Best Practices for Risk Assessment when Managing Contracts

Contracts are the DNA of a company—vital to the success and growth of every type of business. From hiring employees to closing deals, contracts are the core of building relationships and creating successful partnerships in the business world.

A large part of the reason contracts are even created is to ameliorate the risks that can come with making agreements. Assessing and managing that risk is crucial for gaining the best deals possible, and if managed well, contracts can offer a great deal of protection from liability and risk. From their drafting and negotiation to execution once the signatures are in place and throughout the lifecycle of a contract, there are many ways to assess the risk of an organization’s contracts. Here are some strategies for determining any risk within contracts and best practices that will help mitigate that risk. Often, the first place to start is by focusing on the one issue that magnifies all risk: a lack of transparency.

How Contracts Can Present Risks

Visibility within contracts is essential for planning and management. Little or no transparency can cause miscommunication, revenue loss, increased cost, scope creep, and more. Without the right insights into a company’s contract portfolio, it’s difficult to perform adequate reviews, causing businesses to deal with financial burdens and lack of follow-through on promised services or goods.

The central function of an effective contract lifecycle management process is to help both parties collaborate on a deal that is beneficial and satisfactory to each side. Having a solid understanding of a deal’s parameters from all sides will help each party to better protect against risks.

Reviewing the Contract

Identifying the risks that may arise over the course of a contract’s lifecycle requires the right kind of knowledge and experience with managing contracts. Reviewing language, especially among the warranty and risk allocation clauses, will help ensure that the content in the contract fully expresses the risks posed and both sides are satisfied with the terms that are outlined to decrease those risks.

Contract review and approval is critical for risk management. Legal teams are familiar with the need to scope the risks and evaluate whether they exceed the organization’s risk tolerance. Elements such as regulatory and business risk factors as well as risk to third parties should be considered during the risk assessment.

Managing risk for an entire company can be made simpler through better management—and simply, a contract lifecycle management platform. Having set terminology for contracts that will protect against any risk is much simpler and consistent with technology, and Legal can be involved at any step in the process necessary through approval workflows and greater visibility over all documents.

Transferring Risk

Once contract risk is assessed, implementing risk transfer is a key strategy in minimizing any potential risk. The Harvard Risk Management and Audit Services department defines risk transfer as the intention to assign the responsibility, either financial or otherwise, to one of the parties involved. Essentially, one party alleviates their liability by giving it to another party on the contract. Risk transfer is accomplished through a combination of indemnification clauses, limitation of liability clauses, and waiver of subrogation clauses.

  • Indemnification Clauses:An indemnification clause is a type of exemption clause that essentially allows one party to compensate a third party in the result of an injury—monetary, physical, or otherwise. Indemnity moves liability to the party that was originally responsible for causing the injury.
  • Limitation of Liability:This type of clause puts a cap on the exposure a company might face in the event of a claim made or action taken. Limitation of liability clauses most often reduce liability to the fees paid, a specifically agreed upon amount, insurance coverage available, or some combination of these factors. Including a limitation of liability clause in a contract has the potential to reduce a company’s exposure to risk drastically—some organizations report up to 90%.
  • Subrogation Waiver Clause:Subrogation pertains largely to insurance and involves the right of an insurance carrier to pursue a third party that caused an insurance loss to the original insured party. When insurance claims are made, the insurance company is subrogated, stepping into the shoes of the insured, to sue the third party for losses suffered by the insured. In other words, insurers make the insured whole through paying for damages, and then through subrogation can sue the third party who caused the initial damage, to make themselves whole.
    Waiving subrogation removes the right of, in this example, the insurance company to sue the third party who caused the insurance loss. Commercial insurance and other protections are often advised in addition to a subrogation waiver clause to ensure financial stability in the event of any losses.

Best Practices for Optimizing Contract Management Practices

As the risk transfer clauses are considered when drafting agreements, it is also crucial to look back and address the initial underlying cause of contract risk: lack of transparency and difficulty collaborating. Enhancing collaboration looks like bringing contracts back to their core purpose: relationships. Contracts are not just documents with text to be filed away and forgotten, but living, vital agreements in business and life. Engaging with stakeholders and potential partners in a way that keeps this in mind and increases transparency will help avoid risks that come from lack of communication and misunderstanding of contract terms.

The easiest and most effective way to realize these best practices is to automate the contract lifecycle through the use of technology with a contract lifecycle management platform. A contract lifecycle management platform offers a centralized location for all people, processes, and documents that streamlines workflows and increases the ability to collaborate across parties. With technology aiding communication, teams can mitigate risk and work towards creating better relationships through their contracts.

Managing Risk with Concord

Concord is at the forefront of contract lifecycle management software. Concord addresses the central issue of contract risk by focusing on facilitating collaboration in the contract negotiation and management process, thereby enhancing transparency. This opens up channels of communication between colleagues, external stakeholders, and third parties. All of Concord’s features are built on the premise that the contract negotiation process is inherently relational and collaborative. Some of the key features provided that help optimize contract collaboration and communication to reduce risk are:

  • Versioning:In Concord, new versions of contracts are saved and displayed in chronological order next to the corresponding document. These records are permanent, and cannot be tampered with or altered. Concord keeps all versions clearly marked and centrally stored. This feature allows all parties to quickly and easily see that they are working on the most up-to-date version as well as the evolution of past changes to the document.
  • Discussion Panel:Concord’s discussion panel provides a medium through which parties can hold conversations about the contract. Having a discussion built into the contract platform itself eliminates the need for back-and-forth by email. With Concord, the discussion panel is always attached to the contract for reference as contract terms are discussed.
  • Collaboration Across Teams:Concord provides a central hub through which colleagues can collaborate together to produce a document draft. With Concord, a single draft can be worked on easily in real-time, with accurate records of document versions and changes. After the draft is complete, users can invite external stakeholders for negotiation within the Concord platform.
  • Approval Workflows:Concord allows each document to have its own tiered approval workflow in order to ensure the appropriate team members are alerted to act at the appropriate juncture of the negotiation workflow. This greatly simplifies the collaboration process by automating and mapping out the actions needed to approve a document.
  • Clause Alerts:Users can configure clause alerts for specific events in the contract lifecycle, such as advanced notice of termination and contract renewal dates. Concord will send automated alerts via email in advance of and on the date of a clause deadline, allowing users to appropriately prepare needed actions. Alerts ensure that crucial actions will not be missed or forgotten about, and keeps all parties involved and informed.

By eliminating tedious back-and-forth conversations that take place across multiple different tools and bringing all communication into a single place, the entire contract processes can be simplified, reducing risk and increasing transparency. To learn more about how Concord can help mitigate risk by enhancing collaboration request a demo here.