Contract Management can be risky. Contract management must be managed and minimized because contracts are always at risk, and most of them cannot be avoided. It is important to remember that nothing is gained by trying. You have to effectively avoid all risks.
Your contract risks can often be closely linked and have a domino effect. For instance, a brand risk could trigger a financial or security risk. It is crucial to understand the different risks associated with contracts to manage them effectively. Intelligent contract management software can help you identify hidden risks and ease and automate your risk management.
It is important to be aware of the various types of business risks and their consequences on your company when managing risk. The four most prevalent risk categories for contracts are financial, legal, and security.
Table of Contents
Financial Risk
Financial risks refer to contract risks that could result in money loss. It could happen due to contract management issues such as missing key dates and losing business or continuing the contract term by accident because of an automatic rollover clause. You could also experience contract termination, compensation for missed Milestones, claims, problems with warranty, delivery, or other issues.
Legal Risk
When you are liable for a contract breach, there is the possibility of legal liability or litigation. There are many legal risks, including compliance and dispute risks. Your legal risk in contract management could be due to missing obligations or compliance requirements like HIPAA, and other regulations. It could also result from infringement charges, intellectual property, improper use of the appropriate legal clauses, and other contract disputes.
Security Risk
Your organization can face some of the most severe security risks. Security breaches can have serious consequences for your organization, including financial, legal, or brand. Security risks can be created by not storing your contracts in secure locations. This allows everyone who has contract access to the same level of sensitive data. It also leaves confidential data unencrypted.
Brand Risk
Brand risk refers to the risks associated with negative public and consumer opinion and low employee morale. After security, legal and financial concerns, it remains a problem. Because bad news spreads quickly in today’s digital age, it is even more critical to protect your brand reputation. A negative brand reputation can have a negative effect on financial performance, and this cycle will continue.
Steps to Contract Risk Management
This checklist provides a good overview of all the steps involved in managing contractual risk. You should remember that not every step is required for every contract and that some steps can be performed simultaneously.
- A multi-domain team is needed to identify commercial contractual risk management issues – It is better to have representatives from all departments (business, sales, marketing and technical, legal, finance, and so on). Each contract should be analyzed to identify all possible risks. The CIO must also be involved in assessing the risks associated with the implementation of a new support and maintenance plan for IT equipment. This process can involve multiple parties. Contract management software allows you to manage tasks, assign tasks to team members, and keep documentation.
- Assessing and estimating commercial contract risk management issues – Identify and evaluate the risks, likelihood, and consequences.
- Risk avoidance – Establish the acceptable risk threshold to determine which high-risk work should be rejected.
- Participating in risk reduction – The team chooses the most financially sound and not-litigious projects from the list of clients below or at an acceptable risk threshold.
- Considering risk sharing by subcontracting/outsourcing – Sometimes, contract risk can be minimized by outsourcing important processes to an expert. Your company can prove due diligence by engaging an expert.
- Insurance to manage risks – Using insurance to protect yourself against potential losses is often a legal requirement.
- Risk mitigation is the application of risk mitigation through avoidance, elimination or transfer, or bearing the risk (if applicable). This often involves the creation or modification of clauses in contracts. A company’s successful contract risk management will depend on having a comprehensive library of pre-approved clauses. Contract management software allows unlimited storage of your contracts, pre-approved clauses, and template libraries.
- Risk neutralization – Ensure that all parties agree to the terms drawn in the previous step. Modify them as necessary.
- Controlling and monitoring risk – Set up specific checkpoints throughout the contract’s lifecycle to monitor and manage risk. Contract management software allows you to set up email alerts, tasks, and reminders so that you can take action before milestones or deadlines.
- It is important to use well-prepared contractual provisions. Not only is it important to properly develop clauses but also to ensure their enforcement. Your risk is lower if your agreements are well-prepared. Contract management software offers reporting functions and pre-approved clauses and templates libraries. This allows for visibility into deviations from the standard language and minimizes risk.
Final Words
Every project is subject to risk. You can create strategies to avoid and minimize losses if your company works within acceptable risk levels. Contract management software offers significant benefits in the development, coordination, and implementation of risk management.
Tags: Contract management, contract management software, Risk Management
