Contract Risk Mitigation: Why Does Every Business Need It? (2023)

Contracts play a crucial role in any organization, as they provide a legal framework and set of obligations that govern the relationship between parties involved. However, poor clauses and awkward phrases can expose organizations to various contractual risks. To write perfect contracts every time, it's essential to employ the right tools and strategies. By implementing an efficient contract risk mitigation strategy, you can navigate the challenges of disruption, innovation, and business agility.

What is Contract Risk Mitigation?

Contract risk mitigation involves the identification, assessment, and limitation of risk exposure across an organization. While it's impossible to predict or control every risk, you can prepare for different outcomes to minimize their impact. Prioritizing risk reduction in every business agreement is crucial for effective contract management. Failure to do so can result in organizations losing 9% of their value.

Common Contract Risk Types

Managing contracts involves dealing with various risks that can impact an organization to varying degrees. The most common contract risk types include:

1. Financial Risk: These risks involve potential financial losses, such as missed contract deadlines, contract dissolutions, or payment issues.
2. Legal Risk: Legal risks arise from contract breaches that may result in legal action or non-compliance with laws and regulations.
3. Security Risk: Security risks involve the potential compromise of sensitive contract information, leading to monetary, legal, and brand-related problems.
4. Brand Risk: Brand risks arise from poor customer perception, negative public image, and the fallout from financial, legal, and security concerns.

These risk types often intertwine, amplifying the potential negative impact on organizations.

Examples of Contract Risks

Here are some common examples of contract risks that organizations frequently face:

1. Long Turnaround Time: Slow contract negotiation and execution can lead to revenue loss or contract abandonment.
2. Unfulfilled Obligations: The other party's failure to meet their contractual obligations can result in financial losses or cancelled orders.
3. Noncompliance: Contracts that do not adhere to relevant laws and regulations can expose organizations to legal and financial risks.
4. Unanticipated Events: Unforeseen circumstances can hinder contract performance, causing potential losses or disruptions.
5. Ineffective Reporting: Inefficient reporting and lack of visibility into contract terms can result in missed obligations and unaddressed problems.
6. Unauthorized Access: Unauthorized access to contracts can lead to the disclosure of sensitive information and competitive disadvantages.
7. Lost or Misplaced Contracts: Poor contract storage and retrieval can result in difficulties locating important contracts and supporting documentation.
8. Unnecessary Nonrenewals: Lack of awareness about contract expirations may lead to financial losses or unfavorable renegotiations.

Contract Risk Mitigation Strategies

To mitigate contract risks effectively, consider the following steps:

1. Contract Risk Identification: Identify risk areas within existing agreements and evaluate the risks entering your contract lifecycle management (CLM) process.
2. Risk Assessment and Scoring: Assess each risk's likelihood and potential consequences to prioritize mitigation efforts.
3. Establish a Contract Risk Team: Develop a risk response plan with defined roles and responsibilities for handling contract risks.
4. Digitize the Contracting Process: Streamline and centralize contract management by digitizing the process and creating a secure repository.
5. Leverage Notifications and Alerts: Utilize alerts and notifications to keep all parties informed about contractual obligations.
6. Deal with the Greatest Risk First: Address high-risk areas early in the contract cycle to prevent scope creep and future disputes.
7. Streamline the Drafting Process: Use pre-approved legal language, automation tools, and e-signatures to expedite the drafting and approval process.
8. Review and Optimize: Continually review the efficiency of your CLM processes and contract templates to identify areas for improvement.

By following these best practices, organizations can significantly reduce contract risks and ensure smoother operations.

Remember, effective contract risk mitigation requires a proactive approach and ongoing diligence to adapt to changing business landscapes.

Bonus

One tool that can greatly assist in contract risk mitigation is Crove, a document automation tool. Crove simplifies and streamlines the contract management process by digitizing and automating tasks such as drafting, reviewing, and approval. It offers features like pre-approved legal language, automation tools, and e-signatures, which expedite the contracting process and minimize the chances of errors or oversights.

By leveraging Crove or similar document automation tools, organizations can enhance efficiency, reduce turnaround time, improve contract visibility, and ensure compliance with legal and regulatory requirements. Ultimately, incorporating technology solutions like Crove into your contract risk mitigation strategy can significantly enhance your overall contract management practices and protect your business from potential risks.