Intelligent Contracts Blog
Technology is an ever moving target. That’s how I’ve described it to my children, adding it’s one of the most demanding working environments because every few weeks or months you need to understand and account for new technologies changing the nature of IT. In other industries, such as the medical profession, it’s very seldom that a large shift in fundamental knowledge or understanding occurs. It’s like the medical industry is an append only learning method, meaning information is primarily added onto a base of foundational principles.
However, the benefits of being in a fast-paced environment are that new opportunities to combine methods or technology occur almost daily. One such combination is Narrow Artificial Intelligence for contract detection and analytics, brought together with the ‘underlying idea’ of smart contracts, or the encoding and execution of contractual data and events on a programmable blockchain. If you are unfamiliar with the concept of smart contracts, and some of the potential short comings, please read a blog post from a colleague of mine, Gideon Greenspan, at http://www.multichain.com/blog/.
The reason I say ‘underlying idea’ of smart contracts, is that in practice, smart contracts may not fully deliver on all that is promised. In his blog, Gideon points to some of the technical limitations and challenges facing smart contracts, and other writers challenge the usefulness of the data or functions encoded, and how it all gets accurately encoded onto the smart contract.
What this does not mean is that the underlying idea behind smart contracts should be dismissed. There are multiple approaches to the creation of smart contracts to overcome the challenges, including combining Narrow Artificial Intelligence for the detection and extraction of information held within physical contracts, and once extracted, encoding this data onto a blockchain.
This approach is far more intelligent and extensible than smart contracts as they are currently defined, and as such, Seal calls these Intelligent Contracts. The intelligence comes from the ‘I’ in AI, where a system is taught to continually and consistently recognize and extract key information from contracts, with active learning based on users’ responses, both positive and negative, to the extractions and predictions made. This is very different than the current smart contracts, but it still uses some of the underlying methods of blockchain and the extension to store immutable information or actionable events within a block.
You may ask why Seal wouldn’t use Ethereum, the programmable and public block chain infrastructure launched in 2014, and leverage its concept of smart contracts. While it does provide some of the building blocks required, it has many limitations for our definition of Intelligent Contracts, including security, extensibility and performance. To effectively create an Intelligent Contract, you must encode much more information on the blocks (extensibility), in a highly secure method, and the only real way to provide this currently is within a private blockchain solution.
The Value of Intelligent Contracts
So now that we’ve discussed the concept of Intelligent Contracts, and a bit about how to create them, it’s just as important to cover the why. Why are they so important? Why do I need them? Why should I care if I don’t have them?
To answer these why questions, let’s take a sample customer, a large international IT / Software company that has acquired different companies or business units over many years. They have over 16 different contracting solutions on both the buy and sell sides of their business, with no standard reporting on contracts. They continually sign Master Agreements in different locations or departments, and should allow all global entities access to discounts once negotiated levels are reached or exceeded. This is a very common challenge with larger organizations.
You can immediately see where a ‘smart contract’ could be used to encode the master agreement’s key performance indicators (KPIs) onto a blockchain, and then automatically apply the discounts across all departments. But think for a moment, with all the different systems, and no single or consistent method to track and report on new contracts being created, signed, or agreed to on (potentially) 3rd party paper, how will you extract the required information?
Seal’s Intelligent Contracts answers this by providing the consistent information detection and extraction across all entities, and because it’s non-intrusive, it can work alongside existing solutions providing an overall layer of intelligence.
Blockchain: The Single Source of the Truth
If we take this further, past just the encoding of actions, and the combination of parties and events, we can see how this solution provides companies with a ‘single source of the truth’ within contracts. As a contract placed onto the blockchain has been agreed by both parties, why not share the same information between parties – as a single entity with continually updated contract terms?
Some readers may conclude that companies placing details of actual contracts onto a public blockchain might soon run into issues of security and scalability. Security because every person on the blockchain can see the transactions that occurred, and scalability as block size is limited on public blockchains for many reasons, not least of which is performance. With blockchain, the larger the blocks the longer it takes, and the more processing power is needed to reach consensus (e.g. the process used by a group of peers responsible for maintaining a distributed ledger to reach agreement on the ledger’s contents.) To this end, it should be clear that a public blockchain or smart contracts system are unlikely to meet the requirements of many organizations for contracts.
Seal has found a solution to the security and scalability challenges with blockchains. Our Intelligent Contracts use private blockchains with algorithms to ensure no single system controls the creation of the blocks, leading to immutable and distributed consensus. As the chains are private, the issue with sizes of blocks is removed, and security can be implemented at many different layers, including HASH-only and PKI key-level security for access to information encoded on the blockchain. The use of the private blockchain also allows for the system to provide Know Your Customer (KYC) functions, as each entity within the system would be required to be known as they are a party to, or have an interest in a contract. They can all participate in the creation of the blocks as each entity is known and trusted.
With all the differences, it's clear to see why Intelligent Contracts and not smart contracts are what enterprise customers need, and it is why Seal is releasing its first Intelligent Contracts solution in phases from today, with our Version 5.0 announcement through 2017.
Intelligent Contracts: The User Experience
One of the most important aspects of technology is to make users’ daily lives simpler, and the operation and adoption of new technology as seamless as possible. One of the best ways I have found to do this, over years of working with enterprise customers, is to embed new functions into well-known existing applications or processes so users are actually unaware of the new processes and functions taking place behind the scenes.
This is why Seal is launching its first Intelligent Contracts interface within Microsoft Word. The vast majority of contract workers use Microsoft Word to create, edit and manage their contracts, so it makes perfect sense to extend Microsoft Word with Seal’s Intelligent Contracts functionality. This means less training, faster time to value, higher productivity, and happier employees.
We are calling this interface “Analyze This Now,” because it allows users to be working within the document in MS Word, and trigger the discovery and analytics capabilities of Seal right there, in real time. They can determine the variances of language in the contract as compared to standard, approved language and be able to manage the risk associated with the contract as they are interacting with it.
Seal customers will be able to take advantage of our Analyze This Now functionality in the first generation of our Intelligent Contracts.
Who Needs Intelligent Contracts?
In the example above, we described a large Software/IT company with many different contract repositories and processes across their business functions and LOBs.
But there are many other types of use cases for Intelligent Contracts, where the capabilities of this new technology will provide significant value over what is currently available. These include M&A and business restructuring, Contract Lifecycle Management (CLM), and regulatory compliance.
Intelligent Contracts in M&A
Many organizations have implemented business models which utilize active mergers and acquisitions, corporate divestiture, and/or restructuring to create economies of scale, grow market share, increase owned IP, improve profitability, etc. When ownership of an organization changes, the contracts associated with that business are divested or acquired within those transactions, and can greatly affect the accretive nature or overall outcome of the transaction. In M&A, organizations need to review contracts and analyze their metadata in the due diligence phase, to ensure they know what they are buying, and then integrate contracts into the new organization post transaction. With divestitures, they need to know which entities to assign the appropriate contracts.
Intelligent Contracts will change how this is done. Organizations will be able to immediately locate all relevant contracts as they will be located in one repository. All the metadata will be associated as blocks on the relevant chains, and so full reviews will be fast and simple, in due diligence and post transaction. Things like special indemnifications and assignment and termination rules will be identified immediately across the entire portfolio, and will be relevant to valuation. The current deal room, where limited subsets of contract documents are placed for manual reviews across multiple legal professionals will no longer be needed. The deep analytics embedded in Intelligent Contracts will mean that M&A and Legal pros can immediately, and visually, capture all types of metrics and analytics across entire contract portfolios.
Contract Lifecycle Management
Contract Lifecycle Management solutions were developed on the promise of automating the contracting process, from initiation and authoring through negotiation, execution, termination and retention. CLM systems are built on a foundation of ECM (Enterprise Content Management), workflow, data management and integrations with upstream and downstream systems such as CRM, ERP, Procurement, etc.
The problem with CLM is system ROI has been illusive for most customers. The systems are heavy in workflow and document library services, and are very light in contract data management. They have proven to be overly complex, tough to implement, and suffer from low adoption rates and usage with knowledge workers. They also have poor change management functionality, and the data management is primarily manual input of contract data by users, which is inconsistent and error prone.
Intelligent Contracts changes all of this. Contracts are authored in the familiar Word user interface, and collaboration and negotiation is facilitated via workflow in the blockchain. Contract data is captured and shared automatically on the chain, and there is never any question or confusion as to which versions and edits are being used and approved, and why. Changes can be initiated and processed in the LOBs via Word using approved language, meaning Legal Ops resources are used more efficiently and cost effectively. The result is a lean, efficient, secure, and scalable contracting system that finally delivers the ROI desired for contract automation.
The final use case is in regulatory compliance. Changing regulations, such as SR 14-1, Vendor Risk Management, IFRS 15 and 16, and other Resolution and Recovery Preparedness reporting are driving contract reviews and changes to contracts. The penalties for non-compliance are fines, takeovers, and worse.
When a regulation comes out or changes, organizations must review contract data for the relevant information. Manual reviews are expensive, time consuming and are not “future proof”. If a review is completed, and a regulation is modified, or new information is needed from contracts, an organization must start over.
With Intelligent Contracts, when a regulation changes, all the contract data is automatically captured and presented visually, so organizations understand the size and nature of the impact to their business. Compliance owners can determine strategies and project plans to meet compliance deadlines.
When contract repapering or renegotiation is needed to achieve compliance, the business owner can initiate the process in MS Word and using approved language make the needed changes. Those changes are captured on the blockchain, and then can be routed to Legal Ops for final approval. This is more efficient than using Legal Ops resources throughout the entire process. The blockchain is available to all relevant parties, so contract changes are permanent, transparent, and auditable.
The Launching of Intelligent Contracts
The Seal Product team is preparing the release of the first phase of Intelligent Contracts which is the Analyze This Now capability today, with additional capabilities of our IC strategy released in phases through early 2017. We are very pleased to enable our customers to take advantage of the first generation of our Intelligent Contracts, and achieve real business benefit from within the application they know and use daily – MS Word.