Contract Risk Mitigation: Why Does Every Business Need It? (2022)

Contract Risk Mitigation: Why Does Every Business Need It? (2022)

July 26, 2022

Document Automation Tools

contract risk mitigation is the solution to slash down every contract risk that appears during the contract process which leads to delay or cancellation.


Contract Risk Mitigation: The contract lifecycle is the only common thread that can be used to monitor a company’s health and well-being across all organizations. The organization could be quickly exposed to a variety of contractual risks by one poor clause here or an awkward phrase there.

Even though it’s difficult, using the right tools and strategies can help you write a contract that’s perfect every time. It necessitates diligence, meticulousness, and a streamlined procedure utilizing the most recent contract risk mitigation techniques. You can successfully navigate the uncharted waters of ongoing disruption, innovation, and business agility by implementing an efficient contract risk mitigation strategy.

In today’s blog, we’ll understand about contract risk mitigation, the common risk types, example of contract risks that a business faces, and the best contract risk mitigation practices to follow. Without any further ado, let’s get started with a brief introduction to contract risk mitigation.

You might also want to read: Understanding The Mirror Image Rule, A Powerful Rule For Legal Contracts

What is contract risk mitigation?

Contract risk

Identification, assessment, and limitation of risk exposure across your organization are all steps in the process of contract risk mitigation. It depends on a strategic evaluation of all the risks that a company might encounter while conducting business.

While it’s possible that you won’t be able to control or predict every contract risk, you can prepare for a variety of outcomes to help lessen the impact on the business. Any contract your business enters into is subject to the same standard. Every business agreement must prioritize risk reduction in order to be managed effectively through the contract lifecycle. 

If a subpar risk mitigation strategy serves as the main driving force behind an organization’s contracting process, organizations can leak 9% of value. You can identify, evaluate, and mitigate risks by using a cohesive framework when you put your CLM at the center of your digital transformation.

Contract Risk Types: The Most Common Ones

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A risky endeavor is contract management. This is due to the fact that risk is a necessary component of every contract and that, in most situations, it cannot be eliminated but rather managed and reduced. Nothing ventured nothing gained, is the adage after all. You can effectively avoid all opportunities if you completely avoid all risks.

It’s critical to comprehend the various business risks that can affect your organization in varying degrees when managing risk. Financial, legal, security, and brand risks are the four most typical types of risks associated with contracts.

Contract risks are frequently interconnected and can cascade upon one another in many situations. For example, a security risk could lead to legal risk, while a brand risk could lead to financial risk. If you’re aware of the Facebook and Cambridge Analytics scandal, private information of users had gotten stolen in that which is a good illustration of this type, and the number was a whopping 87 million. The loss of $130 billion in Facebook’s market capitalization was the result of this security and compliance violation. Additionally, 40% of its users announced they would stop using the social media platform, dealing a severe blow to the company’s brand.

Financial Risk

Financial risks are contractual risks related to a loss of money, notwithstanding the impact, it has on your revenue or profit. They are frequently broken down into credit, liquidity, asset-backed, and equity risks. From the standpoint of contract management, it might be brought on by missing a crucial contract deadline, like a renewal, and consequently losing business or unintentionally extending the contract term because of an automatic rollover clause. A contract dissolution or payment linked to missed deadlines for deliveries, achievements, claims, or warranty issues would be another illustration.

When there is a contract breach that could result in legal action or litigation, there are legal risks involved. Legal risks come in a variety of forms, such as those related to disputes, compliance, and regulations. Your legal risk in contract management may result from failing to meet contract obligations and legal compliance standards like HIPAA, HITECH, OSHA, Sarbanes-Oxley, or other laws. A contract dispute could also result from allegations of intellectual property (IP) infringement, the incorrect or incomplete use of legal clauses, confidentiality disclosures, or other factors.

Security Risk

Security risks can be related to some of your organization’s most serious and high-profile consequences. This is because security issues with your contracts frequently result in additional monetary, legal, and brand problems. Insecure storage of contracts, granting equal access to sensitive contract information to all parties with contract access, leaving confidential contract data unencrypted, and sending sensitive information via email all pose security risks when managing contracts.

Brand Risk

In essence, the brand risk is your risk related to poor customer and public perception, low employee morale, and the fallout from monetary, legal, and security concerns. As bad news spreads quickly in today’s hyperconnected digital world and has the potential to negatively affect your brand reputation, minimizing brand risk is more crucial than ever. The cycle continues as a result, which may have an effect on your financial performance.

Examples of Contract Risk that Organizations are Likely to Face

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Given below are the most common and popular examples of contract risks that a business is likely to face.

Turnaround time is slow

Long contract turnaround times are frequently the result of poor contract management.  Loss of revenue and, occasionally, complete contract abandonment occur when a contract is negotiated, drafted, reviewed, approved, and signed after a protracted period.

The danger of taking too much time during contract negotiations and execution cannot be overstated. The process might be taking too long because there are too many people involved. One of the important individuals might take a trip, move, or become enmeshed in another undertaking. There’s a chance that one of the parties is simply being slow.

You must understand that a slow or sluggish contract process will most often lead to ruining a good and happening deal. As time passes, it may also lead to management approval for a contract that had it at one point withdrawn. Nothing productive ever occurs when discussions and approvals drag on for too long.

Unfulfilled Obligations

The other party’s failure to perform some or all of their obligations under the contract may be the biggest contract risk. There is a chance that the buyer won’t ever or on time pay if you are the seller. The risk of the seller not delivering the goods as agreed upon exists if you are the buyer. Additionally, there is a chance that the other party won’t uphold all of the clauses in the contract relating to product quality, delivery, and other matters.

Damages may be sustained even when a contract is not fully violated. You might be liable for any subsequent canceled orders if a supplier doesn’t meet the deadlines outlined in a contract. Even if the other party delivers the agreed-upon goods late, you could still lose out on sales.

Any contract you enter into exposes you to the possibility that the other party will fail to fulfill their end of the bargain. You incur financial losses when the other party fails to uphold their end of the bargain.

Noncompliance

You might find that a contract does not adhere to all relevant local, state, and federal laws if it has not been thoroughly reviewed by your legal department. Contracts need to be in line with company policies and industry standards, so make sure they are.

Noncompliance poses a serious risk. A Globalscape study found that the average company must spend $14.8 million on legal and regulatory non-compliance costs.

If contracts are negotiated and carried out by personnel with less authority or experience, noncompliance could become a problem. It might also happen if different divisions or locations are given authority to manage their contracts. In addition to the possibility that nobody will be aware of all the compliance requirements, you also run the risk of having a lot of contracts that are not standard.

Unanticipated Events

All agreements are subject to the possibility that things won’t go as expected. Both parties may find themselves unable to fulfill their obligations due to a variety of unforeseen circumstances. The other party may be impacted by inclement weather, a fire at one of its facilities, the ill health or demise of a significant individual, or some other equally disastrous occurrence.

The contract probably doesn’t account for what happens when unanticipated circumstances affect performance. There is definitely a risk involved. When the agreement you negotiated does not go as expected, there is a risk similar to that one. What would you do if you placed a 1,000-item order in anticipation of brisk sales over a specific period but those sales don’t occur? Are all 1,000 items still your responsibility? There still exists this risk.

Ineffective Reporting

You still run the risk of being unaware of the terms of all of your contracts, including any specific deliverables, even if all parties carry out their obligations as agreed. Many organizations struggle with ineffective reporting because it is impossible to monitor performance if you don’t know when a task or action is due. A great deal of paper contracts gets stored away without being used. There is a chance that any problems that arise as a result of those contracts won’t be noticed or addressed.

Unauthorized Access

The confidentiality of their contracts is something that many organizations demand or favor. This circumstance goes way beyond the sphere of a privacy issue. It’s also a competitive one since you don’t really want your biggest competitor to know the full details you’ve managed to negotiate with customers or suppliers. When contracts are managed manually, there is a chance that unauthorized personnel will gain access to them and divulge sensitive information to rival businesses or other bidders. Confidential information about costs, projects, deadlines, clients, and other intellectual property is contained in contracts. Given that it is in an office file cabinet that is not locked, this information needs to be kept secure, which is challenging.

Lost or Misplaced Contracts

The risk is increased by the matter of contract storage. When necessary, how simple is it for staff to locate specific contracts? Finding contracts is challenging due to manual storage. Contracts among other paper documents are frequently mistakenly misfiled or lost by employees. In the fast-paced environment of today, staff members require immediate access to contracts and supporting documentation. Additionally, you require immediate access to make sure that a contract’s conditions are being followed. Furthermore, a lot of remote workers need significant exposure to contractual agreements, which is tough if the files are only paper copies kept in one specific place. This issue extends beyond staffing in your immediate office.

Unnecessary Nonrenewals

When a contract is up for renewal, poor contract management puts you at risk of losing money or incurring higher costs. You cannot take the necessary action to renew a contract if you are unaware that it is about to expire. If you don’t realize that a key contract is about to expire until it is too late and you need to renegotiate on less advantageous terms, you might also incur unnecessary costs. You could prevent taking this specific risk if you had better contract management.

You might also want to read: Contract Generator Software: Meaning, 9 Robust Benefits & the Best Solution

Contract Risk Mitigation: Steps You Must Follow

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Every business must ensure that its GRC (governance, risk, and compliance) strategy includes a system that is directly responsible for a reduction in risk exposure during the contracting process. To create a successful contract risk mitigation strategy, adhere to the steps below.

Contract risk identification

Finding the locations of each risk within your current agreements is the first step in comprehending your current risk profile. The above-mentioned risk types should be checked out in each contract, and you should list them in your assessment. To identify where additional controls will need to be set up, you should also examine your current CLM process and identify the points where risks are entering the workflow.

Risk assessment and scoring

Once you’ve identified potential risk areas, you need to assess each one in light of its likelihood of happening and the potential consequences. To prioritize where to start your risk mitigation efforts, you can use this information to create a scorecard of your current risk exposure. Wherever the risk cannot be eliminated, you should set reasonable limits to ensure that the exposure is kept to a minimum.

Contract risk team establishment

Once you have this information, you can start adding the required controls and mitigation steps to your contracting model. To achieve this, first, you need to develop a risk response plan with clearly defined roles and responsibilities and a RACCI model for all parties. Following that, you produce the right contingency plans for risks with a higher potential for occurrence and exposure, and you brief your team on their duties in handling these incidents.

Digitizing the contracting process

Digitize your contracting procedure to make it simpler for your teams, and create a single, secure repository for all associated files and records. The RACI model you develop will help in determining the crucial roles required for your software system as you configure your authorization and access management.

Leveraging notifications and alerts

The contracting processes can be driven by alerts and notifications, making it simpler to keep everyone informed about your contractual obligations. Use a standardized procedure for all interaction and shortlisting of third parties to simplify your new contract demands and report intake tasks.

The greatest risk should be dealt with first

As you deeply outline each SOW (scope of work), and that too early on in the cycle, you tend to avoid scope creep. Additionally, this will cut down on the length of time needed to complete the contract talks stage of the lifecycle and eliminate the possibility of future disputes.

Draft process streamlining

The drafting procedure can be sped up by using pre-approved legal language for all of your terms, conditions, and contract types in clause and template libraries. To manage all of your business rules, such as reviews, approvals, and clarifications, you can use automation tools like a workflow engine. Utilize version control to record comments, track changes, and produce a thorough audit trail for every contract. E-signatures can also be used to enable contract approval from any location, further streamlining the procedure.

Sufficient review and optimization where necessary

The efficiency of your CLM can be analyzed to help you make decisions in the future if you have a digital process. Contracts can be grouped based on risks, allowing you to identify any areas where your mitigating actions fell short of your expectations. Utilize this information to adjust and continually review your risk mitigation strategy.

Contract Risk Management: What are the benefits involved here?

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The risks discussed in one of the previous sections are amongst the most typical contract risks. The key message is that getting a contract doesn’t at all assure everything would go as anticipated or that it will clarify all possible issues.  It’s critical that your business adopts the idea of contract risk management for all of the reasons outlined. Contract risk management, which is frequently a step in the contract lifestyle management (CLM) process, lowers the possibility of loss by monitoring and coordinating potential contract risk.

Each phase of the contract lifecycle, including the establishment of contracts from pre-approved layouts, having to negotiate specific terms, enforcing the agreement, and managing digital documents and related documents, is controlled and streamlined by CLM. Contract management using CLM results in a shorter time to contract, lower contract-related expenses, and lower contract risk.

When contract risk management is practiced, the majority of businesses experience some or all of the advantages listed below.

  • More obligations and terms of contracts are fulfilled
  • Organization-wide standardization of contracts and procedures
  • increased adherence to laws and regulations
  • Predesigned contract templates make it simpler to create and negotiate contracts.
  • Availability of individual contracts and relevant data is made easier, which leads to fewer unapproved connections. 
  • Fewer high-risk contracts are signed.
  • fewer occasions of paying suppliers too much
  • increased understanding of contract risk across your entire organization

Crove: Best Contract Risk Mitigation Solution in the Market

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We now reach the concluding part of the blog. I hope I was able to give you an in-depth overview of contract risk, mitigation practices, and the underlying benefits of contract risk management. If you feel you need a support system to defend your business against the risks we discussed above, you don’t need to look further. Crove is recognized amongst the best players in the market with a world-class document and contract automation and generation solution, which helps defend you from any risk or error that’s possible.

By streamlining business procedures, getting rid of tiresome tasks, boosting productivity, and improving business procedures, Crove aims to make document management and the signature process much simpler than ever. Crove is the most affordable contract automation and generation structure on the market, offering the most cutting-edge eSignature solution.

As a result of Crove’s use of heavily guarded encryption and norms, your data cannot be impacted. The Crove eSignarute solution, which also provides security measures to ensure confidentiality, can handle any document, regardless of type.

You receive premium features that are present in the majority of solutions for the price of a basic plan. Our solution also comes with a free version that you can use to explore our features and see how they can streamline the whole of your document-related tasks. This app is without a doubt the best for signing documents online.

Sign up on the website and explore for yourself, how the solution helps you in every phase of your contract generation and automation process.

Kavish Doshi

Kavish Doshi

I am Kavish Doshi, a writer and music enthusiast. I have been working in the content writing domain for the past 2 years improving my communication skills. Without communication, we are just dead souls. If you wish to improve it (verbal and written), I can help you out.

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