It’s summer in the Northern Hemisphere and many of us are probably receiving at least one email, phone call, or text message each day to get our car, grill, lawn, skin, hair, body [insert whatever might need “fixing”] summer ready! While this strategy, and risk management in general, tend to play on our fears, maybe it’s time to take a page from those who celebrate summer solstice and use a more hopeful and optimistic approach to managing the risks in our contracts, focusing on the benefits gained from asking questions, rather than the downside.
What is Contract Risk?
Contract management needs to be a critical part of any risk management strategy because every contract an organization creates (with vendors, customers, partners, employees, etc.) carries risk. There’s no way to completely eliminate risks if the organization hopes to grow, so awareness and management is key. After all, nothing ventured, nothing gained.
The six most common types of contract risk are financial, operational, legal, compliance, security, and brand. Financial risks are those associated with the loss of money, like missing a key renewal date and continuing a contract unintentionally. Other examples include contract terminations or penalties related to a missed delivery date. Operational risks are the potential risks an organization takes on when trying to meet contractual obligations, especially in nonstandard contracts. Legal risks include regulatory, compliance and dispute risks, like when an organization is non-compliant with government and industry regulations. Security risks are when an organization’s key data can be breached, stolen, damaged, or held for ransom in a cyberattack. Security risks can have financial, legal, and regulatory consequences, while brand risks influence how the public (including customers) perceive the organization’s brand. Many of these risks affect each other and can create an avalanche of bad news for an organization.
The Benefit to Asking Good Questions
There are many different approaches to contract risk management, and the process can be as complicated or simple as the organization needs. All, however, should include three foundational actions: identifying, assessing, and mitigating risks, as well as addressing questions about how the organization currently manages contracts.
- How are contract requests currently being handled? Is there a centralized process or are many people involved? Who are they? Standardizing the contract creation process reduces the risk of having contracts with incomplete information.
- How do you ensure that all the organization’s contracts are utilizing the most up-to-date legal and regulatory information? Clause and template libraries based on pre-approved terms and clauses can help here. This is especially powerful when they leverage automated and conditional rules about which language to use, such as the right Governing Law clause.
- How do you ensure that the right people are reviewing contracts? Is there a record? Are there bottlenecks? Using contract management software to automate contract workflows, based on approved routing rules, reduces risk in the process and saves time. E-Signatures can speed up the signing part of the process and are harder to hack or copy.
- How are you keeping track of changes made to the contract? Detailed version control can be automated as well and captured in the process flow.
- How do you prove compliance if your organization is subject to an audit? Automated contract processes make it easy to maintain and demonstrate an audit trail.
- Where are your contracts stored? File sharing, drives, file cabinets? How can you possibly have visibility into all contracts if you can’t find them? Not to mention, the security risks involved. More risk reduction occurs when all contracts are stored in a single digitized repository.
- Who has access to your contracts and why? Role-based permissions help ensure that only the right people with the right permissions can view and change contracts.
- Do you know your deadlines or when deliverables associated with signed contracts are due? Automatic notifications reduce the risk of missing those deadlines.
- How do you currently track the progress of your contracts? Do you know how they are performing? How much are they worth? Detailed analytics allow you to track progress, identify friction points, make changes, and then see how those changes are improving.
Ready or Not
Asking questions can help organizations identify which contracts have a higher exposure to risk, the parts of the current contract management processes that introduce risk and are out of compliance, and where the process breakdowns are. And while there are many tools on the market to help, robust contract lifecycle management software can get your risk management summer ready by digitizing and modernizing the entire contract lifecycle and improving visibility, enhancing workflows, increasing standardization, and monitoring compliance.
Published July 5, 2023.