Contract risk management: 8 potential risk and how to avoid them
What’s life without a little risk? We've all heard that old adage, but it’s not a sentiment that’s always applied to business. Resources available to organizations today are full of ways to avoid risk at all costs, but that’s not an effective way to roadmap for the future. Going out with blinders on to the potential rewards and pitfalls leaves you behind the game and underprepared.
Know the ins and outs of the contract management process before you decide to switch software systems or invest in your first one. In this blog, we’ll cover what contract risk management technology can mean for your business, what to look out for going forward, how vulnerability to risk can impact your revenue, and our core principles to guide you through this dangerous territory.
What is contract risk management?
Risk comes with every contractual agreement, but the purpose of risk management is to mitigate as much of this risk as possible. Risk management for contracts typically involves using assessment tools to determine how much risk is present in one contract. Managing risk exposure is spearheaded by the legal team and involves collaboration between other departments, like sales and operations.
Common risks associated with contract management processes
Risk is commonplace in contract management, but it’s never a good idea to grow complacent or used to the idea. This leaves your organization open to human error and the loss of public integrity. Some of the risk factors many industries face are as follows:
- Data leakage: Without a single secure contract repository, information is likely dispersed, managed inconsistently and ineffectively. Think contracts in shared folders, emails, and on paper. The risk is that sensitive information can fall into the wrong hands – whether through malicious acts or simple oversight – leading to possible regulatory issues and other risks.
- Business interruption: Most procurement functions bear responsibility for ensuring that the company’s suppliers provide a steady stream of production inputs. To satisfy this requirement, the procurement team needs to call upon a system capable of monitoring its supplier feeds. If a supplier fails to deliver, what is the fallback? And can procurement detect early warning signs of imminent failure? Without the right CLM system, companies are at significant risk of breakdowns that could, at worst, shut down a factory and cost sales.
- Compliance failure: While it’s never good to be in non-compliance with relevant governing laws and rules, it’s even worse when the situation could have been prevented. Without a sophisticated CLM system, you can fail to comply because you simply don’t know which regulations apply to your contracts or you are unable to perform required audits.
- Operational delay: Procurement’s mandate is to follow the right process without creating undue delay. However, slow contracting processes that result from the use of outdated contracting technology can mean the business has to wait to get their hands on a much-needed product or service. Such a setback can materially impact a company’s growth capabilities and future earnings. In fact, it can put the business in a reactive mode when responding to operational vulnerabilities, rather than a proactive mode to capitalize on prime opportunities.
- Inflexibility: A top priority of modern chief procurement officers (CPOs) is to support greater business agility: creative purchasing agreements, faster purchasing, conditional sourcing arrangements, etc. Without the right tools, this type of agility isn’t possible. In turn, the company risks being unable to introduce new products and new sales channels, enter new markets, and more. Or it simply can’t do these things as fast or as effectively as it could with a sophisticated CLM system enabling agile procurement.
- Financial loss: When companies are purchasing hundreds of millions of dollars' worth of supplies, even missing a small percentage of potential savings can add up to big dollars. Well-managed contracts ensure procurement knows about its financial obligations, including payments due, service levels, rebates and discounts. However, manual management methods inevitably lead to financial leakage in procurement.
- Reputation risk: While it’s difficult to measure a company’s market reputation, when a company is perceived as being “hard to do business with,” it won’t attract the best suppliers, partners and employees. Contract management technology makes it possible to simplify and streamline procurement in ways visible to suppliers, so they are happier doing business with the company.
- Talent deficiency: Companies must make their brands stand apart in a highly competitive marketplace. Using outdated processes and technology for procurement puts organizations at a disadvantage when it comes to attracting and retaining top talent. As Deloitte says in its global CPO survey report, “Top talent, especially those in the millennial generation will not choose to work in an organization that is significantly behind the latest trends and technologies.”
Teams need to be aware of all potential risk in order to create the best processes around mitigation and prevention. Lax risk management can lead to negative legal exposure and the loss of opportunities.
Risky contract management behaviors
Prioritizing short-sighted goals or success markers is a dangerous pattern that organizations should be careful not to fall into. Because contracts are so critical, legal prefers to examine contracts with a fine-tooth comb. Sales often have a different interest, wanting legal to finish quickly so deals can close faster. The goal is to move contracts through speedily but with enough oversight to manage risk effectively.
It's also important to be consistent in terms and language in your contracts. Gaps in standardized language can introduce risk or confusion. Suppose you can't determine that contracts contain accurate language or identify the difference between contracts. In that case, lawyers might have to get involved in every deal. This also increases the risk of being non-compliant or leaving revenue on the table.
Information silos and manual processes can introduce human error, bottle-necked contract cycles, and limited process control that can increase risk dramatically when contracts are managed manually. Suppose you drop the ball on contract-related communications. In that case, you risk blowing up the relationship with the customer—especially if the contract language (or lack of contract language) exposes the customer to new risks. Your ability to manage the contract changes over time, and the renewal process will directly impact the customer retention rate.
Best practices for contract risk management
Successfully managing your organization's exposure to risk is a team effort that requires transparency, contract visibility, and online collaboration. It may require widespread shifting behavior or coming together with clear goals. Contract lifecycle management (CLM) software built with this in mind will get you part of the way there—the rest of the journey is up to your organization.
Legal teams have a duty to shield their organizations from unnecessary legal risk. At the same time, sales teams need to be empowered to move deals through the pipeline to maximize win rates. This requires balancing maintaining regulatory compliance and achieving revenue growth goals. By leveraging the guard rails established by standardized language and automated contract creation, legal teams won’t have to weigh the consequences of choosing speed to revenue vs. control.
Incorporating contract intelligence
Modernizing your processes with contract intelligence can be a long-term solution to improving risk management. From removing risky contract language and updating renewals to expediting processes and approval cycles, legal teams are critical partners in saving, recouping, and generating revenue. You can easily manage regulatory and environmental changes with a single source of truth that incorporates visibility and reporting capabilities.
Regulations and compliance laws require clauses, terms, and obligations to be standardized, updated, and included in all documentation and processes. Suppose there’s no centralized and templated system for teams to intelligently search for, update, and reuse clauses and other legal language. In that case, mitigating risk and reducing liability is nearly impossible.
Legal teams are charged with scrutinizing every deal and transaction to ensure compliance, from proposals and negotiations to renewals and beyond. With contract intelligence, organizations that deal with large volumes of legal agreements can significantly reduce their document processing costs and meet critical deadlines, all while quickly obtaining valuable insights into the information hidden in their contracts. This solution helps assess risks and liabilities better, compare sensitive clauses, standardize legal framework, and prepare an organization’s balance sheet.
Contract intelligence offers:
- Standardized workflows, negotiations, approvals, and amendments to minimize risk
- Search and discovery capabilities help manage contractual obligations
- Ingestion of 3rd party paper with AI and machine learning enhances visibility and consistency
- Standard clause and term libraries
One of the main challenges is moving contracts through quickly but with enough oversight to manage risk effectively. Both contract standardization and contract intelligence can increase the speed of your contracts while reducing risk—and are possible through practical CLM tools. Read more about the benefits of CLM technology on risk management by checking out Forrester Consulting's® thought leadership paper, Reduce Risk and Improve Your Contract Velocity with a CLM Technology Solution.
Contracts are risky—there's no getting around it. But with the right tools and proper knowledge, your organization can confidently enter the negotiation frontline.
Ready to learn how Conga contract intelligence could make a difference within your organization? Download the Ultimate guide to contract management to learn more about how effective contract management can help you streamline processes, maximize deal values, and reduce risk.
Conga crushes complexity in an increasingly complex world. With our Revenue Lifecycle Management solution, we transform each company's unique complexities for order configuration, execution, fulfillment, and contract renewal processes with a unified data model that adapts to ever-changing business requirements and aligns the understanding and efforts of every team.
Our approach is grounded in the Conga Way, a framework of entrepreneurial spirit and achieving together to champion our 11,000+ customers. We’re committed to our customers and to removing complexity in an increasingly complex world. Our solutions quickly adapt to changing business models so you can normalize your revenue management processes.
Conga has global operations across North America, Europe, and Asia.