Generative AI turns spotlight on contract management

It is important business technology, yet most people have never heard of it.

Contract lifecycle management software — which helps to draft, store, search and manage a company’s commercial agreements — is widely used by lawyers and also by procurement and finance departments. But, in spite of the technology’s steady growth, and its pioneering use of artificial intelligence to automate information-intensive legal tasks, the market for the software has generally had a low profile.  

The financial value of the contract lifecycle management market has remained relatively small, at about $1.5bn in 2022, according to an estimate by data company Verified Market Research.

Now, however, this area of legal technology, which can handle anything from supply deals to non-disclosure agreements and government outsourcing, is very much in demand. Users and suppliers are increasingly aware of the power of digitisation to execute contracts better and to turn them into data-rich digital documents: both aspects will be boosted by generative AI.

I feel like I’ve seen a few trajectories of consolidation — and I do think this one is unique

In recent months, there has been a flurry of mergers, acquisitions and partnerships between established suppliers of legal tech, and smaller companies that use advanced AI in the drafting and managing of contracts.

In May, DocuSign, which began as an electronic signature company before diversifying, acquired Lexion, whose products include generative-AI powered contract management software. Around the same time, Icertis — another contract management software company — said it would partner with Evisort, a supplier with a strong reputation for AI tech. The partnership will include integrating their respective technologies.

“I’ve been in legal tech for two decades and so I feel like I’ve seen a few trajectories of consolidation — and I do think this one is unique,” says Bernadette Bulacan, a marketing executive at Icertis and AI expert. She feels that contract management is “having a moment”.

More recently, in June, LexisNexis, provider of information and software for legal professionals, said it would buy Henchman, a software company specialising in generative AI document drafting. And Sirion, another contract management supplier, bought Eigen Technologies. Eigen uses AI to summarise and extract information from contracts, especially in financial services.

Investors are interested, too. In May, private equity firm KKR took a majority stake in Agiloft, a contract management software supplier.

Sign up for the FT Due Diligence newsletter

The top stories from the world of corporate finance and private equity, including detailed analysis of the dealmakers driving the news.

Click here to sign up now.

The convergence of several tech and market trends has driven this increased interest in the technology.

According to a study published in 2023 by researchers from Princeton University, the University of Pennsylvania and New York University, legal services is one of the industries most “exposed” to generative AI — the latest wave of the technology. As companies look for digital routes to managing legal contracts, there is growing interest in incorporating generative AI into the software — subject to human oversight. And that will fuel further growth in the market, experts predict.

“There’s a lot of interest in generative AI . . . and if you look at all the predictions out there, the number one vertical to be affected by this . . . is legal,” argues Zach Posner, managing partner and co-founder of The LegalTech Fund, a venture capital firm that invests in legal tech start-ups.

Expect further consolidation around larger suppliers of contract management software, experts say.

“The space itself is very fragmented,” points out Ajay Agrawal, chief executive and founder of Sirion. “Right now there are roughly 150 [to] 200 players just in [contract lifecycle management].”

If you’ve got fewer players that are doing more things, then that’s much easier

But company lawyers — the customers — would rather have fewer suppliers offering broader technology that meets more of their contract needs, says Jennifer Swallow, an adviser on legal technology and former chief executive of LawtechUK, a government-backed initiative to help modernise legal services. “If you’ve got fewer players that are doing more things, then that’s much easier.”

Although contract management is a mature market, it is not yet saturated, figures suggest. Just over half (55 per cent) of corporate legal departments are using a contract management system, according to global research by Thomson Reuters. And most legal departments are in the experimental phase of using generative AI. Combining the two technologies will help contract management expand, experts believe.

“There’s still a massive greenfield opportunity,” says Posner.

There are also hopes that generative AI-based contract management software will be able to help lawyers with legal tasks such as “redlining” — reviewing contracts and making edits.

Research company Gartner has noted that AI-driven redlining features in contract lifecycle management software is “immature” and may require fine tuning before being widely available. Nevertheless, some argue that the technology is imminent.

“Not only will the AI detect what’s wrong with the contract, but it will mark it up and redline it just the way a human [would] . . . by surgically removing a few words [or] adding a few words,” says Agrawal. He adds that the technology remains “cutting edge” but predicts that it will start to come into wider use by the start of next year.

Feedback from some corporate legal departments has been promising. For instance, Hoare Lea, a UK engineering consultancy, has predicted that the AI-powered CLM software it uses should reduce the contract review team’s costs by about one-third a year, over five years.

As other in-house legal departments eye similar potential savings, says Posner, they are asking their contract management suppliers about their strategy for generative AI.

For some suppliers, the simpler and quicker way to incorporate this technology is to acquire a smaller specialist.

“If you’re not an AI native business, you can take a lot of time to try and build that yourself, but you need money to do that [and the investment] funding cycle has been difficult,” says Swallow. “The next best thing is to buy a business or merge with the business.”

Swallow predicts that consolidation among contract management companies will continue. And, as the software incorporates more AI features, she reckons lawyers will be able to fine tune their judgment, their analysis of supplier performance, and their ability to spot risks and opportunities in contracts. “You’re able to be way more strategic . . . less reactive, more proactive,” she says.