Contract Risk Isn't Going Anywhere - Here's How to Manage It

While the economic outlook continues to look cloudy, there’s no crystal ball with which to see the future.

Fortunately, there are contracts. What if you could use contracts to better predict and insulate against whatever risks are over the horizon?

Since contracts are at the heart of everything a business does, they contain incredible information about nearly every aspect of a commercial operation. As our guest speaker Alla Valente, Forrester Senior Research Analyst, noted during a February 9, 2023, webinar hosted by Icertis, this includes not just what is happening now in a business, but what will happen in the future under different scenarios. 

“[Contracts] answer questions like who is buying? Who is selling? Who's entering into this arrangement? What are the terms…? But the other really interesting thing about contracts is that they also define the ‘what if,’” Valente stated. “What if all these things that we hope will happen, don't? What if there's a change? What if there is an inability to either pay or deliver? What if the world suddenly goes into a global pandemic while we're in the middle of this contract? What happens next?”

Going from “what if” to “what’s next”

In good times or bad, having a well-defined set of what-if scenarios is the key to managing risk in today’s commercial environment.

“What we know is that an organization's ability to anticipate the downside is what makes contracts such a wonderful tool,” Valente said of the need for modern organizations to react to the macroeconomic forces shaping the business world.

Through contracts, specifically the business and market understanding gained through them, organizations can determine where things may go awry, and what prescriptive actions they can take to remedy them. 

“So, this ability to almost predict the future (or), at the very least, anticipate some of the things that might not go as planned is really critical for what the parameters of contracting have looked like for decades.”

Contract risk: a growing problem

Notably, while contracts can play a key role in controlling risk if not properly managed, they can also create risk. According to Valente, Forrester has found in a 2022 global survey of enterprise decision-makers, that 44 percent feel the rate of enterprise risk is climbing — that today they contend with more risk than they did yesterday.

She directly attributes this to the influx of third-party (contractual) relationships. “It's really one of the top contributors to that increasing level of enterprise risk. So, the more vendors and suppliers you have, the more risk you have. The more customers you have, the more risk you have, basically, the better you're doing, the faster you're growing.”

Forrester data suggests more than three-quarters (77 percent) of organizations have had to handle a critical risk event in the past year — significant events that would impact their ability to operate or could negatively impact their brand.

Of course, not striving to grow isn’t the way to solve this rising challenge. Valente suggested a better approach is a tighter focus on the contract management process.

Making hay in the shade

Many companies may use the current economic climate as an excuse to pause innovation, but that would be a mistake. It could be an opportune time to update processes and accelerate innovation in your business.

“We can only go as fast as our contracting process and techniques allow us to go, which means that without modern [CLM], we're inhibited by how we can define what our future looks like,” Valente said.

She notes that modern recessions only tend to last 10 to 12 months, during which there will inevitably be businesses that see opportunity in boldly moving forward. 

“They're going to invest and might even double down because when everyone is going right, they go left.”

Embrace contract process change

Given the timeline and risks during economic downturns, acting fast to keep up with the rapidly shifting market is crucial. That requires contract processes to be sped up, but also for the language and clauses within them to anticipate what might come down the road. 

Valente pointed out that many contract managers know there’s a need for change: “I really want to stress that contract managers know their ability to respond and change quickly when their businesses and market factors change is so necessary, and, in fact, they’re more willing to prioritize.”

Whether or not there will be a recession, it won’t last forever. Consider where the business needs to be on the other side. No matter the macroeconomic forces you must contend with over the next year, contract risk will continue to grow in parallel with your organization's growth.  

Contract managers need to take the time now to show leadership which outdated contract processes are holding them back, and how improvements will put them on the best footing for years to come.