Contract Risks: Top 4 Challenges and How to Mitigate Them
The average company has 20,000-40,000 contracts. How do you make sure contract risks are properly safeguarded?
Modern companies have thousands of contracts. From vendor relationships to sales agreements, there is no shortage of variety, types, and lengths of contracts for enterprise businesses.
As the amount of contracts continues to grow, there are numerous uncertainties associated with making and handling them. Here are the top four contract risks and how to mitigate them.
Insufficient Speed
One of the most significant contract risks is the lack of speed during the contract process. It isn’t uncommon for it to take weeks or even months to create a contract. Not to mention the time the legal team spends honing proper language or creating templates.
The longer it takes to create and finalize a contract, the more it slows down the entire business process. Contract creation, negotiation, and approval all take much longer than necessary, which can result in missed opportunities, deadlines, and goals.
Time-to-signature is an important number, especially for sales teams. Goals shouldn’t be missed simply because the contract process isn’t fast enough.
One of the easiest ways to reduce this contract risk is a contract lifecycle management platform. Storing contracts in one easily-searchable location eliminates the need to dig through old emails – or worse – file cabinets and folders. A good option is a cloud contract repository, and even better if it has an OCR feature.
Having a template library that all users can access also saves time and effort by not having to create a new document every time. Furthermore, enabling easy access to everyone who needs to view the contract simplifies the process of sending emails back and forth.
Visibility and Access Rights
As mentioned before, visibility can be a major blockade in contract creation. Yet this goes beyond just creation. Truly, having the right visibility into a contract helps the entire contract lifecycle.
Not having the proper access rights to contracts can be problematic, particularly for businesses that have a large number of contracts. This lack of access can make it difficult for the team members to keep track of their contracts throughout the contract lifecycle process.
Ensuring that the appropriate team members have access to the contracts and providing the necessary permissions is key to preventing this contract risk. The legal team can quickly find, review, and approve a contract when it’s time for renewals. This approach is far preferable to cutting the legal team out entirely.
Visibility is also critical in high-growth business phases, and contract management can be more complex. Companies should consider establishing clear visibility and access rights to mitigate contract risk. The right contract management platform can provide visibility into contracts, allowing users to view and approve them promptly to maintain compliance.
A solid approach to contract management involves being aware of and mitigating any contract risks that come along with the process. Establishing efficient processes, such as communication across the company, workflows, and written strategies, can help prevent inconsistencies and minimize contract risks.
Compliance and Contract Risk
Companies have the challenge of navigating regulations, requirements, and rules, along with industry expectations and business process changes. For any enterprise business, but especially a global company, internal and supplier contract risks need to be evaluated, analyzed, and eliminated.
Noncompliance can lead to costly fines or breaches of contracts that can break trust and damage relationships. Obviously, contract compliance is more than just legal rules to adhere to. It’s a core function of maintaining or increasing savings, a way to establish a good reputation and ensure a well-respected brand.
An easy way to do this is through the visibility factors mentioned above. Contracts need to be viewed and approved by the necessary parties to maintain compliance. It is also important to come up with an approach for monitoring any modifications in regulations and for understanding how to comply with these new regulations in the future. Analytics and technology should be used to assess and mitigate contract risk.
Even with completely automated systems, laws and rules still change. It’s important for all teams, especially Legal, to keep up with current regulations to ensure that companies are working within the correct local and global rules. Establishing compliance ownership clarifies processes and ensures that all parties know what is expected of them.
Be sure to identify:
- Who is responsible for compliance
- What is their objective view of the company
- How compliance will be enforced
- Ways that compliance and performance are related
- What measures are in place to keep employees aligned
With these key factors identified, managing risk even in a changing landscape will be much simpler.
Process Inefficiencies
Lack of consistency across a company’s documents and processes can lead to a lot of contract risks. For example, a few are unpredictable pricing, rogue spending, compliance issues, and much more. Successful businesses have processes outlined and workflows in place to make sure these inconsistencies don’t happen in their organization.
One key process that can be streamlined is contract approval workflows. These workflows should be standardized and documented to ensure that all necessary approvals are obtained before a contract is executed. This can prevent delays and misunderstandings, and also help to reduce the risk of contract disputes. Contract management software can automate the approval process, allowing managers to easily track the status of contracts and ensure that they are being reviewed and approved in a timely manner.
Another way to improve process inefficiencies is to create a contract template library. This library should include templates for different types of contracts, such as service agreements, nondisclosure agreements, and employment contracts. The templates should be standardized and pre-approved by legal, ensuring consistency across all contracts. This can help reduce the time and effort required to create new contracts and improve the accuracy of the information contained in the contracts.
A legal clause library is another contract management software feature that can be used to mitigate contract process inefficiencies. Such a library contains pre-approved legal clauses that can be added to contracts as needed. It helps ensure that all contracts are compliant with relevant laws and regulations, reducing the risk of legal disputes. Additionally, a clause library can save time and effort by eliminating the need for legal teams to review and approve individual clauses for each contract
Finally, clear communication across a company and a well-planned, written strategy are necessary for any organization to reinforce efficient processes.
Mitigating Contract Risks
Practical contract management involves being aware of and mitigating any contract risks that come along with the process. Ensuring contracts are optimized by implementing a contract lifecycle management platform is the first step in lowering risk and simplifying contracts. `
For mitigating contract risks, choose a contract management platform with the following features:
- Contract template library
- Clause library
- Contract approval workflows
- Cloud contract repository
