The rise of AI in contract management has been a game-changer for many, offering unprecedented gains in efficiency, accuracy, and risk mitigation. Yet, for others, the promised land remains frustratingly out of reach.

What's the reason for this disparity? It's not that AI itself is ineffective. Rather, it's often a matter of mindset, preparation, and strategy. Failing to understand the concept of AI in relation to your organization’s unique contract management needs exposes you to a wide variety of pitfalls, ultimately setting you up for disappointment in the long run.

Here, we’ve covered the basics of how a traditional CLM works, how AI has revolutionized the ecosystem, the various mistakes organizations make when adopting AI-powered CLMs, and how you can avoid these pitfalls.

How does a traditional CLM work?

A traditional CLM offers a comprehensive ecosystem of tools that helps organizations streamline contracting processes from start to end. Its functionalities digitize various manual and routine contract management tasks, from contract drafting and reviews to storage and reporting.

This helps contract-facing teams (in-house counsel, sales personnel, business devs, compliance officers, etc.) save hours of manual labor, onboard contracts at scale, and ultimately make more positive contributions to the organization’s bottom line.

Here’s a breakdown of how a traditional CLM works:

#1 Contract creation

• Templates and clause libraries—CLMs typically come with prebuilt templates and clause libraries for a wide variety of contracts. So, every time a new contract is needed, you can quickly dive in, find the category of the contract you need, access its template, and get down to business.

• Data integration—CLMs can also integrate with ERPs, CRMs, and other business tools to automatically populate contracts with relevant information, such as customer details, pricing data, product specifications, and other key terms. This integration streamlines the contract creation process, reduces the risk of errors, and keeps the contracts consistently aligned with the most up-to-date information from various business systems.

Also read: Supercharging Salesforce Contract Management with SpotDraft

• Collaborative drafting—CLMs allow multiple users to collaborate in real-time during contract drafting and editing processes. Users can track changes, provide comments, and review contracts more efficiently.

“We are able to draft and redline contracts inside the CLM tool. Therefore, we no longer need to rely exclusively on tools such as MS Word and Google Docs. Now, all stakeholders can view and access just one true version of the contract.”

~Igor Poroger, Director of Legal, EMEA, Vectra AI
How CLMs Empower Legal Teams in B2B SaaS Companies 

#2 Centralized repository

Think about how many contracts sit on someone's laptop or in multiple databases, and then think about the value of contract management. The importance of simply being able to locate all of the company's contracts and relevant amendments in one place without significant effort cannot be minimized."

~Sterling Miller, CEO and Senior Counsel, Hilgers Graben PLLC
‍Ten Things: Minimizing Risks in Commercial Contracts

• Search and filtering functionalities—To make stored contracts more accessible, CLMs employ search and filtering functionalities. These allow you to quickly find contracts using parameters such as creation date, contract type, assigned owner, or specific keywords.

• End-to-end encryption—End-to-end encryption ensures that stored contracts remain completely protected in transit and at rest. With this system, data is encrypted on the user's end and remains so during transmission and storage. This robust security measure safeguards sensitive contract information from unauthorized access, providing data integrity and confidentiality.

• Role-based Access Control (RBAC)—CLMs leverage RBAC to ensure only stakeholders with assigned roles in a particular contract can access the document. This is crucial for protecting the contract from unauthorized access.

Also read: Contract Repository—Everything You Need to Know

#3 Workflow automation

• Automated routing and approvals—CLMs can automatically assign contracts to stakeholders for approvals based on predefined triggers. For instance, you can set a rule that pushes contracts worth $100,000 and above to a specific stakeholder for review and approval or automatically approve contracts worth below $10,000.

• Notifications and reminders—This feature automatically sends emails and push notifications about upcoming deadlines, contract expirations, and other important events.

• Custom triggers and actions—CLMs can be customized to trigger specific actions based on predefined events, such as automatically sending reminders when a clause is changed or escalating an issue to a manager.

Also read: Contract Workflow—Examples + Steps for an Effective Workflow

#4 Negotiation

• Version control and redlining—CLMs maintain a record of contract versions, allowing users to track changes made during negotiations. Redlining features highlight alterations, enabling parties to quickly identify and understand modifications made by each party.

• Electronic signature—This allows parties to electronically sign contracts, eliminating the need for physical signatures and paper documents. This significantly speeds up the execution process, helping organizations close more deals in lower time frames.

Also read: A Quick Introduction to eSignatures

#5 Reporting and analytics

• Performance metrics—CLMs provide insights into contract performance metrics, such as contract cycle times, approval delays, and overall efficiency. These analytics empower organizations to identify bottlenecks and optimize processes for better performance.

• Audit trails—Detailed audit trails capture every action taken within the CLM, creating a comprehensive history of contract-related activities. This feature is invaluable for internal audits, regulatory compliance, and dispute resolution.

Raising the bar: What does AI bring to the CLM ecosystem?

The conventional CLM has left an indelible mark in the world of business. Yet, the advent of AI is proof that there’s much more to be seen. This revolutionary technology has pushed the boundaries of efficiency beyond what we’ve experienced with the traditional CLM, helping contract-facing teams hit new productivity milestones.

Here, we will look at the various functionalities AI has brought into the CLM ecosystem:

#1 Intelligent contract creation

• Personalized templates—An AI-based CLM can analyze vast datasets of past contracts to identify patterns and generate templates that automatically populate with relevant clauses and terms based on specific contract types, parties involved, and the negotiation stage.
  For example, SpotDraftAI generates templates by scanning uploaded documents, finding variable texts, and assigning types to customizable elements. That way, you get a questionnaire you can fill out and have your contracts ready to go. 

• Smart clause libraries—AI can learn from past negotiations and successful contracts to identify effective clauses and suggest them proactively when relevant situations arise. This ensures you're equipped with the best possible language for specific scenarios.

#2 Predictive analytics

“Insights can help the legal team identify gaps in the system and work toward improving workflows and building solutions that would increase efficiency.”

~Igor Poroger, Director of Legal, EMEA, Vectra AI
The Counsel Corner: How CLMs Empower Legal Teams in B2B SaaS Companies

• Contract lifecycle forecasting—AI can analyze historical data to predict contract execution times, approval delays, and potential bottlenecks in the workflow. This allows you to proactively allocate resources and manage expectations during the contract journey.

• Trend identification—AI can identify emerging trends in contractual language, such as the adoption of new industry standards or changes in regulatory requirements, allowing businesses to stay ahead of the curve and tune their contracting practices accordingly.

• Negotiation intelligence—AI can analyze negotiation history and market data to recommend optimal negotiation strategies and predict likely outcomes based on your position and counterparty's behavior. This empowers your team to negotiate with greater confidence and effectiveness.

Also read: Contract Negotiation with AI: Proven Strategies for Seamless Implementation

• Contract renewal prediction—AI can predict which contracts are most likely to be renewed based on historical data and customer behavior, enabling proactive renewal strategies and minimizing revenue loss.

Also read: Contract Renewal Process: Strategy + Best Practices

#3 Smart contract review

“If you try to read a complex contract carefully, from front to back, and expect to understand it on just the first read-through, that’s wishful thinking (and potentially very messy).”

~Sterling Miller, CEO and Senior Counsel, Hilgers Graben PLLC
Ten Things: How to Read a Contract

• Suggestions, redlines, and comments—AI can scan your entire contract, make suggestions, and provide in-depth explanations for its recommendations. This is typical of VerifAI, SpotDraft's AI-powered contract review assistant. Powered by prompts and playbooks from industry-leading legal experts, this tool will spot risk areas in your contract, suggest the right changes, and add comments to explain said changes to the counterparty reviewer.

• Clause comparison—AI can compare different versions of contracts or different contracts from the same vendor, highlighting changes and potential discrepancies. This streamlines the review process and ensures accuracy.

Also read: AI for Legal Documents: How AI is Transforming Legal Workflows

#4 Natural Language Processing

• Smart data extraction and contract summarization—AI can automatically extract key information from contracts, such as parties involved, key terms, and obligations, saving time and effort for contract administrators.

• Contract Q&A—AI-powered chatbots can answer questions about contracts, providing quick and accurate information to stakeholders. With VerifAI, you can ask open-ended questions about different areas of your contract and get detailed answers in return.

• Contract language standardization—AI can help ensure consistency in contract language across different teams and departments, reducing the risk of errors and ambiguity.

Also read: Exploring NLP in Legal Practice: Use Cases, Pros, Cons & More

#5 Iterative learning

As AI is exposed to more contracts and feedback, it continuously learns and improves its ability to identify risks, suggest edits, and predict outcomes. This continuous learning cycle ensures that the AI-powered CLM system becomes increasingly proficient and valuable over time.

Common mistakes companies make when adopting AI-powered CLMs

AI has, indeed, shown tremendous potential to revolutionize the contract management ecosystem. However, many businesses get carried away by the hype, failing to prepare and ignoring critical elements they need for successful adoption.

Without the right mindset, preparation, and strategy, incorporating an AI-powered CLM will likely end in counterproductive outcomes.

#1 Unclear objectives and lack of strategy

Diving headfirst into AI-powered CLMs (or any business technology, for that matter) without a clear definition of goals and strategies lays a strong foundation for failure.

Saying, “We want to be more efficient,” is also not enough. You must lay out specific pain points the AI-powered CLM must address. For instance, your goal can be to reduce contract cycle times by a certain percentage, improve post-execution tracking, onboard more contracts, etc.

Strategizing the rollout process is also a key component. If you do not define your implementation timelines, resource allocation, and performance metrics, maximizing the potential of the CLM will be more difficult.

#2 Overlooking the human side of things

It is true that AI is faster and potentially more efficient than humans on many levels. However, humans are the ones behind the wheel. They’re the ones who feel the direct impact of AI’s implementation, too.

So, implementing something as revolutionary as AI in a business environment requires adequate change management strategies. Overlooking this will result in pushback and uneven adoption across the board, ultimately undermining the benefits of the technology.

“When you implement new technology or processes and tell your team that you’re going to take 40% of what they do and do it in a way that's way faster and more effective, the automatic reaction is, ‘You're taking my job.’

In that case, I help my team understand that we’re just doing this to become the creative and innovative in-house lawyers we can be while co-leading business. The simplest piece of advice I could give to anybody, in business or otherwise, is to create that headspace; Take a step back, open your mind to the possibility of doing things in a more modern and effective way.”

~David Lancelot, ex-VP Global Head of Legal, eBay Classifieds
Embracing Legal’s Role as Business Co-Leaders

Additionally, it is important to strike a balance between human expertise and AI’s efficiency. Ignoring this will result in over-reliance and irresponsible use of AI systems.

#3 Unrealistic expectations

Many organizations get carried away by some “flowery promises” of AI and begin to have unrealistic, short-term expectations. But AI adoption is a journey, not a magic bullet.

In the words of Mark Ross, Principal at Deloitte Tax LLP, “Technology will never fix a broken process. Yet, legal departments often jump to the purported magic wand of technology before they even implement some of the basic building blocks of process improvement.”

Organizations that expect magical returns without putting in the initial work will almost always end up disappointed.

#4 Inadequate plan to monitor and improve

“True transformation of the contracting function requires a multidisciplinary approach that embraces process standardization, automation, global delivery, alternative resource models, and continual improvement.”

~Holly Tucker, Partner at Deloitte Financial Advisory Services LLP
Raising the Bar on Contract Management With AI

Successful AI adoption is an ongoing process that requires continuous monitoring, evaluation, and improvement. Many organizations make the mistake of neglecting the need for a robust plan to monitor the performance of AI-powered CLMs post-implementation.

This lack of ongoing evaluation can lead to the persistence of issues, diminishing the long-term benefits of AI adoption.

How Lex by SpotDraft can help you better adopt AI-powered CLMs

Lex is an on-demand, platform-agnostic service by SpotDraft CLM designed to help businesses handle various legal and contract-related tasks more efficiently.

Through Lex, you get access to over a hundred seasoned and vetted legal experts ready to assist with everything related to contracts and legal processes. This includes contract creation and execution, contract review, negotiation, e-signature execution, administrative tasks, etc. 

You can view the full catalog of services here.

With respect to implementing AI-powered CLMs, Lex can help you in the following ways:

• CLM selection and evaluation—Lex's team of legal experts has extensive experience with various CLM platforms and can help you evaluate AI-enabled features, pricing models, and compatibility based on your specific needs and goals.

• CLM implementation—Lex provides expert guidance and support throughout the CLM implementation process, from data migration and configuration to user training and change management.

• Transition support—With ongoing support, Lex empowers your team to adapt to the new AI-powered system. They provide personalized guidance, address user concerns, and help optimize workflows to leverage the full power of your chosen CLM's AI capabilities, ensuring a successful transition and sustained efficiency gains.

• In-house training—Upskilling your team is crucial for maximizing the ROI of your AI-powered CLM. Lex offers targeted training programs tailored to different user roles, from contract managers to legal professionals. These programs educate users on the CLM's features, AI functionalities, and best practices for efficient contract management, empowering them to fully utilize the system's potential.

• Playbooks and template creation—Lex's legal team can help you develop playbooks for specific contract types or negotiation scenarios, incorporating AI-powered functionalities for faster drafting, smarter reviews, and streamlined approvals.

If you have questions about the specifics of how Lex can benefit your organization, feel free to book a free consultation.

Wrapping up

An AI-powered CLM is one of the most transformational pieces of technology to cater to your organization’s contract management challenges—thanks to its immense benefits and potential contributions to revenue.

However, its adoption should not be approached without preparation and guidance from experienced professionals.

Keep in mind that AI in the legal tech industry is still in its formative era, and there’s more to see in the coming years. Ensure you stay abreast of all emerging trends and compliance requirements, and never stop optimizing.

Want to speak with us about your CLM needs? Click here to book a free consultation.