The Five (5) Contract Management Risks and How They Can Expose Your Business
Contracts are at the heart and lifeblood of any business. How your company manages contractual risks is a key consideration from a risk management perspective, but it also allows you to extract maximum value from these agreements. Protecting your company against liabilities and related contract-based exposure can be as easy as conducting a periodic risk assessment of your existing agreements in place.
Businesses can proactively manage and resolve contract management risks with the help of contract management risk assessment processes within your Contract Lifecycle Management system. This will help you automate and streamline the risk management process and avoid falling prey to some of the more common risks that we see our customers experiencing in our daily interactions.
How can you assess your contract management risks?
Every organization, regardless of how long it has been in operation, what industry it competes in, or how large it is, must plan for some level of contract management risk. As a company, you must be willing to commit to the terms of the contracts you have in place with your customers and employees alike. It’s also natural to expect your suppliers, partners, and contractors to meet their respective agreements.
Has your business ever failed to adhere to contract agreements, missed payments, or missed expirations? If, for example, your contracts team is tracking your contract performance, expirations, opportunities, renewals, etc. with a system outside of a contract lifecycle management tool, you could be exposing your business to long-term risks such as penalties for missing regulatory requirements, brand reputation, missed obligations, etc.
The above-mentioned risks are associated with either manual contract management processes, spreadsheet functions, or any practice outside of contract management software. However, contract lifecycle management (CLM) will help you assess, monitor, and manage these within an acceptable range that your contract and executive teams are comfortable with. Below, we look at some of the more common risks we see in practice and how to avoid them and reduce your risk and exposure.
Here are five of the leading contract management risks – and the practices to fix them
Excessive access
Excessive access can lead to dishonest employees mishandling information or walking away with trade secrets. Access needs to vary between different departments, divisions, teams, and employee classifications. Keeping information safe requires multi-layered access controls that compartmentalize data by addressing these different needs. Only those that need access should have access.
Missed expirations
Missed expirations and renewals expose companies to liabilities. For example, licensing agreements commonly specify finite periods that intellectual property belonging to another party may be utilized. Operating outside of licensing terms is a sure-fire way to get sued. For the licensor, the same concern represents the potential loss of revenue if the contract expiration is missed and not renewed. Quality contract management software goes beyond repository-only functionality and includes the ability to track contracts and alert staff of upcoming expirations and renewals.
Compliance issues
Lack of compliance can lead to regulatory fines and missed opportunities. Companies can eliminate compliance issues like rogue spending and ensure adherence to regulatory provisions by implementing rule-based contract management software that requires contracts to meet specific conditions as they move through the approval process. Rule-based contract management software can also log events and actions as they occur, making compliance documentation automatic, instead of a cumbersome afterthought.
Ineffective approval workflow
Without approval workflow automation, contracts can be unnecessarily delayed. And the longer contracts take to get approved, the greater the risk of deals dying on the grapevine. Many deals even have terms that expire should they not be executed in a specified timeframe. The solution is a system that removes human-caused delays by automatically nudging, routing, and escalating. By removing humans as much as possible from the equation, you also minimize the oops factor.
Lackluster Reporting
With repository-only contract management software, you aren’t harnessing the power to turn data into easily actionable information. In contrast, contract lifecycle management software uses flexible reporting to arm executives with company-specific KPI-driven reports that allow them to see adverse issues (like undesirable contract risk profiles) before they become disasters. The five risks discussed above are by no means the only risks you and your organization face when managing your contracts, but they are the most common.
At Adaptive, we typically address these and other identified risks with our best-practice CLM implementations and guide our customers toward better risk mitigation using CLM. The effective use of available technology coupled with process improvements allows contract managers to realize significant value that resides within their contracts. ” Gerhard Roux, Sales Director, Adaptive.
In conclusion, because contracts are the backbone of business, they are a gold mine of information for any company. Within these agreements, every transaction, customer, supplier, and potential collaboration is documented and agreed upon. Contracts act as a reading receipt for the company’s internal and external operations.
Companies can use Contract Lifecycle Management (CLM) software to view data in bulk while observing patterns and initiating required actions. Industry-leading CLM solutions leverage machine learning and artificial intelligence (AI) to reduce the amount of manual effort used to extract value from contract data. CLM software can’t prevent risks entirely, but it can help you assess, monitor, and manage them.
Contract management risks can cause more than just headaches. Contract expirations can easily go unnoticed, and should a team undergo an audit for contract compliance, it could take days, if not weeks, to try and locate all the relevant documents. For an additional read on contract management risks and how you can mitigate them, we found the Planergy article to be useful.
If you want to increase visibility into your contract lifecycle management, streamline approval processes and manage risk, request a demo with Adaptive today.
