In the fast-paced world of business, agreements are created every day. These agreements, known as contracts, often involve several different teams and can affect the arrangements, operations, and relationships between each of those parties. Knowing that it's almost impossible to keep track of each and every contract, the terms within them, and how they will impact your business both in the short and long term, it's a good idea to have a contract management solution to protect your business from "risky business".
Though we may never be completely free of risks in day-to-day business operations, many of them can be proactively addressed to reduce negative impacts.
WHAT IS CONTRACT RISK MANAGEMENT?
Contract risk management involves the accurate assessment of the amount of risk contained within a contract. This may include loss of opportunity, legal exposure if things go wrong, and potential business impact the contract will have on the involved parties. To be most accurate, contract risk management should evaluate the total risk contained across a company's entire portfolio of active agreements.
Before you take the first step in your contract risk management journey, it's important to understand the key benefits. Though there are many advantages, we've narrowed them down to three fundamental advantages that contract risk management can bring to your business.
TYPES OF RISK IN CONTRACT MANAGEMENT
There are a few common contract risks each business is likely to encounter, either directly or indirectly. These risks include the following:
- Security risks: When confidential or contract information is shared with the wrong parties, accessed by unauthorized individuals, or lost or stolen
- Financial risks: When third-party bankruptcy occurs, key renewal dates are missed, or contracts are auto-renewed without cost evaluation and analysis
- Regulatory risks: When location legislation is ignored, parties are unprepared for changes in regulations, or documentation doesn’t remain up-to-date
Not every risk can be accounted for in a formal contract document, but a key element of good contract management and design is anticipating possible risks, evaluating past experiences, and drafting expectations to minimize or prevent future impact. A party’s risk appetite, in conjunction with both practicality and probability, should guide agreements and subsequent risk management strategies.
Contract risk management can minimize potential losses that could occur in each of these areas with effective strategies and contract evaluations. After all, who doesn't love productivity and profitability?
From "Legalese" to Legal Ease
It can be hard for the different parties involved in contract negotiations to understand the full meaning of its terms, as many people don’t have the expertise needed to follow the unclear, long-winded, and, let's face it, grammatically awkward language of legal documents.
The low readability of contracts makes it difficult for companies to know when terms have been violated, if the contract contains strong enough clauses, or if it is written in their favor. Contract breaches become harder to identify and litigate, especially if the contract language is obscure or generalized.
Readability by multiple individuals in the organization is a key way to remove the significant risks associated with contract obscurity. Though a legal team has a valuable role in this area, using a CLM solution can also be helpful. A modern CLM solution will provide a library of pre-approved terms during authoring and fallback language for negotiation. This can help to reduce the burden of contract analysis, so legal teams can focus on higher-value activities.
With the right CLM in place, contracts can be created with approved and clear legal language and moved through rigorous scrutiny, feedback, and approval before final signature. Contracts are also indexed and can be searched according to risk-profiled language to reduce legal exposure.
CONTRACT RISK MITIGATION IN ACTION
Contract risk management is important for the overall success of contract relationships and arrangements because the process provides a more efficient way to spot potential challenges early on and avoid them.
In order to get a CLM strategy in place, a company must first take the following contract risk mitigation steps:
- Know the common risks associated with each type of contract
- Review records of past risks encountered
- Approximate the financial consequences or results of past assumed risks
- Develop a list of risk-reducing solutions to implement
When a company has all of this information on hand, an effective risk management strategy can be put in place and change the nature and impact of contract risk in the following ways:
- De-risk future negotiations through use of approved contract templates
- Avoid occurrences of human error by automating processes
- Engage an automatic contingency protocol to minimize losses when a risk event occurs
- Improve company-wide understanding of contractual obligations for both parties
- Reduce expenses from overpayments or fees associated with late payments
Find the right contract lifecycle management solution
The bottom line? Contract risk impacts the bottom line, and improving your contract management is a great way to protect your business and improve profitability. Malbek provides a comprehensive contract risk management solution for companies of all sizes. Reduce contract costs and inefficiencies across your legal, sales, finance, and procurement teams by working with an automated, highly efficient, AI-powered contract management solution. Request a demo today!