Contracts are essential to business operations, whether they involve vendors, suppliers, customers, or employees — you need them to survive. Having a business that functions solely on someone’s worth is a foolhardy endeavor, it’s playing with fire.
You need a lifeline, a platform, and a solid ground on which to curate your business and the relationships it will undoubtedly need in order to function. Still, contracts can also pose huge risks to businesses, which is why contract risk management is crucial.
Effective contract risk management in a complex and oftentimes difficult-to-conceptualize practice, there are a lot of moving parts to it.
At its core, it involves identifying potential issues that may arise in the course of executing contracts and taking steps to mitigate those risks.
In this article, we’ll explore what contract risk management actually is, what key potential risks most businesses may face, why they should mitigate these risks and easy-to-follow strategies for identifying them.
We will also dive deep into the role of contract management platforms in ensuring long-term business success and effective supervision in this area.
What is Contract Risk Management?
Contract risk management involves spotting, highlighting, and putting on the microscope all the possible risks and threats a legally binding agreement might bring in its wake – and ultimately mitigating those risks that may arise in the course of executing contracts.
This includes, but is not limited to, how a contract might impact a company’s financial, legal, reputational, and operational aspects. Effective contract risk management is paramount for safeguarding a company’s assets, reputation, and long-term success.
What are the Potential Contract Management Risks?
The potential risks that businesses may face in contract management can be categorized into the following 5 – legal, financial, security, brand, and operational risks. Let’s break those down.
- Legal risks involve the potential for a contract to be found invalid or unenforceable due to one or more of the following: unclear or ambiguous language, non-compliance with regulations, or a lack of legal capacity to enter into a contract. There are a couple of more reasons why a contract might end up being a dud, but those are the main ones to watch out for.
- Financial risks relate to the potential for economic loss due to contractual obligations that may not be met, such as missed payments or unexpected costs.
- Security risks mostly involve the potential for a breach of sensitive or confidential information. This may include factors such as sensitive customer data or hush-hush trade secrets.
- Brand risks refer to the possibility for damage to a company’s reputation or carefully maintained brand due to a contract-related issue, such as a breach of contract, or a spotty vendor or second party, or failure to deliver goods or services as agreed upon.
- Operational risks relate to the potential punch for a contract to impact the day-to-day operations of a business – for example, a delay in the delivery of goods or services or a lack of necessary resources to fulfill contractual obligations.
Why Should You Mitigate These Risks?
Mitigating or even editing out most of these risks is business 101 for most companies. This is because it helps to protect their assets, and their reputation, and ultimately paves the way for continued success.
By taking the edge off these risks, folks can avoid legal disputes, financial losses, and damage to their brand or reputation.
Effective contract risk management can also help to ensure that contracts are executed smoothly – that your operation runs on greased tracks and that all obligations are met on time.
This can eventually help companies maintain friendly relationships with clients, suppliers, and other stakeholders.
Strategies for Identifying and Mitigating Contract Risks
There are several strategies that businesses can use to identify and mitigate contract risks:
Conduct a thorough review of contracts
Businesses, regardless of their size, should conduct a thorough review – even painstaking ones – of all their contracts, active and inactive, old or new, in order to identify potential risks and areas in dire need of improvement.
This may involve consulting with legal or financial experts to ensure that contracts are compliant and financially viable.
Develop a contract management plan
A contract management plan has to include policies and procedures for managing contracts – for example, protocols such as timelines for contract review and approval, and a system for tracking key contact information.
Use contract management software
Contract management software is the technological magic bullet most businesses are employing right now. They can help departments streamline their contract management processes, right out of the gate – from its creation to tracking and reporting.
They can also help to ensure that contracts are executed on time and that obligations are met.
Develop a risk management framework
A risk management framework is the last line of defense when it comes to risks – it’s also the first. Everything lives or dies by your framework and whether or not you stick to it.
It should include policies and procedures for identifying, assessing, and mitigating risks. This may involve developing a risk matrix to prioritize the different threats and risks – categorizing them from low level to high – and identifying strategies for mitigating those risks.
Conduct ongoing monitoring and reporting
Risk management is an ongoing affair. Businesses need to conduct constant monitoring and reporting to ensure that contracts are being executed in accordance with their terms and that risks are being alleviated effectively.
The role of contract management platforms in today’s risky world
Contract management platforms are dynamic and easy-to-adopt software solutions that are specifically designed to automate the contract management process – and to have your back.
These platforms provide a centralized repository for all contracts, enabling companies to supervise their contracts more efficiently and effectively.
They can also, due to multiple innate and already built into their digital DNA tools help businesses ID and mitigate most contract risks.
They can provide real-time visibility into a contract’s performance, and lifecycle and enable businesses to monitor compliance with contract terms and conditions.
Contract management platform can also automate key processes such as contract creation, negotiation, and approval.
By supercharging these steps, companies can reduce the risk of human errors and easily to avoid omissions and ensure that contracts are compliant with relevant laws and regulations.
Finally, these platforms can ultimately help businesses to mitigate financial risks by providing real-time visibility into all aspects of a contract, particularly does that hurt the bottom line.
For example, if a contract is not performing as expected, the platform can alert businesses to this fact and enable them to take remedial action before the situation worsens.
