto-populate the database for newly created documents, enterprises can have vast numbers of legacy contracts with information that won’t be in the contract management database unless someone puts it there. That’s where automated contract review software (like ours) can help. Finding data from contracts to put into a contract management database takes real time. Our system can do this automatically. Or—the better way as we see it at this stage—it can help human reviewers do their work faster and more accurately.
Next, On To Technology
The next several posts in the “Contract Review Software Buyer’s Guide” will cover technology. Specifically, they will drill down into how automated contract provision extraction systems work. Essentially, companies offering automated contract abstraction systems base their extraction systems on one of two very different technologies: keyword searches (aka, manual rules) and machine learning-approaches. It is also possible to use comparison methods to identify contract provisions for extraction, and the series will cover those too. This technology choice matters—keyword search systems are easier to set up but have significant flaws (and are disfavored in most other areas because of their performance limitations); machine learning-based systems are very hard to build well, but can be powerful once up and running. The next several parts of the series will give much, much more detail on these points. Up first: a brief background post on how software finds contract provisions, then on to manual rules systems.