The Importance of Risk Scoring in Contracts
A first stop at the hospital ER is the triage desk. There, a nurse will evaluate how urgent and important a given patient’s situation is, often using pre-set rules to make this determination. Post-triage, high risk patients (e.g., someone at imminent risk of death, or perhaps a pregnant mom with worrying symptoms) get immediate attention, while lower risk patients (e.g., someone with a hurt ankle) get taken care of when the ER can get to them. Triage is especially important when the ER has more patient flow than it can easily handle. It enables an ER team to direct their efforts to the places it needs to be.
Triage isn’t just for hospitals. Contracts are a super important part of nearly all businesses. But companies can have a lot of them, and they aren’t all equally risky or important. Since lawyers can be expensive, company legal teams tend to be stretched thin, and businesses can have a LOT of agreements, businesses can benefit from triaging their contracts. Some contracts are inherently important and risky (an agreement with a top customer or vendor), and some are not (an un-altered agreement on company paper, an agreement with a low value vendor (your water delivery contract)). But sometimes it’s hard to tell which contracts matter - their risk depends on what they say. In order to triage these agreements, businesses need to figure out some set of rules for what matters in them - what they find risky. In other words, a risk score.
How Can AI Help with Contract Risk Scoring?
Risk scoring requires converting situations into numbers. Contract risk scoring requires turning contracts into discrete data points. AI enhances contract risk scoring by automating and refining the risk assessment process through sophisticated data analysis and machine learning techniques. Contracts AI tools like Zuva can swiftly extract key information from contracts, such as clauses and terms, which are crucial for evaluating potential risks. This extracted data is then analyzed using predefined risk criteria in workflow automation tools. By automating these steps with AI, organizations can ensure more consistent, accurate, and timely assessments compared to manual processes. AI also enables scalability, allowing businesses to efficiently handle large volumes of contracts, identify high-risk agreements quickly, and focus resources on critical areas that need human intervention.
Tools Used to Build an Automated Risk Scoring Application
Building an automated risk scoring application does not necessarily require a huge investment or significant effort. Depending on the complexity of requirements, it could be built easily with a couple of tools and be ready in a few hours or days. As proof of this statement, we have built an internal risk scoring application using Microsoft Power Automate and Functions, as well as Zuva API, for the following functionalities:
- Power Automate is used to automate workflows by creating automated processes between your apps and services.
- Zuva API is a contracts AI tool used to extract key information from documents.
- Microsoft Functions is a serverless computing service that allows you to run event-driven code.
How Our Risk Scoring Application Works
There are various ways to develop a risk scoring application. The application logic flow described below is designed for effective simplicity; it can be easily extended and customized based on the requirements.
Here’s how we built a risk scoring application:
- The workflow starts when an email with a contract attachment is sent to a specified email address using Power Automate.
- Power Automate sends the attached contract to Zuva API. Zuva extracts key information from the contract, including clauses, terms, and other relevant data points necessary for risk assessment.
- Power Automate sends the extracted data to a Microsoft Function.
- The Microsoft Function calculates a risk score based on predefined criteria. The criteria for scoring should reflect the company’s risk assessment policies. The Microsoft Function uses these criteria to analyze the extracted contract data and compute a risk score. The calculated score is then sent back to the Power Automate flow for evaluation.
- Power Automate evaluates the risk score and chooses one of two paths: If the score is above the set threshold, the workflow raises a flag. Notification: An email is sent with the contract attached, indicating that the contract requires further review due to its high risk. If the score is below or equal to the threshold, the workflow confirms the contract’s alignment with the company’s legal criteria. An email is sent stating that the contract is aligned with the company’s legal criteria, indicating low risk.
How Microsoft Used Zuva and Power Automate to Develop a Risk Scoring Application
Maybe you think that we’re exaggerating by saying how easy it can be for companies to build their own risk scoring applications. This video shows how Microsoft’s in-house legal team utilized Zuva Power Automate connector to develop a risk scoring application:
Conclusion
The integration of AI into contract risk scoring represents an advancement in the field of risk management. By leveraging AI’s capabilities, organizations can achieve a higher level of accuracy, efficiency, and insight in their contract analysis processes. This not only mitigates risks but also means users can get answers faster. With advancements in the AI domain, it is much easier and more effective to build an in-house risk management workflow tailored to your specific needs. If you want to learn more about it, reach out to Zuva.
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