Contract Management Risk: Assessing Your Exposure and Avoiding Pitfalls
Every business – no matter how long they’ve been operating, what industry they compete in, or how large they’ve grown – must prepare for some measure of contract management risk. They must be prepared to live up to the contract terms that they have extended to their customers and employees. Furthermore, they should expect their suppliers, partners, and contractors to meet their respective terms.
In a utopian world, all products and services would be delivered to perfection and expectation. Accidents would never happen, and errors would never be made. Also, there would never be delays in delivering on promises and sending and receiving payments.
Unfortunately, none of us live or conduct our business in such a utopian world. That is why there are contracts that address when a business relationship goes well and what would happen if one or both parties are dissatisfied. Sometimes, it is the way that contracts, themselves, are authored, and not the business activities that they govern, that create risk.
Here are seven of the leading contract management risks – and the practices that best mitigate them.
1. CONTRACT PROVISIONS AREN’T CONSISTENT OR CONCISE
If your business works with complex agreements, such as fixed-price statements of work (SOW), software license, or partnership agreements, your corporate legal and operations teams may spend a lot of time on defining, fine-tuning, and negotiating terms.
In the case of an SOW, your business may have completed similar products in the past. You may have hundreds of business partners and a multitude of business applications. Standard terms and conditions may apply across many of your contracts. Still, there are always customers like government entities or large corporations that demand non-standard terms.
For all of these contract scenarios, a library of contract templates and approved reusable terms can reduce your risk exposure. An AI-augmented contract management repository, in particular, can take the guesswork out of contract terms during the assembly process while mitigating risk exposure. Most businesses in the Fortune 2000 manage between 20,000 to 40,000 contracts.
2. VAST NUMBERS OF SUPPLIERS WITH UNIQUE CONTRACT TERMS
A 2018 Forbes article revealed that Walmart has contracts with over 100,000 suppliers while Proctor and Gamble have over 75,000. Most businesses in the Fortune 2000 manage between 20,000 and 40,000 contracts, though.
Many of these contracts may be stored in filing cabinets and off-site document storage locations, or captured electronically but aren’t searchable. By adopting a contract management platform that can run scanned contracts through an OCR process, indexing and storing them in a searchable repository, organizations can conduct business with a multitude of suppliers and partners.
If an unforeseen event should occur during the term of the contract, such as contamination of a food product, corporate legal can refer to the agreements that they have in place with related suppliers, and take corrective action or communications accordingly.
3. REVIEW OF COMPLEX THIRD-PARTY AGREEMENTS
A review of third-party agreements can be a significant time investment for your in-house or outside legal resources. Just think about a buy-side capital purchase or lease agreement for an asset like real estate.
Augmenting your review process with a lawyer-trained AI contract processing engine can help your team identify any terms that could incur significant risk. You can then make data-driven decisions or negotiate terms from a more informed position without risking opportunity loss due to lengthy reviews.
4. CHANGE MANAGEMENT
There are many services and supply-oriented contracts that need to be modified during the term. There may be changes in scope, duration, or project details. A contract lifecycle management system can support contract addenda and amendments. Furthermore, it stores multiple versions of the contract as it is modified throughout the term.
5. CALCULATING, PROCESSING, AND APPROVING RISK
Risk can be challenging for the human mind to assess before entering into an agreement with another business. Legal teams review the terms, highlight their concerns, and make estimations.
By automating the risk assessment process and leveraging automated risk reports, business executives can establish benchmarks and make data-driven decisions. As concerns are addressed or negotiated away, privileged users can approve risks with an audit-tracked mouse click.
6. MERGERS AND ACQUISITIONS
Contract due diligence is critical before, during, and after a business acquires another company or is acquired, itself. Due to the sensitivity of these negotiations, a “Virtual Deal Room” or negotiation portal can help to store draft contracts, track any changes to contract versions, and maintain an audit trail of changes throughout the entire process.
CLM software can’t prevent risk entirely, but it can help you assess, monitor, and manage it. A secure, cloud-based contract portal accelerates the negotiation process regardless of where parties are located throughout the world. Users can access critical files and analytics on their computer or mobile device of choice. By tracking when and how frequently a potential acquirer accesses your negotiation portal, it can provide insight into how serious the other party is in the relationship.
By tracking and controlling which users can access, print, share, or email files from the portal, businesses mitigate the risk of news of a pending M&A deal being leaked prematurely.
7. OVERLOOKED OPPORTUNITIES, MISSED RENEWAL TERMS
Has your business ever failed to make prompt payments and missed out on a discount opportunity? Perhaps you thought a contract would automatically renew, only to find that it, indeed, expired. If your contracts or legal teams are tracking your contract periods of performance through a spreadsheet or other manual function, you could be exposing your business to:
- Brand reputation damage
- Penalties for missing regulatory requirements
- Supply chain disruption
- Lack of insurance coverage if a policy should lapse
- Fines for breach of financial or environmental regulations
- Risk of missing out on pricing agreements based on timing, volume, or buying groups
These are some of the risks associated with manual contract management processes. Many of these risks will persist even if a business implements an entry-level contract repository application, without the added benefits of advanced analytics and AI. Of course, contract lifecycle management software cannot prevent risk entirely. It can, however, help you to assess, monitor, and manage it within a range that you and your legal and executive team are comfortable with. Quite often, the costs of implementing and maintaining contract management solutions far outweigh the costs that may incur from not implementing them.
If you want to increase visibility into your contract lifecycle management, streamline approval processes and mitigate risk, schedule a demo of ContractPodAi today.
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