In one of my earlier blogs, I discussed how you should make the case for modern contract management. Hopefully, those arguments were so compelling that you now have the budget and staff you need to take over the world. If that seems slightly out of reach, I hope you at least have the tools to understand the different risks in your contract management processes and can kick off 2021 by taking the steps to identify, assess, and mitigate them.
Common Types of Contract Risks
As I’ve described before, all contracts contain risk. Financial risks are contract risks associated with the loss of money, while legal risks can be regulatory, compliance or dispute risks. Security risks are often the highest profile with the most severe consequences, and brand risk is essentially the risk associated with negative public and customer opinion, poor employee morale, and is often part of the aftermath of financial, legal, and security issues. Many of these risks are interdependent, and there’s no way to truly avoid them without limiting your opportunities.
First step: Identify
In order to manage risk, you first need to identify where it exists. To do that, you can start by answering these questions:
- Which contracts have a higher exposure to risk?
- Are there parts of your contract management process that introduce risk? For pre-execution, this could involve workflows, timeframes, or other factors associated with contract creation, negotiation, and approval. For post-execution, it could be how you store and manage existing contracts.
- Are there vertical-specific regulatory compliance risks that you need to manage in your contracts, such as HIPAA, OSHA, DFARs, PCI, or others?
- Are there geographic regulatory compliance risks that you need to manage in your contracts with parties located in different states, countries or legal jurisdictions, such as GDPR in the EU or PIPEDA in Canada?
Contract management software can help simplify this process and get you to the next step.
Second step: Assess
Once you’ve identified a risk, you need to assess what that risk means to your organization and assign a score based on the level of risk identified for each contract. There are a few factors to consider: risk probability (the likelihood of the risk occurring), risk consequence (the impact to your organization if it does occur) and how those factors can change over time.
Once risk scores are established, it’s time to create risk thresholds for your organization. This allows you to determine how much risk you are willing to tolerate so that you can recognize contracts that are within this threshold.
Contract management software allows you to harness and structure your contract data in a way that it can be easily searched for and presented in reports and dashboards that give you the visibility to assess your contract risks and create scores.
Third step: Mitigate
Legal teams mitigate contract risk by incorporating specific language such as: indemnification, insurance, cyber security, limited liability, governing law, termination, and warranty clauses. Some other important risk factors to address in your contract management process include unauthorized access to contracts, lack of contract compliance and governance, broken contractual obligations, and missed renewal and expiration dates. While there are many contract management software solutions on the market, the best will help you mitigate risks in ways that would be hard to execute manually. The ways software can help include:
- Eliminating missed milestones and obligations with alerts and notifications
- Regulating who can access contracts with role-based permissions
- Protecting data using encryption
- Creating clause and template libraries to increase compliance
- Maintaining contract version control
- Enforcing business rules and processes using automated workflows
- Speeding up secure document approvals using e-signatures
Risks will always be a part of the contract process, but good contract management practices should be a cornerstone of any risk management effort by helping with the identification, assessment and mitigation of risk.
A version of this post originally appeared in a series on risk management here.
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