GenAI in Contracting: From Hype to Hands-On

Introduction

The year 2024 marked a momentous shift in the intersection of artificial intelligence and legal practice. Generative AI (GenAI) has risen as a transformative force, significantly impacting the contract management domain. This article examines the practical applications of GenAI in contracting, moving beyond the initial excitement to address real-world implementation. As demonstrated in recent studies by World Commerce & Contracting (WorldCC) and Icertis, adoption is accelerating in contract management, but the journey from hype to practical use still entails challenges.

Understanding Generative AI and Large Language Models (LLMs)

Generative AI, a subset of artificial intelligence, creates new content across media—text, audio, images, and beyond. At the heart of GenAI are Large Language Models (LLMs), such as OpenAI’s GPT models, which process massive datasets to predict human-like responses. LLMs don’t “understand” language in the human sense but rather identify patterns in text, allowing them to generate highly relevant, contextually appropriate content.

In contract management, LLMs aid in drafting, summarizing, and analyzing contracts among other things, enabling legal teams to scale operations and reduce manual workload. Yet, to navigate this landscape effectively, understanding essential concepts like “prompting” (the process of guiding model responses) and “hallucinations” (instances of incorrect or fabricated output) is crucial.

Why GenAI in Contracting?

Contracts are a cornerstone of business relationships, but the traditional methods of contract management have long been criticized for their inefficiency. The process, from drafting to negotiation, execution, and management, is labor-intensive and error-prone. GenAI provides a pathway to efficiencies in these stages, enabling automation, reducing risks, and allowing for more strategic decision-making.

Recent research underscores the growing interest in GenAI within the contract management community. According to the latest WorldCC Benchmark Report, 94% of respondents believe that GenAI can enhance risk analysis and compliance functions¹.

Additionally, 72% of legal operations professionals see using technology to simplify workflow as a high priority². Despite these promising indicators, 70% of business leaders still report inadequate contract visibility, underscoring a need for more accessible and integrated contract intelligence solutions³.

Practical Applications of GenAI in Contracting

1. Contract Summarization
   One of the most immediate applications of GenAI is contract summarization, a feature highly valued by legal professionals. By automatically generating concise summaries, GenAI reduces the time required to review extensive documents. This capability not only improves productivity but also enhances accessibility for stakeholders unfamiliar with legal jargon, fostering transparency in legal operations.
2. Contract Drafting
   Drafting contracts is a complex and repetitive task, but GenAI can assist by generating initial drafts based on specific inputs. Although human review is necessary to ensure accuracy and compliance with regulations, GenAI-generated drafts streamline the process, enabling legal teams to focus on more strategic tasks.
3. Risk and Compliance Analysis
   GenAI’s ability to analyze language patterns is beneficial for identifying potential risks in contract language. The WorldCC report shows that 94% of respondents anticipate that GenAI will improve risk and compliance checks⁴. By flagging ambiguous language or compliance issues, GenAI supports risk management and mitigates the likelihood of disputes.
4. AI-Enhanced Decision-Making in Contract Negotiations
   GenAI can also support negotiations by suggesting clauses, identifying deviations from company playbooks, and even predicting the likelihood of successful negotiations. This predictive aspect is particularly valuable in complex contracts, where multiple rounds of negotiation are common. By leveraging GenAI insights, legal teams can strategize effectively, saving time and resources.

Training and Upskilling in Prompt Engineering

With the rise of GenAI in contracting, prompt engineering—designing effective prompts to achieve desired outputs—has emerged as a vital skill for legal professionals. A well-crafted prompt guides the AI’s response, ensuring accuracy and relevance. Training teams in prompt engineering enables them to maximize GenAI’s utility, making this skillset indispensable as the technology becomes more integrated into workflows.

Challenges in Adopting GenAI

While GenAI offers considerable benefits, several barriers to adoption remain. A key concern is the “black box” nature of AI outputs; without clear transparency into how GenAI reaches conclusions, legal professionals are cautious about relying on these tools for critical decisions. Moreover, the issue of “hallucinations”—where the AI generates misleading or incorrect information—remains an inherent risk. In one such case the U.S. District Judge P. Kevin Castel of the Southern District of New York imposed a $5,000 penalty on Peter LoDuca, Steven A. Schwartz and the firm Levidow, Levidow & Oberman who had included cases that were made up by ChatGPT and never verified by a human to be real⁵. Human oversight is necessary to validate GenAI outputs, reinforcing the importance of pairing AI tools with experienced legal professionals.

The WorldCC and Icertis research also highlights structural challenges: 42% of companies report a lack of clear oversight in contract management, and 70% indicate inadequate contract visibility⁶. For GenAI to fulfill its potential, contract management systems must address these foundational issues to create an environment where AI-driven insights can be effectively utilized.

Overcoming Reluctance: An AI-Ready Mindset

Adopting GenAI requires not only technological adjustments but also a shift in mindset. In the September 2024 issue of Contract Management magazine, Alexis Bonnell discusses the “emotional phases of technology adoption,” which include initial resistance, gradual exploration, and eventual acceptance⁷. For many legal teams, transitioning to GenAI involves confronting fears of job displacement and concerns over AI’s reliability. Cultivating an AI-ready mindset involves fostering openness to technological support, viewing AI as an augmentation tool rather than a replacement for human judgment.

Recent Case Studies in GenAI for Contracting

WorldCC and Icertis have documented several case studies that showcase GenAI’s transformative role in contract management. The highest benefit has been seen in increased productivity with 44% of responded stating it was the number one benefit from implementing GenAI⁸. Other key areas that has shown benefit is cycle time reduction, increased transparency in contracting activities, innovation, improved accuracy in contract review, value-add, cost savings, enhanced risk management, raised skills and even grater support of ESG goals⁹. All in all each case study shows that those who have implemented GenAI into their contracting processes are seeing positive benefits.

The Future of GenAI in Contracting

As GenAI technology continues to evolve, its potential in contract management will expand. One anticipated development is the creation of domain-specific models—LLMs fine-tuned for legal language, which would reduce the prevalence of hallucinations and improve accuracy. Additionally, advancements in prompt engineering will allow for more precise control over GenAI outputs, making it easier for legal professionals to guide the AI’s responses.

Furthermore, as all major Contract Lifecycle Management (CLM) systems like Icertis and Sirion, continue to integrate GenAI functionalities, the technology is getting integrated seamlessly into everyday contract management process. Additionally, GenAI native applications such as Speedlegal and RobinAI provide easy entry points to integrate GenAI tools into your existing processes. GenAI native applications leverage LLMs for sophisticated analysis, allowing companies to derive actionable insights from their contract data in real-time.

Conclusion

The journey from hype to hands-on GenAI adoption in contract management is well underway. The potential benefits are clear: enhanced efficiency, better risk management, and improved decision-making capabilities. However, realizing these benefits requires overcoming both technical and cultural hurdles. By fostering an AI-ready mindset, investing in prompt engineering skills, and addressing foundational visibility and oversight issues, legal professionals can harness GenAI’s power to transform the contract management landscape.

¹ World Commerce & Contracting, 2024 Benchmark Report, World Commerce & Contracting

² Thompson Reuters, 2023 Legal Department Operations Index, 

³ Icertis, State of CLM and AI-Powered Contract Intelligence

⁴ World Commerce & Contracting, 2024 Benchmark Report, World Commerce & Contracting

⁵ ABAJournal, Lawyers who ‘doubled down’ and defended ChatGPT’s fake cases must pay $5K, judge says

⁶ Icertis, State of CLM and AI-Powered Contract Intelligence

⁷ Alexis Bonnell, An AI-Ready Mindset, Contract Management Magazine, Sept. 2024

⁸ World Commerce & Contracting, 2024 Benchmark Report, World Commerce & Contracting

⁹ World Commerce & Contracting, 2024 Benchmark Report, World Commerce & Contracting

References:

ABAJournal, Lawyers who ‘doubled down’ and defended ChatGPT’s fake cases must pay $5K, judge says,  https://www.abajournal.com/web/article/lawyers-who-doubled-down-and-defended-chatgpts-fake-cases-must-pay-5k-judge-says#google_vignette (last visited Nov. 12, 2024)

Alexis Bonnell, An AI-Ready Mindset, Contract Management Magazine, Sept. 2024.

Icertis, State of CLM and AI-Powered Contract Intelligence, https://www.icertis.com/research/analyst-reports/state-of-clm-and-ai-powered-contract-intelligence/intro/ (last visited Nov. 12, 2024).

World Commerce & Contracting, 2024 Benchmark Report, World Commerce & Contracting, https://www.worldcc.com/Portals/IACCM/Reports/AI-in-Contracting.pdf?ver=P4x9_UqMiBJrHwAdsMFt0g%3D%3D (last visited Nov. 12, 2024).

Thompson Reuters, 2023 Legal Department Operations Index,  https://legalsolutions.thomsonreuters.co.uk/content/dam/ewp-m/documents/legal-uk/en/pdf/reports/legal-depart-operations-index_2023.pdf (last visited Nov. 12, 2024)